Outline in Corporation Law and Allied laws

A. FOREIGN INVESTMENT ACT RA 7042

1. Policy
1. To attract, promote and welcome productive investments from foreign individuals, partnerships,
corporations, and governments, including their political subdivisions, in activities which
significantly contribute to national industrialization and socioeconomic development to the
extent that foreign investment is allowed in such activity by the Constitution and relevant laws;
2. To encourage foreign investments in enterprises that significantly expand livelihood and
employment opportunities for Filipinos; enhance economic value of farm products; promote the
welfare of Filipino consumers; expand the scope, quality and volume of exports and their
access to foreign markets; and/or transfer relevant technologies in agriculture, industry and
support services;and
3. To welcome Foreign investments as a supplement to Filipino capital and technology in those
enterprises serving mainly the domestic market
As a general rule, there are no restrictions on extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can invest as much as one hundred percent (100%)
equity except in areas included in the negative list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to undertake measures that will gradually increase Filipino
participation in their businesses by taking in Filipino partners, electing Filipinos to the board of
directors, implementing transfer of technology to Filipinos, generating more employment for the
economy and enhancing skills of Filipino workers. (sec. 2, RA 7042)

2. Philippine national
The following are Philippine Nationals:
i.
ii.
iii.
iv.

a citizen of the Philippines or a domestic partnership or association wholly owned by

citizens of the Philippines; or
a corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines or a
corporation organized abroad and registered as doing business in the Philippine under
the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or
a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine national.
Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations
must be owned and held by citizens of the Philippines and at least sixty percent (60%) of
the members of the Board of Directors of each of both corporations must be citizens of
the Philippines, in order that the corporation shall be considered a Philippine national;
(as amended by R.A. 8179).

2.1 Gamboa v. Teves, GR 176579, Oct 9, 2012 (and June 28, 2011 decision)
Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership of 60 percent of the outstanding
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capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate
The 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without voting rights.
Preferred shares when denied the right to vote in the election of directors, are anyway still entitled
to vote on the eight specific corporate matters mentioned above. Said act are acts of ownership.
The evident purpose of the citizenship requirement is to prevent aliens from assuming control of
public utilities, which may be inimical to the national interest. This specific provision explicitly
reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the
1987 Constitution: to conserve and develop our patrimony and ensure a self-reliant and
independent national economy effectively controlled by Filipinos.
3. Export enterprise shall mean an enterprise wherein a manufacturer, processor or service
(including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader
purchases products domestically and exports sixty percent (60%) or more of such purchases
4. .Domestic market enterprise shall mean an enterprise which produces goods for sale, renders
service, or otherwise engages in any business in the Philippines.
5. Investment equity participation in any enterprise organized or existing under the laws of the
Philippines. It includes both original and additional investments, whether made directly as in stock
subscription, or indirectly through the transfer of equity from one investor to another as in stock
purchase. Ownership of bonds (including income bonds), debentures, notes or other evidences of
indebtedness does not qualify as investment.
The purchase of stock options or stock warrants is not an investment until the holder thereof
exercises his option and actually acquires stock from the corporation.
6. Foreign investment
equity investment made by a non-Philippine national; provided,however, that for purposes of
determining foreign ownership, peso investments made by non-Philippine nationals shall be
considered; Provided, further, that only foreign investments in the form of foreign exchange and/or
other assets actually transferred to the Philippines and duly registered with the Central Bank (CB)
and profits derived therefrom can be repatriated; and Provided, finally, That, for purposes of Section
8 of the Act, and Rule VIII, Section 6 of these Rules and Regulations, Existing Foreign Investment
shall mean an equity investment made by a non-Philippine national duly registered with the SEC or
the Bureau of Trade Regulation and Consumer Protection (BTRCP) in the form of foreign exchange
and/or other assets transferred to the Philippines.
7. Doing business in the Philippines
Shall include soliciting orders, service contracts, opening offices, whether liaison offices or
branches; appointing representatives or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period
or periods totaling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to and in progressive prosecution of commercial gain or of the purpose
and object of the business organization.
The following acts shall not be deemed doing business in the Philippines:
(1) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such investor;
(2) Having a nominee director or officer to represent its interests in such corporation;
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(3) Appointing a representative or distributor domiciled in the Philippines which transacts business
in the representatives or distributors own name and account;
(4) The publication of a general advertisement through any print or broadcast media;
(5) Maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by another entity in the Philippines;
(6) Consignment by a foreign entity of equipment with a local company to be used in the processing
of products for export;
(7) Collecting information in the Philippines; and
(8) Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or exported to
the Philippines, servicing the same, training domestic workers to operate it, and similar incidental
services.

7.1 Relate to Section 133 and 144 of the Corporation Code.

7.2 Top-weld Manufacturing v. ECED, 138 SCRA 118
When the respondents entered into the disputed contracts with the petitioner, they were
carrying out the purposes for which they were created, i.e. to manufacture and market welding
products and equipment. The terms and conditions of the contracts as well as the respondents'
conduct indicate that they established within our country a continuous business, and not merely one
of a temporary character. This fact is even more strengthened by the admission of the respondents
that they are negotiating with another group for the transfer of the distributorship and franchising
rights from the petitioner.
Respondents' acts enabled them to enter into the mainstream of our economic life in competition
with our local business interests. This necessarily brings them under the provisions of R.A. No.
5455.

7.3 Merrill Lynch Futures v. CA, 211 SCRA 824

ML FUTURES, operating in the United States, had indeed done business with the Lara
Spouses in the Philippines over several years, had done so at all times through Merrill Lynch
Philippines, Inc. (MLPI), a corporation organized in this country, and had executed all these
transactions without ML FUTURES being licensed to so transact business here, and without MLPI
being authorized to operate as a commodity futures trading advisor. The Laras did transact
business with ML FUTURES through its agent corporation organized in the Philippines, it being
unnecessary to determine whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or
Merrill Lynch Pierce Fenner & Smith (MLPI's alleged predecessor). The fact is that ML FUTURES
did deal with futures contracts in exchanges in the United States in behalf and for the account of the
Lara Spouses, and that on several occasions the latter received account documents and money in
connection with those transactions. With these, the Laras are estopped from raising the defense
that ML Futures may not sue as it has no license to do business because their transactions lasted
for a span of 7 years which they themselves benefited from it.
7.4 Hahn v CA, GR 113074, Jan 22, 1997
Hahn was appointed as exclusive distributor of BMW in the Philippines with stipulated
commission. BMW has also acknowledged Hahn as its agent in the Philippines. Pursuant to this,
Hahn exported cars by virtue of orders and BMW had an exclusive control over Hahns activities as
a dealer. Hahn also put up a service center which was regularly inspected by BMW Corporation to
enforce compliance with BMW standards and specifications. This clearly constituted an agency.
This is contrary to the contention of BMW that Hahn was doing business in its own name and for its
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own account. The Court held that these acts constituted doing business in the Philippines. The
arrangement showed that the foreign corporation's purpose was to penetrate the Philippine market
and establish its presence in the Philippines.
7.5 Eriks Pte Ltd vs. CA, GR 118843, Feb 6, 1997
The series of transactions in question could not have been isolated or casual
transactions. What is determinative of doing business is not really the number or the quantity of the
transactions, but more importantly, the intention of an entity to continue the body of its business in
the country. The number and quantity are merely evidence of such intention. 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. Whether a foreign
corporation is doing business does not necessarily depend upon the frequency of its transactions,
but more upon the nature and character of the transactions.
Note that there were 17 orders and deliveries (only sixteen per our count) over a four-month
period. The appellee (private respondent) made separate orders at various dates. The transactions
did not consist of separate deliveries for one single order. In the case at bar, the transactions
entered into by the appellant with the appellee are a series of commercial dealings which would
signify an intent on the part of the appellant (petitioner) to do business in the Philippines and could
not by any stretch of the imagination be considered an isolated one, thus would fall under the
category of doing business.
7.6 Agilent Technologies v. Integrated Silicon Technology, GR 154618, April 14, 2004
Agilents activities in the Philippines were confined to (1) maintaining a stock of goods in the
Philippines solely for the purpose of having the same processed by Integrated Silicon; and (2)
consignment of equipment with Integrated Silicon to be used in the processing of products for
export. As such, Agilent cannot be deemed to be doing business in the Philippines.
7.7 Cargill Inc. v Intra Strata Assurance Corp., G.R. No. 168266, March 15, 2010
Petitioner and NMC amended their contract three times to give a chance to NMC to deliver to
petitioner the molasses, considering that NMC already received the minimum price of the contract.
There is no showing that the transactions between petitioner and NMC signify the intent of
petitioner to establish a continuous business or extend its operations in the Philippines. It is an
isolated transaction.

7.8 Steelcase, Inc v. Design Intl Selection, GR 171995, April 18, 2012
Steelcase is an unlicensed foreign corporation not doing business in the Philippines. Aside from
the products of Steelcase, DISI also distributed products of other companies including carpet tiles,
relocatable walls and theater settings. The dealership agreement between Steelcase and DISI is
basically a buy and sell arrangement where they would inform Steelcase of the volume of the
products needed for a particular project and Steelcase would, in turn, give special quotations or
discounts after considering the value of the entire package. In making the bid of the project, they would
then add out profit margin over Steelcases prices. DISI was an independent contractor which sold
Steelcase products in its own name and for its own account. As a result, Steelcase cannot be
considered to be doing business in the Philippines by its act of appointing a distributor as it falls under
one of the exceptions under R.A. No. 7042.
8. Foreign Investment Negative List
8.1 List A
In Negative List A, foreign ownership is limited by mandate of the Constitution and specific laws.
These are:
No Foreign Equity
1. Mass Media except recording
2. Practice of professions
3. Retail trade enterprises with paid-up capital of not less than US$ 2,500,000.00
4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
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7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic
zone
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological
weapons and anti-personal mines
11. Manufacture of firecrackers and other pyrotechnic devices
Up to Twenty Percent (20%) Foreign Equity
12. Private radio communication network
Up to Twenty-Five Percent (25%) Foreign Equity
13. Private recruitment, whether for local or overseas employment
14. Contracts for the construction and repair of locally-funded public works, except: a.
infrastructure/development projects covered in RA 7718; and b. projects which are foreign
funded or assisted and required to undergo international competitive bidding (Sec. 2(a) of RA
7718)
15. Contracts for construction of defense-related structure
Up to Thirty Percent (30%) Foreign Equity
16. Advertising
Advertising Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources
18. Ownership of Private Lands
19. Operation and management of public utilities
20. Ownership/establishment and administration of educational institutions
21. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof
22. Contracts for the supply of materials, goods and commodities to government-owned or
controlled corporation, company, agency or Municipal Corporation
23. Project Proponent and facility Operator of a BOT project requiring a public utilities franchise
24. Operation of deep-sea commercial fishing vessels
25. Adjustment Companies
26. Ownership of condominium units where the common areas in the condominium projects are
co-owned by the owners of the separate units or owned by a corporation
Up to Sixty Percent (60%) Foreign Equity
27. Financing companies regulated by the Securities and Exchange Commission
28. Investment housed regulated by the
8.2 List B
In Negative List B, foreign ownership is limited for reason of security, defense, risk to health and
morals and protection of small-and-medium-scale enterprises.
These are:
Up to Forty Percent (40 %) Foreign Equity
1. Manufacture, repair, storage and/or distribution of products and/or ingredients requiring
Philippine National Police (PNP) clearance:
a.) Firearms (handguns to shotguns), parts of firearms and ammunition therefore, instruments or
implements used or intended to be used in the manufacture of firearms
b.) Gunpowder
c.) Dynamite
d.) Blasting supplies
e.) Ingredients used in making explosives:
f.) Telescopic sight, sniper scope and other similar devices
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2. Manufacture, repair, storage and/or distribution of products requiring Department of National

Defense (DND) clearance;
a.) Guns and ammunition for warfare
b.) Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs, grenades, missiles)
c.) Gunnery, bombing and fire control systems and components
d.) Guided missiles/missile systems and components
e.) Tactical aircraft (fixed and rotary -winged), parts and components thereof
f.) Space vehicles and component systems
g.) Combat vessels (air. land and naval) and auxiliaries
h.) Weapons repair and maintenance equipment
i.) Military communications equipment
j.) Night vision equipment
k.) Stimulated coherent radiation devices, components and accessories
l.) Armament training devices
m.) Others as may be determined by the Secretary of the DND
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other like activities regulated by law because
of risks posed to public health and morals
5. All forms of gambling, e.g. race track operation
6. Domestic market enterprises with paid-in equity capital of less than the equivalent of
US$200,000
7. Domestic market enterprises, which involve advanced technology or employ at least fifty (50)
direct employees with paid-in-equity capital of less than the equivalent of US$100,000
9. Foreign investments in Export Enterprises
Foreign investment in export enterprises whose products and services do not fall within Lists A
and B of the Foreign Investment Negative Lists is allowed up to one hundred percent (100%)
ownership.
10. Foreign Investments in Domestic Enterprises
Non-Philippine nationals may own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign
Investment Negative List under Section 8 hereof.
A domestic market enterprise may change its status to export enterprise if over a three (3) year
period it consistently exports in each year thereof sixty per cent (60%) or more of its output.
11. Investment Rights of Former Natural-born Filipinos
a.) Purchase by a former natural-born Filipino citizen pursuant to the Dual Citizenship Law which
states that a former Filipino re-acquiring his Filipino Citizenship shall be deemed not to have
lost his Philippine citizenship, thus enabling them to enjoy all the rights and privileges of a
Filipino;
b.) If a former natural-born Filipino who has become a naturalized citizen of another state opts not
to re-acquire Filipino citizenship according to the Dual Citizenship Act, he may nonetheless own
land but limited to the following according to BP 185 and RA 8179):
i. For residential use:
1. Up to 1,000 square meters of residential land
2. Up to 1 hectare of agricultural land
ii. For business or commercial use
1. Up to 5,000 square meters of urban land
2. Up to 3 hectares of rural land
c.) Purchase of not more than 40% interest in a condominium project; and
d.) Ownership through Filipinos who are married to aliens who retain their Filipino citizenship
e.) They shall have the same investment rights as Philippine citizens in:
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i. cooperative (RA 6938);

ii. rural banks (RA 7353);
iii. thrift banks and private development banks (RA 7906); and
iv. financing companies (RA 5980).

These rights, however, shall not extend to:

Activities reserved by the Constitution
Exercise of profession in the Philippines
Defense-related activities (unless specificall authorized)
Activities covered by Retail Trade Act, Security Agency Act, Small Scale Mining Act,
Rice & Coron Industry Act (as amended) and Cockpits Operation and Management
Presidential Decree
12. Other rights of natural-born citizen pursuant to the provisions of Article XII, Section 8 of the
Constitution
- a natural-born citizen of the Philippines who has lost his Philippine citizenship may be a
transferee of private lands, subject to limitations provided by law.
o
o
o
o

B. SECURITIES REGULATIONS CODE (SRC) - RA 8799

1. Policy
The State shall :
establish a socially conscious, free market that regulates itself;
encourage the widest participation of ownership in enterprises;
enhance the democratization of wealth;
promote the development of the capital market;
protect investors;
ensure full and fair disclosure about securities; and
minimize if not totally eliminate insider trading and other fraudulent or manipulative devices
and practices which create distortions in the free market.
1.1 PSE v. CA, 281 SCRA 232 (1997)
It is the policy of the state to protect its investors. What is material here is that the
uncertainty of the properties ownership and alienability exists, and this puts to question the
qualification of PALIs public offering.
Being a stock exchange, PSE performs a function that is vital to the national economy,
as the business is affected with public interest. As a matter of fact, it has often been said that
the economy moves on the basis of the rise and fall of stocks being traded. By its economic
power, the petitioner certainly can dictate which and how many users are allowed to sell
securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as
it may please. Petitioner can either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to government regulation. It was
reasonable for PSE, therefore, to exercise its judgment in the manner it deems appropriate for
its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
1.2 Abacus Securities Corp. v. Ampil, GR 160016, Feb. 27, 2006
A related purpose of the governmental regulation of margins is the stabilization of the
economy. Restrictions on margin percentages are imposed in order to achieve the objectives of the
government with due regard for the promotion of the economy and prevention of the use of
excessive credit.
Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve
a macroeconomic purpose, that is why payment of traded shares within specified periods are meant
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for the protection of the overall economy from excessive speculation in securities, and thus,
mandatory. Their recognized secondary purpose is to protect small investors.
2. Securities
"Securities" are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instruments, whether written or
electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed
securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement,
certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates
or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.

2.1 Power Homes Unlimited Corp. v. SEC, GR 164182, Feb. 26, 2008
An investment contract is a transaction or scheme (collectively contract) whereby a person
invests his money in a common enterprise and is led to expect profits primarily from the efforts
of others
We therefore rule that the business operation or the scheme of petitioner constitutes an
investment contract that is a security under R.A. No. 8799. Thus, it must be registered with public
respondent SEC before its sale or offer for sale or distribution to the public. As petitioner failed to
register the same, its offering to the public was rightfully enjoined by public respondent SEC. As an
investment contract that is security under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the investing public from fraudulent
securities. The strict regulation of securities is founded on the premise that the capital markets
depend on the investing public level of confidence in the system.
2.2 SEC v. Prosperity.Com Inc., GR 164197, January 25, 2012
For an investment contract to exist, the following elements, referred to as the Howey test
must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is
made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the
efforts of others. Thus, to sustain the SEC position in this case, PCIs scheme or contract with its
buyers must have all these elements.
The buyers of the website do not invest money in PCI that it could use for running some
business that would generate profits for the investors. The price of US$234.00 is what the buyer
pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and
technical skills.

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2.3 SEC v. Santos, GR 195542, March 19, 2014

a person must first and foremost be engaged in the business of buying and selling securities in
the Philippines before he can be considered as a broker, a dealer or salesman within the coverage of
the Securities Regulation Code.
3. Issuer is any entity authorized by the Commission to offer to sell, sell or promote the sale to the
public of its equity, bonds, instruments of indebtedness and other forms of securities.
4. Broker is a person engaged in the business of buying and selling securities for the account of
others.
5. Dealer means many person who buys sells securities for his/her own account in the ordinary
course of business.6
6. Associated person of a broker or dealer is an employee therefor whom, directly exercises
control of supervisory authority, but does not include a salesman, or an agent or a person whose
functions are solely clerical or ministerial.
7. Clearing agency is any person who acts as intermediary in making deliveries upon payment
effect settlement in securities transactions.
8. Exchange is an organized market place or facility that brings together buyers and sellers and
executes trade of securities and/or commodities.
9. Insider means (a) the issuer; (b) a director or officer (or any person performing similar functions)
of, or a person controlling the issuer; gives or gave him access to material information about the
issuer or the security that is not generally available to the public; (d) A government employee,
director, or officer of an exchange, clearing agency and/or self-regulatory organization who has
access to material information about an issuer or a security that is not generally available to the
public; or (e) a person who learns such information by a communication from any forgoing insiders.
10. Pre-need plans are contracts which provide for the performance of future services of or the
payment of future monetary considerations at the time actual need, for which plan holders pay in
cash or installment at stated prices, with or without interest or insurance coverage and includes life,
pension, education, interment, and other plans which the Commission may from time to time
approve.
11. Promoter is a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives consideration therefore.
12. Prospectus is the document made by or an behalf of an issuer, underwriter or dealer to sell or
offer securities for sale to the public through registration statement filed with the Commission.
13. Registration statement is the application for the registration of securities required to be filed with
the Commission.
14. Salesman is a natural person, employed as such as an agent, by a dealer, issuer or broker to buy
and sell securities.
15. Uncertificated security is a security evidenced by electronic or similar records.

16. Underwriter is a person who guarantees on a firm commitment and/or declared best effort basis
the distribution and sale of securities of any kind by another company.
17. Powers and Functions of SEC
The commission shall act with transparency and shall have the powers and functions provided by
this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the
Financing Company Act and other existing laws. Pursuant thereto the Commission shall have,
among others, the following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnership or associations who are the
grantees of primary franchises and/or a license or a permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspect of the securities market and propose
legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
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(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SROs;
(f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputized any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm, association or
person in the implementation of its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders
or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of
corporations, partnership or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
The Commissions jurisdiction over all cases enumerated under section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the enactment
of this Code. The Commission shall retain jurisdiction over pending suspension of
payment/rehabilitation cases filed as of 30 June 2000 until finally disposed.

18. Requirement of Registration of SecuritiesSecurities shall not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance as the Commission may
prescribe, shall be made available to each prospective purchaser.
The Commission may conditionally approve the registration statement under such terms as it
may deem necessary.

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The Commission may specify the terms and conditions under which any written communication,
including any summary prospectus, shall be deemed not to constitute an offer for sale under this
Section.
A record of the registration of securities shall be kept in Register Securities in which shall be
recorded orders entered by the Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered therein shall be open to public
inspection at reasonable hours on business days.
The Commission may audit the financial statements, assets and other information of firm
applying for registration of its securities whenever it deems the same necessary to insure full
disclosure or to protect the interest of the investors and the public in general. (RA 8799 sec. 8)

19. Exempt Securities

A. Any evidence of indebtedness issued by a financial institution that has been licensed
by the BSP to engage in banking or quasi-banking shall be exempt from registration
under Section 8.1 ofthe Code.
B. The requirement of registration of securities shall not likewise as a general rule apply
to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of the Philippines, or by any political
subdivision or agency thereof, or by any person controlled or supervised by, and acting as an
instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which the Philippines
maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis
of reciprocity: Provided, That the Commission may require compliance with the form and content for
disclosures the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory
Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
C. The registration requirements shall not likewise apply to evidence of indebtedness, e.g.,
commercial papers, that meet the following conditions:
1. Issued to not more than nineteen (19) non-institutional lenders;
2. Payable to a specific person;
3. Neither negotiable nor assignable and held on to maturity; and
4. In an amount not exceeding One Hundred Fifty Million Pesos (PhP 150,000,000.00) or such
higher amount as the Commission may prescribe.
Notwithstanding that a particular class of securities is exempt from registration, the conduct by
any person in the purchase, sale, distribution of such securities, settlement and other post-trade
activities shall comply with the provisions of the Code and the rules issued thereunder.

Page 11 of 91

Moreover, the purchase and sale of such security shall not be exempt from the coverage of the
provisions ofthe Code on civil and other related liabilities, and other applicable provisions of the
Code on fraud.
Consistent with public interest and for the protection of investors, the Commission, may require
an Issuer of a class of securities exempted from registration, to make available to investors and file
with the Commission periodic disclosures regarding the Issuer, its business operations, its financial
condition, its governance principles and practices, its use of investor of funds, and other appropriate
matters, and may also provide for suspension and termination of such requirement with respect to
such Issuer.
Other Exempt Securities
. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of
securities if it finds that the enforcement of this Code with respect to such securities is not necessary
in the public interest and for the protection of investors. (sec 9, RA 8799)

Union Bank v. SEC, GR 138949, June 6, 2001

The law exempts from the registration requirement any security issued or guaranteed by any
banking institution, however, the exemption enjoyed by Union Bank is merely to the initial
requirement of registration of securities for public offering, and not [to] the subsequent filing of
various periodic reports. Failure to do so would defeat the objectives of the `Full Material Disclosure
policy since corporation and its dealings would be totally beyond the reach of respondent
Commission and the investing public.
Exempt Transactions
The requirement of registration of securities shall not apply to the sale of any security in any of
the following transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of
offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the
provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for
such debt.
(c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by
the owner therefore, or by his representative for the owners account, such sale or offer for sale or
offer for sale, subscription or delivery not being made in the course of repeated and successive
transaction of a like character by such owner, or on his account by such representative and such
owner or representative not being the underwriter of such security.
(d) The distribution by a corporation actively engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security holders as a stock dividend or other
distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in connection with the sale of
such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal
property, when the entire mortgage together with all the bonds or notes secured thereby are sold to
a single purchaser at a single sale.
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(g) The issue and delivery of any security in exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make
such conversion:Provided, That the security so surrendered has been registered under this Code or
was, when sold, exempt from the provision of this Code, and that the security issued and delivered
in exchange, if sold at the conversion price, would at the time of such conversion fall within the class
of securities entitled to registration under this Code. Upon such conversion the par value of the
security surrendered in such exchange shall be deemed the price at which the securities issued and
delivered in such exchange are sold.
(h) Brokers transaction, executed upon customers orders, on any registered Exchange or other
trading market.
(i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or
in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or remuneration is paid or given in connection
with the sale or disposition of such securities, and only when the purpose for soliciting, giving or
taking of such subscription is to comply with the requirements of such law as to the percentage of
the capital stock of a corporation which should be subscribed before it can be registered and duly
incorporated, or its authorized, capital increase.
(j) The exchange of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any
twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the Philippines or any
political subdivision thereof or manage by a bank or other persons authorized by the Bangko
Sentral to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as qualified buyers, on the
basis of such factors as financial sophistication, net worth, knowledge, and experience in
financial and business matters, or amount of assets under management.
The Commission may exempt other transactions, if it finds that the requirements of registration
under this Code is not necessary in the public interest or for the protection of the investors such as
by the reason of the small amount involved or the limited character of the public offering.
Any person applying for an exemption under this Section, shall file with the Commission a
notice identifying the exemption relied upon on such form and at such time as the Commission by
the rule may prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth
(1/10) of one percent (1%) of the maximum value aggregate price or issued value of the securities.
(sec 10, RA 8799)

Nestle Phil v. CA, GR 86738, Nov 13, 1991

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Under the ruling issued by the SEC, an issuance of previously authorized but still unissued
capital stock may, in a particular instance, be held to be an exempt transaction by the SEC under
Section 6(b) so long as the SEC finds that the requirements of registration under the Revised
Securities Act are "not necessary in the public interest and for the protection of the investors" by
reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential
buyers are very limited in number and are in a position to protect themselves.
20. Commodity Future Contracts No person shall offer, sell or enter into commodity futures
contracts except in accordance with the rules, regulations and orders the Commission may prescribe
in the public interest. The Commission shall promulgate rules and regulations involving commodity
futures contracts to protect investors to ensure the development of a fair and transparent
commodities market (sec 11, RA 8799)
21. Regulation of Pre-Need Plans No person shall sell or offer for sale to the public any pre-need
plan except in accordance with rules and regulations which the Commission shall prescribe. Such
rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of
pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to
prospective plan holders, prescribing advertising guidelines, providing for uniform accounting
system, reports and recording keeping with respect to such plans, imposing capital, bonding and
other financial responsibility, and establishing trust funds for the payment of benefits under such
plans.
22. Reportorial requirements
Public and Reporting Companies
This SRC Rule shall apply to all public and reporting companies as defined in SRC Rule 3. However,
the obligation of a company which has sold a class of its securities pursuant to a registration under
Section 12 of the Code shall be suspended for any fiscal year if, as of the first day of any such fiscal
year, it has less than one hundred (100) holders of such class of securities and the Commission is
notified of that fact. The suspension shall be availed of only after the year the registration became
effective.
I.

The public and reporting companies shall file with the Commission:

a. An annual report on SEC Form 17-A for the fiscal year in which the registration statement was
rendered effective by the Commission, and for each fiscal year thereafter, within one hundred
five (105) calendar days after the end ofthe fiscal year;
b. A quarterly report on SEC Form 17-Q within forty five (45) calendar days after the end of each of
the first three quarters of each fiscal year. The first quarterly report of the Issuer shall be filed
either within forty five (45) calendar days after the effective date of the registration statement or
on or before the date on which such report would have been required to be filed if the Issuer had
been required previously to file reports on SEC Form 17-Q, whichever is later;
c. A current report on SEC Form 17-C, as may be necessary, to make a full, fair and accurate
disclosure to the public of every material fact or event that occurs which would reasonably be
expected to affect the investors' decisions in relation to those securities. In the event a news
report appears in the media involving an alleged material event, a current report shall be made
within the period prescribed herein in order to clarify the said news item which may create public
speculation if not officially denied or clarified by the concerned company.
The disclosure required by SRC Rule shall be made by the company in
accordance with the following guidelines:
a. Promptly to the public through the news media;
b. If the Issuer is listed on an Exchange, to that Exchange and to the Commission
within ten (10) minutes after the occurrence of the event and prior to its release to
the public through the news media; Provided that, disclosure by the Issuer to the
Exchange may be deemed as filing with the Commission pursuant to a
Memorandum of Agreement between the Exchange and the Commission; Provided
further that, the Memorandum of Agreement shall provide for the ability of the
Page 14 of 91

II.

III.

IV.

V.

Commission to download and upload the same information made available to the
Exchange;
c. If the issuer is not listed on an Exchange, to the Commission through SEC Form 17C within five (5) calendar days after the occurrence of the event reported, unless
substantially similar information as that required by Form 17-C has been previously
reported to the Commission by the Issuer.
Any disclosure signed and filed with the Commission and the Exchange where the securities
of the lssuer are listed, or released to the news media by any director, executive officer or a
principal (as defined under Section 23 of the Code) of an Issuer shall be considered as part
of any report mentioned in SRC Rule 17.1.1.1.3(a) and deemed as an official filing of such
company if it does not deny the subject information within two (2) days /Tom the filing or
release of the disclosure. Any misleading statement, misrepresentation or omission of a
material fact therein shall be considered the joint responsibility of the Issuer and the reporting
director, officer or principal.
An owner of more than five percent (5%) of the voting rights of a public and reporting
company that meets the requirements of Section 17.2 of the Code who holds material
information which may materially affect such company may be required by the Commission
to disclose such information within the period prescribed under SRC Rule 17.1.1.1.3. Failure
to provide the required information shall subject the said stockholder to the sanctions
applicable to violations of this Rule. 17.1.1.4. Issuers of securities registered with the
Commission shall file an annual report on SEC Form 17-A for its predecessors that
registered securities with the Commission during the last full fiscal year of the predecessor
prior to the Issuer's succession, unless such report has already been filed by the
predecessor. The annual report shall contain the information required if it were filed by the
predecessor.
In the event a non-reporting Issuer (in connection with succession by merger, consolidation,
exchange of securities or acquisition of assets) issues equity securities to holders of equity
securities issued by a reporting Issuer, the non-reporting Issuer shall assume the same
obligation as the reporting Issuer to file reports pursuant to Section 17 of the Code, and the
non-reporting Issuer shall file such reports on the same forms as the reporting Issuer.
Notification of lnability to File on Time All or Any Required Portion of SEC Form 17-A or 17-Q.
17.1.1.6.1. If all or any required portion of an armual report (SEC Form 17-A) or quarterly
report (SEC Form 17-Q) required to be filed pursuant to Page 48 of 280 2015 SRC IRR
Section 17 of the Code and SRC Rule 17.1 is not filed within the period prescribed for such
report, the Issuer shall, not later than the due date for such report, file with the Commission
and, if applicable, with the Exchange where any class of its securities is listed, SEC Form 17L which shall contain a disclosure in reasonable detail of its inability to timely file the report
and the reasons for such failure. All information available on the date of the required filing
shall be filed. 17.1.1.6.2. If any report or portion of any report described in SRC Rule 17.1.1.1
is not timely filed because the Issuer is unable to do so without unreasonable effort or
expense, such report shall be deemed to be filed on the prescribed due date for such report.
(RA 8799 IRR)

23. Protection of Shareholder Interests

23.1Tender Offers
means a publicly announced intention by a person acting alone or in concert with other
persons to acquire outstanding equity securities of a public company as defined in SRC Rule 3,
or outstanding equity securities of an associate or related company of such public company
which controls the said public company.
*public company is defined as a corporation.
Mandatory tender offers :
1.) Any person or group of persons acting in concert, who intends to acquire fifteen percent
(15 %) of equity securities in a public company which is listed on an exchange, or a
corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at
Page 15 of 91

least 200 of them holding not less than 100 shares of such company in one or more
transactions within a period of twelve (12) months, shall file a declaration to that effect with
the Commission.
2.) Any person or group of persons acting in concert, who intends to acquire thirty five percent
(35%) of the outstanding voting shares or such outstanding voting shares that are sufficient
to gain control of the board in a public company in one or more transactions within a period
of twelve (12) months, shall disclose such intention and contemporaneously make a tender
offer for the percentage sought to all holders of such securities within the said period. If the
tender offer is oversubscribed, the aggregate amount of securities to be acquired at the
close of such tender offer shall be proportionately distributed across selling shareholders
""ith whom the acquirer may have been in private negotiations and other shareholders. For
purposes of SRC Rule 19.2.2, the last sale that meets the threshold shall not be
consummated until the closing and completion of the tender offer.)
3.) Any person or group of persons acting in concert, who intends to acquire thirty five percent
(35%) of the outstanding voting shares or such outstanding voting shares that are sufficient
to gain control of the board in a public company through the Exchange trading system shall
not be required to make a tender offer even if such person or group of persons acting in
concert acquire the remainder through a block sale if, after acquisition through the
Exchange trading system, they fail to acquire their target of thirty five percent (35%) or such
outstanding voting shares that is sufficient to gain control of the board.
4.) Any person or group of persons acting in concert, who intends to acquire thirty five percent
(35%) of the outstanding voting shares or such outstanding voting shares that are sufficient
to gain control of the board in a public company directly from one or more stockholders
shall be required to make a tender offer for all the outstanding voting shares. The sale of
shares pursuant to the private transaction or block sale shall not be completed prior to the
closing and completion of the tender offer.
5.) If any acquisition that would result in ownership of over fifty percent (50%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make a
tender offer under this Rule for all the outstanding equity securities to all remaining
stockholders of the said company at a price supported by a fairness opinion provided by an
independent financial advisor or equivalent third party. The acquirer in such a tender offer
shall be required to accept all securities tendered. (RA 8799 IRR)
23.1.1 CEMCO Holdings Inc. v. National Life Insurance Co., GR 171815, Aug. 7, 2007
Mandatory tender offer rule covers not only direct acquisition but also indirect acquisition
or any type of acquisition. It is further provided that mandatory tender offer is still applicable
even if the acquisition is less than 35% when the purchase would result in ownership of over
51% of the total outstanding equity securities of the public company.
The legislative intent of Section 19 of the Code
acquisition of control of the listed company and for the
stockholders of a listed corporation. Whatever may be the
company is obtained, either through the direct purchase
means, mandatory tender offer applies.

is to regulate activities relating to

purpose of protecting the minority
method by which control of a public
of its stocks or through an indirect

The bottom line of the law is to give the shareholders of the public company the
opportunity to decide whether or not to sell their shares in connection with the transfer of
control.

23.2Proxy Solicitations
Page 16 of 91

involves the securing and submission of proxies in accordance with the rules. It is a
procedure that antecedes proxy validation.
GSIS v. CA, GR 183905, April 16, 2009
Section 6(g) of Presidential Decree No. 902-A, which states:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx
(g) To pass upon the validity of the issuance and use of proxies and
voting trust agreements for absent stockholders or members;
However, when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.

23.3Internal Record Keeping and Controls \

Every issuer which has a class of securities that satisfies the requirements of Subsection
17.2 shall:
Device and maintain a system of internal accounting controls sufficient to provide reasonable
assurance that:
(a) Transactions and access to assets are pursuant to management authorization;
(b) Financial statements are provided in conformity with generally accepted accounting principles
cggttdvthat are adopted by the Accounting standards council and the rules promulgated by the
Commission with the regard to the preparation of the financial statements; and
(c) Recorded assets are compared with existing assets at reasonable intervals and differences are
reconciled.

23.4Transaction of Directors, Officers and Principal Stockholders 24. Insider trading

The legal version is when corporate insidersofficers, directors, and employeesbuy and sell
stock in their own companies. When corporate insiders trade in their own securities, they must report
their trades to the SEC..

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary
duty or other relationship of trust and confidence, while in possession of material, nonpublic
information about the security. Insider trading violations may also include "tipping" such information,
securities trading by the person "tipped," and securities trading by those who misappropriate such
information.
PROHIBITIONS:
1.) It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of
material information with respect to the issuer or the security that is not generally available to the
public, unless:
(a) The insider proves that the information was not gained from such relationship; or
Page 17 of 91

(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider
proves:
(i) that he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party otherwise is also in possession
ofthe information. A purchase or sale of a security of the issuer made by an insider or such
insider's spouse or relatives by affinity or consanguinity within the second degree, legitimate or
common-law, shall be presumed to have been effected while in possession of material non
public information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time for market to
absorb such information; Provided, however, That this presumption shall be rebutted upon a
showing by the purchaser or seller that he was aware of the material non public information at
the time of the purchase or sale.
2.) Information is "material nonpublic" under this Rule if: (a) It has not been generally disclosed
to the public and would likely affect the market price of the security after being disseminated to the
public and the lapse of a reasonable time for the market to absorb the information; or (b) would be
considered by a reasonable person important under the circumstances in determining his course of
action whether to buy, sell or hold a security.
3.) It shall be unlawful for any insider to communicate material nonpublic information about the
issuer or the security to any person who, by virtue of the communication, becomes an insider as
defined in Section 3.8 of the Code, where the insider communicating the information knows or has
reason to believe that such person will likely buy or sell a security of the issuer whole in possession
of such information.
4.) Where a tender offer has commenced or is about to commence, it shall be unlawful for:
a. Any person (other than the tender offeror) who is in possession of material nonpublic
information relating to such tender offer, to buy or sell the securities of the issuer that are sought or
to be sought by such tender offer if such person knows or has reason to believe that the information
is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its
behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such
issuer; and
b. Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be
sought by such tender offer, and any insider of such issuer to Page 92 of 280 20/5 SRC /RR
communicate material non public information relating to the tender offer to any other person where
such communication is likely to result in a violation of the preceding SRC Rule.
The term "securities of the issuer sought or to be sought by such tender offer" shall include any
securities convertible or exchangeable into such securities or any options or rights in any of the
foregoing securities. (Rule 27, RA 8799 IRR)
24.1SEC v. Interport Resources Corp, GR 135808, October 6, 2008
The Revised Securities Act does not require the enactment of implementing rules to make it binding and
effective. The provisions of the RSA are sufficiently clear and complete by themselves. The requirements are
specifically set out and the acts which are enjoined are determinable. The insider's misuse of nonpublic and
undisclosed information is the gravamen of illegal conduct. The intent of the law is the
protection of investors against fraud, committed when an insider, using secret information,
takes advantage of an uninformed investor. Insiders are obligated to disclose material
information to the other party or abstain from trading the shares of his corporation. This duty to
disclose or abstain is based on two factors: first, the existence of a relationship giving access,
directly or indirectly, to information intended to be available only for a corporate purpose and
not for the personal benefit of anyone; and second, the inherent unfairness involved when a
party takes advantage of such information knowing it is unavailable to those with whom he is
dealing.
25. Margin Trading
A kind of trading that allows a broker to advance for the customer/investor part of the purchase
price of a security and to keep it as collateral for such advance.
The credit extended must be for an amount not greater than whichever is higher of:
a. 65% of current market price of the security;or
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b. 100% of the lowest market price of security during the preceding 36 calendar
months, but not greater than 75% of the current market price (SRC, Sec. 48)
25.1Abacus Securities Corp. v. Ampil, GR 160016, Feb. 27, 2006
The law places the burden of compliance with margin requirements primarily upon the
brokers and dealers. The mandatory close-out rule, clearly vest upon petitioner the obligation,
not just the right, to cancel or otherwise liquidate a customers order, if payment is not received
within three days from the date of purchase. The word shall as opposed to the word may, is
imperative and operates to impose a duty, which may be legally enforced. For
transactions subsequent to an unpaid order, the broker should require its customer to deposit
funds into the account sufficient to cover each purchase transaction prior to its execution. These
duties are imposed upon the broker to ensure faithful compliance with the margin requirements
of the law, which forbids a broker from extending undue credit to a customer.
27. Civil Liability
Citibank v. Tanco-Gabaldon, GR 198444, Sept 4, 2013
Section 62 of the SRC provides that no o action shall be maintained to enforce any
liability created under Section 56 of the SRC (False registration statement) and 57 (sale of
unregistered security and liabilities arising in connection with prospectus, communication and
other reports) unless brought within two (2) years after the discovery of the untrue statement or
the omission, but not more than five (5) years after the security was bona fide offered to the
public, ormore than five (5) years after the sale. The prescriptive periods under the mentioned
sections pertain only to civil liability in cases of violations under SRC and not to criminal liability
under the same violations.
Pua v. Citibank, GR 180064, Sept 16, 2013
Civil liabilities arising from violations of the requirements for offers to sell or the sale of
securities, as well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall
be exclusively brought before the regional trial courts.
Therefore civil suits falling under the SRC are under the exclusive original jurisdiction of
the regional trial courts and hence, need not be first filed before the SEC, unlike criminal
cases wherein the latter body exercises primary jurisdiction
C. CORPORATION CODE BP 68
A. Corporation
1. Definition
A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its existence. (sec.
2, BP 68)
2. Attributes of the Corporation
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent
on its will," it is "a creature without any existence until it has received the imprimatur of the state
acting according to law." A corporation will have no rights and privileges of a higher priority than
that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs.
(Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1)
(2)
(3)

It is an artificial being;
Created by operation of law;
With right of succession;
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(4)
Has the powers, attributes, and properties as expressly authorized by law or incident to
its existence

Reyes v. RTC of Makati, GR 165744, Aug 11, 2008

The injury he seeks to remedy is one suffered by an heir (for the impairment of his successional
rights) and not by the corporation nor by Rodrigo as a shareholder on record.
Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia;
he only stands as a transferee-heir whose rights to the share are inchoate and unrecorded. An heir
does not automaticall becomes a stockolder of the corporation.
Rodrigo must, hurdle two obstacles before he can be considered a stockholder of Zenith with
respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement
of the decedents estate. Second, he must register the transfer of the shares allotted to him to make it
binding against the corporation. He cannot demand that this be done unless and until he has
established his specific allotment (and prima facie ownership) of the shares. Without the settlement of
Anastacias estate, there can be no definite partition and distribution of the estate to the heirs. Without
the partition and distribution, there can be no registration of the transfer. And without the registration,
we cannot consider the transferee-heir a stockholder who may invoke the existence of an intracorporate relationship as premise for an intra-corporate controversy within the jurisdiction of a special
commercial court. The subject shares of stock (i.e., Anastacias shares) are concerned Rodrigo
cannot be considered a stockholder of Zenith.There is no injury, actual or threatened, alleged to have
been done to the corporation due to Oscars acts. If indeed he illegally and fraudulently transferred
Anastacias shares in his own name, then the damage is not to the corporation but to his co-heirs; the
wrongful transfer did not affect the capital stock or the assets of Zenith. As already mentioned, neither
has Rodrigo alleged any particular cause or wrongdoing against the corporation that he can champion
in his capacity as a shareholder on record.

B. Classes of Corporations
- Corporations formed or organized may be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations

CIR v. Club Filipino de Cebu, 1962

For a stock corporation to exist, 2 requisites must be complied with:

(1) a capital stock divided into shares
(2) an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of shares held.
What is determinative of whether or not the Club is engaged in such business is its
object or purpose, as stated in its articles and by-laws. Filipino Club is a non stock corporation.
Page 20 of 91

The Club was organized to develop and cultivate sports of all class and denomination
for the healthful recreation and entertainment of its stockholders and members. There was in
fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its
bar and restaurants used were to defray its overhead expenses and to improve its golf course.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for
the distribution of its dividends or surplus profits

Baluyot v. Holganza, 2000

The Philippine National Red Cross (PNRC) is a government owned and controlled corporation,

with an original charter under Republic Act No. 95, as amended. The test to determine whether a
corporation is government owned or controlled, or private in nature is simple. Is it created by its own
charter for the exercise of a public function, or by incorporation under the general corporation law?
Those with special charters are government corporations subject to its provisions, and its employees
are under the jurisdiction of the Civil Service Commission, and are compulsory members of the
Government Service Insurance System. The PNRC was not "impliedly converted to a private
corporation" simply because its charter was amended to vest in it the authority to secure loans, be
exempted from payment of all duties, taxes, fees and other charges of all kinds on all importations
and purchases for its exclusive use, on donations for its disaster relief work and other services and in
its benefits and fund raising drives, and be allotted one lottery draw a year by the Philippine Charity
Sweepstakes Office for the support of its disaster relief operation in addition to its existing lottery
draws for blood program.

Roman Catholic Church v. Register of Deeds of Davao City, 1957

Roman Catholic is a corporation sole . A corporation sole is a special form of corporation

usually associated with the clergy Any corporation sole may purchase and hold real estate and
personal; property for its church, charitable, benevolent, or educational purposes, and may receive
bequests or gifts of such purposes.
*see nationality of a sole corporation

Hall v. Piccio, 86 SCRA 603 (1950)

The Court held that there was no de facto corporation on the ground that the corporation
cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of
incorporation.
The court has jurisdiction on the dissolution of de facto corporation. However, in this
case, they were aware that they have not yet formed a corporation until the issuance of the
SEC registration.
*SEE 4 REQUISITES BEFORE A ONE MAY BE DECLARED AS A DE FACTO CORPORATION
C. Nationality of Corporations 1. Place of Incorporation Test Sec 123
National of the country under whose laws was incorporated
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A foreign corporation is one formed, organized or existing under any laws other than those of
the Philippines and whose laws allow Filipino citizens and corporations to do business in its own
country or state. It shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in this country in accordance with this Code and a certificate of authority
from the appropriate government agency.

3. Control Test

Gamboa v. Teves, GR 176579, Oct 9, 2012 (and June 28, 2011 decision)

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation
to be granted authority to operate a public utility, at least 60 percent of its capital must be owned by
Filipino citizens. The term capital in Section 11, Article XII of the Constitution refers only to shares of
stock entitled to vote in the election of directors of a public utility, i.e., to the total common shares in
PLDT.
The evident purpose of the citizenship requirement is to prevent aliens from assuming control of
public utilities, which may be inimical to the national interest. This specific provision explicitly reserves
to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to conserve and develop our patrimony and ensure a self-reliant and independent national
economy effectively controlled by Filipinos.
4. Grandfather Rule
Under this rule, corporate stockholdings will be traced from the nationality of the stockholders of
investor corporations in determining in turn, the nationality of investee corporation. The rule should
apply only if there is a problem on the nationality of the investor-corporation itself. (SEC now applies
control test).

Redmont Consolidated Mines Corp v. Mc Arthur Mining Inc, 2010

The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command
of the Constitution. Hence, the Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.

D. Corporate Juridical Personality Sec. 19

1. Doctrine of Separate Juridical PersonalityPage 22 of 91

a. Liability for Torts and Crimes

PNB v CA, 1978

A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort committed
by an agent or servant are the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial person. All of the
authorities agree that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person, A corporation is liable,
therefore, whenever a tortious act is committed by an officer or agent under express direction or
authority from the stockholders or members acting as a body, or, generally, from the directors as
the governing body."

b. Recovery of Moral Damages

Sec 36

NAPOCOR v. Phillip Brothers Oceanic, 2001

The award of moral damages is likewise improper. To reiterate, NAPOCOR did not act in bad
faith. Moreover, moral damages are not, as a general rule, granted to a corporation. [47] While it is true
that besmirched reputation is included in moral damages, it cannot cause mental anguish to a
corporation, unlike in the case of a natural person, for a corporation has no reputation in the sense that
an individual has, and besides, it is inherently impossible for a corporation to suffer mental anguish.

Filipinas Broadcasting Network v Ago Medical, 2005

A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock. However, the Courts statement in Mambulao that a corporation may have a
good reputation which, if besmirched, may also be a ground for the award of moral damages is an
obiter dictum. Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander
or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages. Moreover, where the broadcast is libelous per
se, the law implies damages. In such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the recovery of some
damages. In this case, the broadcasts are libelous per se.
Bataan Shipyard &Eng Co v PCGG, 1987
Right against self-incrimination has no application to juridical persons. There is a reserve right
in the legislature to investigate the contracts of a corporation and find out whether it has exceeded its
powers. It would be a strange anomaly to hold that a state, having chartered a corporation like
BASECO to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these
franchises had been employed, and whether they had been abused, and demand the production of the
corporate books and papers for that purpose.

Page 23 of 91

Neither is the right against unreasonable searches and seizures applicable here. There were no
searches made and no seizure pursuant to any search was ever made. BASECO was merely ordered
to produce the corporate records.

2. Doctrine of Piercing the Corporate Veil

It is a theory introduced for the purpose of convenience and to serve the ends of justice. But
when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convinence,
justify wrong or defend crime, this fiction shall be disregarded and the individuals composing it will be
treated identically. This is a judicial function.

a. Grounds for Application of Doctrine

PNB v Andrada Electric & Engineering Co, 2002

Piercing the veil of corporate fiction may be allowed only if the following elements concur:
(1) control not mere stock control, but complete domination not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been such that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own;
(2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the
violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiff's legal right; and
(3) the said control and breach of duty must have proximately caused the injury or unjust loss complained
of.
The absence of the foregoing elements in the present case precludes the piercing of the
corporate veil . First, other than the fact that PNB and NASUDECO acquired the assets of
PASUMIL, there is no showing that their control over it warrants the disregard of corporate
personalities. Second, there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter
ego, business conduit or instrumentality of another entity or person. Third, AEEC was not
defrauded or injured when PNB and NASUDECO acquired the assets of PASUMIL. Hence,
although the assets of NASUDECO can be easily traced to PASUMIL, the transfer of the latter's
assets to PNB and NASUDECO was not fraudulently entered into in order to escape liability for
its debt to AEEC. Neither was there any merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation Code 59 was not followed. In
fact, PASUMIL's corporate existence had not been legally extinguished or terminated

Seaoil v Autocorp Group, 2008

It is settled that a corporation has a personality separate and distinct from its individual
stockholders or members, and is not affected by the personal rights, obligations and
transactions of the latter The corporation may not be held liable for the obligations of the
persons composing it, and neither can its stockholders be held liable for its obligation.
Page 24 of 91

Of course, this Court has recognized instances when the corporations separate
personality may be disregarded. However, we have also held that the same may only be done
in cases where the corporate vehicle is being used to defeat public convenience, justify wrong,
protect fraud, or defend crime. Moreover, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.

b. Test in Determining Applicability

Concept Builders Inc v. NLRC, GR 108734, May 29, 1996

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction
are:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty or dishonest and unjust act in
contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

Clearly, CBI ceased its business operations in order to evade the payment to Marabe, et. al. of
back wages and to bar their reinstatement to their former positions. HPPI is obviously a
business conduit of CBI and its emergence was skillfully orchestrated to avoid the financial
liability that already attached to CBI.

PNB v Ritratto Group, 2001

The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the personal rights,
obligations and transactions of the latter. The mere fact that a corporation owns all of the stocks
of another corporation, taken alone is not sufficient to justify their being treated as one entity. If
used to perform legitimate functions, a subsidiary's separate existence may be respected, and
the liability of the parent corporation as well as the subsidiary will be confined to those arising in
their respective business. The courts may in the exercise of judicial discretion step in to prevent
the abuses of separate entity privilege and pierce the veil of corporate entity
The Circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to
catalogue the infinite variations of fact that can arise but there are certain common
circumstances which are important and which, if present in the proper combination, are
controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
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(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.

DBP v HRCC, GR 167603, March 13, 2013

A corporation is an artificial entity created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or incident to its
existence. It has a personality separate and distinct from that of its stockholders and from that of other
corporations to which it may be connected. As a consequence of its status as a distinct legal entity and
as a result of a conscious policy decision to promote capital formation, a corporation incurs its own
liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the
separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder. This protection from liability for shareholders is the principle of limited liability.
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud,
or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
In this connection, case law lays down a three-pronged test to determine the application of the
alter ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporations
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to
Page 26 of 91

establish whether the subsidiary corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent corporations conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the
plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses
the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of
injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the instrumentality of
the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendants exercise of control and improper use of the corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent corporation,
fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing
the corporate veil.

E. Incorporation and Organization

1. Promoter a. Liability of Promoter
GENERAL RULE:

Promoters are personally liable on their contracts made on behalf

of a corporation to be formed.

EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted

that the fact that the corporation when formed has adopted or ratified the contract
does not release the promoter from responsibility unless a novation was intended.

b. Liability of Corporation for Promoters Contracts

While a corporation could not have been a party to a promoter's contract since it
did yet exist at the time the contract was entered into and thus could not possibly have
had an agent who could legally bind it, the corporation may make the contracts its own
and become bound thereon if, after incorporation, it:
(1)
(2)

Adopts or ratifies the contract; or

Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the
corporation cannot adopt only the part that is beneficial to it and discard that which is
burdensome. Moreover, the contract must be one which is within the powers of the
corporation to enter, and one which the usual agents of the company have express or
implied authority to enter.
Page 27 of 91

Cagayan Fishing Devt Co Inc v. Sandiko ***see general capacity to act****

The contract here was entered into not between Manuel Tabora and a non-existent corporation

but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the
same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand.
For reasons that are self-evident, these promoters could not have acted as agent for a projected
corporation since that which no legal existence could have no agent. This is not saying that under
no circumstances may the acts of promoters of a corporation be ratified by the corporation if and
when subsequently organized, however, under the peculiar facts and circumstances of the present
the court declined to extend the doctrine of ratification which would result in the commission of
injustice or fraud to the candid and unwary. A corporation, until organized, has no life and therefore
no faculties. Cagayan Fishing Devt Corp could not and did not acquire the four parcels of land sold
by Tabora, it also follows that it did not possess any resultant right to dispose of them by sale to the
defendant, Teodoro Sandiko. The corporation had no juridical personality to enter into a contract.

Rizal Light & Ice Co., Inc. v. Municipality of Morong, GR L-20993, Sept 28, 1968
The incorporation of (Morong) and its acceptance of the franchise as shown by this action in

prosecuting the application filed with the Commission for approval of said franchise, not only
perfected a contract between the municipality and Morong but also cured the deficiency pointed out
by the petition. The fact that Morong did not have a corporate existence on the day the franchise
was granted does not render the franchise invalid, as Morong later obtained its certificate of
incorporation and accepted the franchise.

2. Number and Qualifications of Incorporators Sec 10

Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of the corporation.

3. Corporate Name Limitations on Use of Corporate Name Sec 18& 16

No corporate name may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.

Republic Planters Bank v. CA, 1992

Page 28 of 91

The corporation, upon such change in its name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same corporation with a different name, and its character
is in no respect changed.
A change in the corporate name does not make a new corporation, and whether affected by
special act or under a general law, has no affect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation continues, as before, responsible in its new name for all debts or
other liabilities which it had previously contracted or incurred. As a general rule, officers or directors
under the old corporate name bear no personal liability for acts done or contracts entered into by
officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent
of the old corporation and the change of name meant only the continuation of the old juridical entity, the
corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.

4. Corporate Term Sec 11

A corporation shall exist for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50)
years in any single instance by an amendment of the articles of incorporation, in accordance with this
Code; Provided, That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Securities and Exchange Commission.
5. Minimum Capital Stock and Subscription Requirements Sec 12
At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of
the total subscription must be paid upon subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon
call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital
be less than five Thousand (P5,000.00) pesos
.
6. Articles of Incorporation a. Nature and Function of Articles
It contains the purpose of which a corporation is organized. Contents of which are enumerated
below.

b. ContentsSec 14
All corporations organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly signed and acknowledged by
all of the incorporators, containing substantially the following matters, except as otherwise prescribed
by this Code or by special law:
Page 29 of 91

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which must be within
the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen
(15);
7. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the share are par value shares,
the par value of each, the names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of the shares are without
par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of incorporation of any
stock corporation unless accompanied by a sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully
paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five
(25%) percent of the said subscription, such paid-up capital being not less than five thousand
(P5,000.00) pesos.

c. Amendment Sec 16
xxx Unless otherwise prescribed by this Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors or trustees and the vote or written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the vote or written assent of at least
two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be set
out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath by the corporate secretary and
a majority of the directors or trustees stating the fact that said amendment or amendments have been
duly approved by the required vote of the stockholders or members, shall be submitted to the
Securities and Exchange Commission.
Page 30 of 91

The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the corporation. xxx

d. Non-Amenable Items 7. Registration and Issuance of Certificate of Incorporation

Documents to be filed with SEC (2002 Bar exams)

The documents to be submitted to the Securities and Exchange Commission (SEC) to
incorporate a new company to be called FSB Savings & Mortgage Bank, Inc., to obtain the
certificate of incorporation for said company, are:

1) Articles of Incorporation
2) Treasurers Affidavit;
3) Certificate of Authority from the Monetary Board of the BSP;
4) Verification slip from the records of the SEC whether or not the proposed name has already
been adopted by another corporation, partnership or association;
5) Letter undertaking to change the proposed name if already adopted by another corporation,
partnership or association;
6) Bank certificate of deposit concerning the paid-up capital;
7) Letter authorizing the SEC or Monetary Board or its duly authorized representative to
examine the bank records regarding the deposit of the paid-up capital; and
8) Registration Sheet.
Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or
by special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and the vote
or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it
be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be set out
in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath by the corporate secretary
and a majority of the directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members, shall be submitted to the
Securities and Exchange Commission.

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The amendments shall take effect upon their approval by the Securities and Exchange Commission
or from the date of filing with the said Commission if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation.
Section 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. The Securities and Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance with the requirements of this
Code: Provided, That the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The following are grounds
for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with
the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is
false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasibanking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other corporations
governed by special laws shall be accepted or approved by the Commission unless accompanied by
a favorable recommendation of the appropriate government agency to the effect that such articles or
amendment is in accordance with law. (n)

Grounds for revocation Sec 17

8. Adoption of By-Laws Sec 46

When adopted:
(a) No later than one (1) month after receipt from SEC of official
notice of issuance of Cert. of incorporation.
Requirement:

Affirmative vote of stockholders representing at least

majority of outstanding capital stock (Stock Corp.) or members (NonStock)
Must be signed by stockholders or members voting for them

(b) Prior to incorporation

Requirement:

Approval of all incorporators; must be signed by all of them

Where kept:

(1) In the principal office of the corporation ; and

(2) Securities and Exchange Commission

When effective:

Only upon the SECs issuance of a certification that the by-laws

are not inconsistent with the Corporation Code.

Special corporations: By-laws and/or amendments thereto must be accompanied by

a certificate of the appropriate government agency to the
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effect that such by-laws / amendments are in accordance with

law.

banks or banking institutions

building and loan associations
trust companies
insurance companies
public utilities
educational institutions
other special corporations governed by special laws

a. Nature and Functions of By-Laws

China Banking Corp. v. CA, 1997

Settled is the rule that, third persons are not bound by the by-laws of the Corporation as it
operates as an internal rules of the Corporation. In order to be bound, the third party must have
acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said
third party and the shareholder was entered into. Herein, at the time the pledge agreement was
executed. VGCCI could have easily informed CBC of its by-laws when it sent notice formally
recognizing CBC as pledgee of one of its shares registered in Calapatia's name.

b. Requisites of Valid By-Laws Sec 74

i. It must be consistent with the Corporation Code, other pertinent laws and regulations;
ii. It must be consistent with the Articles of Incorporation. Hence, in case of conflict, the AOI
prevails.
iii. It must be reasonable and not arbitrary or oppressive; and
iv. It must not disturb vested rights, impair contract or property rights of stockholders or
members or create obligations unknown to law.

c. Binding Effectsi. As to the Corporation and is components:

binding not only upon the corporation but also on its stockholder, members and those
having direction, management and control of its affairs.
ii. As to third persons:

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It is not binding unless there is actual knowledge. Third persons are not even bound to
investigate the content because they are not bound to know the By-laws which are merely provisions of
the government of a corporation and notice to them will not be presumed.

d. Amendment or Revision Sec 48

The board of directors or trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the members of a non-stock
corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any bylaws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the
power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to
the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be
considered as revoked whenever stockholders owning or representing a majority of the outstanding
capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original articles of incorporation
and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code.

F. Corporate Powers
1. General Powers, Theory of General Capacity Sec 36
Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
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transaction of the lawful business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

2. Specific Powers, Theory of Specific Capacity Sec 37-44

a. Power to Extend or Shorten Corporate Term Sec 37
A private corporation may extend or shorten its term as stated in the articles of incorporation
when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action
and of the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this
code.
b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded IndebtednessSec 38
No corporation shall increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board of directors and, at a
stockholders meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of
the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholders meeting at which the proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder
at his place of residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par
stock thereof actually subscribed, the names, nationalities and residences of the persons
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subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall
be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and
the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing
may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of
the corporation lawfully holding office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twentyfive (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission,
which shall have the authority to determine the sufficiency of the terms thereof.

c. Power to Deny Pre-Emptive Rights- Sec 39

All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings, unless such right is
denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt.

d. Power to Sell or Dispose of Corporate Assets- Sec 40

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Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation
may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such
terms and conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a stockholders or members meeting duly called for the
purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or
other disposition of property and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in the usual and regular course of
business of said corporation or if the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into any
transaction authorized by this section.

e. Power to Acquire Own Shares Sec 41

A stock corporation shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.

f. Power to Invest Corporate Funds in Another Corporation or Business- Sec 42

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Subject to the provisions of BP 68, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a stockholders or members meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of the meeting shall
be addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.

g. Power to Declare Dividends Sec 43

The board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.

h. Power to Enter Into Management Contract- Sec 44

No corporation shall conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation, at a meeting duly called for the
purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both
the managing and the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation, then the management contract must be
approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a
non-stock corporation. No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of another
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corporation, whether such contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may be entered into for such
periods as may be provided by the pertinent laws or regulations.

i. Ultra Vires Acts Sec 45

No corporation under this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except such as are necessary or incidental
to the exercise of the powers so conferred.

i. Applicability of Ultra Vires Doctrine

Montelibano v. Bacolod Murcia Milling Co., GR 15092, May 18, 1962

Bacolod-Murcia Milling Co., Inc. cannot deny its obligation to increase the participation of their
planters as embodied in the resolution duly adopted by its Board of Directors when the
corporation extended its milling contract with the planters. The court said that the act in question
is in direct and immediate furtherance of the corporations business, fairly incident to the
express powers and reasonable necessary to their exercise. The court also reiterated the rule
that questions of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its judgment with that
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 nor reviewable by the courts.

ii. Consequences of Ultra Vires Acts

The corporation may be dissolved under a quo warrranto proceeding.

The Certificate of Registration may be suspended or revoked by the SEC.

Parties to the ultra vires contract will be left as they are, if the contract has been
fully executed on both sides. Neither party can ask for specific performance, if the
contract is executory on both sides. The contract, provided that it is not illegal, will
be enforced, where one party has performed his part, and the other has not with the
latter having benefited from the formers performance.

Any stockholder may bring an individual or derivative suit to enjoin a threatened

ultra vires act or contract. If the act or contract has already been performed, a
derivative suit for damages against the directors maybe filed, but their liability will
depend on whether they acted in good faith and with reasonable diligence in
entering into the contracts. When the suit against the injured party who had no
knowledge that the corporation was engaging in an act not included expressly or
impliedly in its purposes clause.
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 Ultra vires acts may become binding by the ratification of all the stockholders, unless
third parties are prejudiced thereby, or unless the acts are illegal.

3. How Exercised
a. By the Shareholders- Sec 6
Shareholders may exercise the following rights as it is an acts of ownership:
1.. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

b. By the Board of Directors Sec 23; exceptions Sec 35 and Sec 44

Section 23. The board of directors or trustees. The corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of stocks, or where there
is no stock, from among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.

Except Powers vested under

Xxx

xxxx

xxxx

xxxx

Section 35. Executive committee. The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed by the board. Said committee
may act, by majority vote of all its members, on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
(1) approval of any action for which shareholders approval is also required;

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(2) the filing of vacancies in the board;

(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.

Section 44. Power to enter into management contract. No corporation shall conclude a
management contract with another corporation unless such contract shall have been approved by the board
of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a
majority of the members in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed corporations own or control more
than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the
case of a non-stock corporation. No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the exploration, development, exploitation or
utilization of natural resources may be entered into for such periods as may be provided by the pertinent
laws or regulations. (n)

c. By the Officers- Sec 25; Sec 27

Section 25. Corporate officers, quorum.
Xxx

xxxx

xxxx

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the bylaws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority
of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a
meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Section 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five
(5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any
corporation.

Doctrine of apparent authority Associated Bank v. Pronstroller, 2008

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Apparent authority is derived not merely from practice. Its existence may be ascertained
through 1) the general manner in which the corporation holds out an officer or agent as having
the power to act, or in other words, the apparent authority to act in general, with which it clothes
him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers.
4. Trust Fund Doctrine

Phil. Trust Co v. Rivera, 44 Phil. 469, 1923

The capital stock, property and other assets of the corporation are regarded as equity in trust
for the payment of the corporate creditors. The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the corporation which creditors have the right to look up to
satisfy their credits. Corporation may not dissipitate this and the creditors may sue stockholders
directly for the unpaid subscription.
This doctrine is the underlying principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of corporate capital only in
three instances:
(1)

amendment of the Articles of Incorporation to reduce the authorized capital

stock,]

(2)

(2) purchase of redeemable shares by the corporation, regardless of the

existence of unrestricted retained earnings; ] and

(3)

(3) dissolution and eventual liquidation of the corporation.

Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent
requirements therefor are complied with.

Yong v Tiu, GR 144476, 8 April 2003

Rescission of the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not
one of the instances when distribution of capital assets and property of the corporation is
allowed.

Yamamoto v. Nishino Industries, GR 150283, April 16, 2008

It is settled that the property of a corporation is not the property of its stockholders or
members. Under the trust fund doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors which are
preferred over the stockholders in the distribution of corporate assets. The distribution of
corporate assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are followed.
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G. Board of Directors and Trustees

1. Doctrine of Centralized Management Sec 23
The corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
A corporation can only act through its directors and officers. Acts of management pertain to the
board and those of ownership to the stockholders or members (Tan v Sycip, GR No. 153468, Aug 17,
2006).

Matling Industrial v. COROS, GR 157802, Oct 13, 2010

A position must be expressly mentioned in the By-Laws in order to be considered as a

corporate office. Thus, the creation of an office pursuant to or under a By-Law enabling provision is not
enough to make a position a corporate office.

Exceptions: Sec 35, Sec 44, Sec 97

a. In case of EXECOM duly authorized by the by-laws;

b. In case of a contracted manager which may be an individual, a partnership or another
corporation;
c. In case the contracted manager is another corporation, the special rule in Sec. 44 applies
which reads:
_____________xxx____________
Section 44. Power to enter into management contract. No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation, at a meeting duly
called for the purpose: Provided, That (1) where a stockholder or stockholders representing
the same interest of both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the board of directors of
Page 43 of 91

the managing corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in
the case of a non-stock corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
--------xxxx--------d. In case of close corporation, the stockholders may directly manage the business of the
corporation instead, if the AOI so provide.
Reason:

The raison detre behind the conferment of corporate powers on the board of directors is not
lost on the Court. Indeed, the concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business directly. And so the plan
of corporate organization is for the stockholders to choose the directors who shall control
and supervise the conduct of corporate business.
2. Business Judgment Rule
As a general rule, directors and trustees of the corporation cannot be held liable for
mistakes or errors in the exercise of their business judgment, provided they have acted in good
faith and with due care and prudence. Contracts intra vires entered into by the board of
directors are binding upon the corporation, and the courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to a wanton destruction of the
rights of the minority.
However, if due to the fault or negligence of the directors the assets of the corporation
are wasted or lost, each of them may be held responsible for any amount of loss which may
have been proximately caused by his wrongful acts or omissions. Where there exists gross
negligence or fraud in the management of the corporation, the directors, besides being liable for
damages, may be removed by the stockholders in accordance with Sec. 28 of the Code.
(Campos & Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.
EXCEPTION:

When such contracts are so unconscionable and oppressive as

to amount to a wanton destruction of the rights of the minority.

Filipinas Port Services v. Go, GR 161886, March 16, 2007

Page 44 of 91

Section 35 of the Corporation Code provides, as a rule, that the creation of an executive
committee (as powerful as the BOD) must be provided for in the bylaws of the corporation.
Should this be violated, it is required that bad faith must be proved.
.
Further, the determination of the necessity for additional offices and/or positions in a
corporation 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 or with malice.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were
the Court to determine the propriety or impropriety of the creation of offices therein and the
grant of salary increases to officers thereof. Such are corporate and/or business decisions
which only the corporations Board of Directors can determine.

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

Sec 23 & Sec 27

QUALIFICATIONS OF DIRECTORS:
a.) Stock Corporation- must own at least one (1) share capital stock of the corporation inhis
own name
Non-stock corporation- must be a member. (sec. 23)
*He must be a stockholder in his own right. It must be legal title not beneficial title.
b.) A majority of the directors/trustees must be residents of the Philippines (SEC 23);
c.) He must not have been convicted by final judgment of an offense punishable by

imprisonment for period exceeding six (6) years or a violation of the Corporation Code, committed
within five (5) years before the date of his lection (sec 27);
d.) He must be of legal age;
e.) He must possess other qualifications as may be prescribed in the by-laws of the corporation.
For example, the percentage of equity participation of foreigners with respect to nationalized activities
must be complied with or he must not be a director in a competing corporation.

Grace Christian High School v. CA, GR 108905, Oct 23, 1997

As a rule, The board of directors of corporations must be elected from among the stockholders

or members.The only exception is when an officer is an ex-officio member in which case he holds a
particular office . By reason of which, he qualifies to be an ex-officio. However, in this case, the seat of
Grace Christian HS in the association was merely tolerated nor can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the members of the association
to waive its invalidity. For that matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law.
4. Elections Page 45 of 91

a. Cumulative Voting for One Candidate- a stockholder is allowed to concentrate his votes and gove
one candidate as many as votes as the number of directors to be elected multiplied by the number of
his shares shall equal.
Cumulative Voting by Distribution-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.

Straight Voting-every stockholder may vote such number of shares for as many persons as
there are directors to be elected

b. Quorum -Sec 52
Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations. (n)

5. Removal Sec 28. Exception.Sec 24.

Requisites for Removal
a. It must take place either at a regular meeting or special meeting of the stockholders
or members called for that purpose;
b. Thre must be previous notice to the stockholders or members of the intention to
remove;
c. The removal must be by vote of the stockholders representing 2/3 of Outstanding
Capital Stock or 2/3 of members.
d. The director may be removedwith or without cause unless he was electedby the
minority, in which case, it is required that there is a cause for removal.

6. Filling of Vacancies Sec 29

a. By stockholders or members--- If vacancy results because of:
i. removal;
ii. expiration of term;
iii. the ground is other than removal or expiration (death, resignation, abandonment)
where the remaining directors do not constitute quorum;
iv.

Increase in the number of directors.

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b. By board if remaining directors constitute a quorum-cases not reserved to stockholders or

members
7. Compensation Sec 30

Western Institute of Technology v. Salas, GR 113032, August 21, 1997

Salas received salaries not as a director but as officer of the Corporation.

As a rule, Directors or trustees, as the case may be, are not entitled to salary or other compensation when
they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation.
Under Section 30 of the Corporation Code, there are only two (2) ways by which members of the board
can be granted compensation apart from reasonable per diems:
(1) when there is a provision in the by-laws fixing their compensation; and
(2) when the stockholders representing a majority of the outstanding capital stock at a regular or special
stockholders' meeting agree to give it to them.

Also, the proscription, however, against granting compensation to director/trustees of a corporation is

not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which state: "[T]he directors
shall not receive any compensation, as such directors." The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The unambiguous implication is that 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.
8. Fiduciaries Duties and Liability Rules

Strategic Alliance Development Corp v. Radstock Securities, Ltd., GR 178158, Dec 4, 2009
The members of the board of directors have a three-fold duty: duty of obedience, duty of

diligence, and duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the
affairs of the corporation only in accordance with the purposes for which it was organized; (2) shall
not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or
act in bad faith or with gross negligence in directing the affairs of the corporation; and (3)
shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees.
In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed
to act in good faith in handling the affairs of PNCC.

Sec 31, 34 65.

Section 31. Liability of directors, trustees or officers. Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly
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and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own funds in the venture.
Section 65. Liability of directors for watered stocks. Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par or issued
value or for a consideration in any form other than cash, valued in excess of its fair value, or
who, having knowledge thereof, does not forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to
the corporation and its creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same.

Special Facts Doctrine Strong v. Repide, 213 US 419 (1909)

held a dominant insider could not trade surreptitiously with an unsuspecting shareholder
when the insider possessed highly material, confidential corporate information.
Repide, the companys majority shareholder and general manager, had finished
negotiating the sale of a significant corporate property and sought to buy more corporate shares
from a fellow shareholder. To hide his identity, Repide used an intermediary who bought the
shares from shareholders agent. The court agreed the agent would not have sold had he knew
Repide was the buyer.
Under these circumstances, Repide employed an agent to purchase the stock of Strong,
concealed his own identity and his knowledge of the state of negotiations and their probable
result. The concealment of his identity while procuring the purchase of the stock, by his agent,
was in itself strong evidence of fraud on the part of Repide. By such means, the more easily
was he able to avoid questions relative to the negotiations for the sale of Dominican lands and
actual misrepresentations regarding that subject. He kept up the concealment as long as he
could by giving the check of a third person Rueda Ramos, for the purchase money. This move
of Repide was a studied and intentional omission to be characterized as part of the deceitful
machinations to obtain the purchase without giving any information whatever as to the state and
probable result of the negotiations and to obtain a lower price for the shares of Strong. After the
purchase of stock, he continued negotiations for the sale of the Dominican lands as the
administrator general and eventually entered into a contract of sale. The whole transaction
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gives conclusive evidence of the overwhelming influence Repide had in the negotiations and it
is clear that the final consummation was in his hands at all times.

9. Responsibility for Crimes

Time Inc. v. Reyes, 1971

That respondents-plaintiffs could not file a criminal case for libel against a non-resident
defendant does not make Republic Act No. 4363 incongruous of absurd, for such inability to file a
criminal case against a non-resident natural person equally exists in crimes other than libel. It is a
fundamental rule of international jurisdiction that no state can by its laws, and no court which is only
a creature of the state, can by its judgments or decrees, directly bind or affect property or persons
beyond the limits of the state. Not only this, but if the accused is a corporation, no criminal action
can lie against it, whether such corporation or resident or non-resident. At any rate, the case filed
by respondents-plaintiffs is case for damages.

10. Inside Information

USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at
all to stockholders in relation to transactions whereby the officers and directors buy for
themselves shares of stock from the stockholders?
MINORITY RULE:
YES. Directors and officers have an obligation to
the stockholders individually as well as collectively.
MAJORITY RULE:
the

NO. Directors and officers owe no fiduciary duty at

all to stockholders, but may deal with them at arms
length. No duty of disclosure of facts known to
director or officer exists. Nondisclosure cannot
constitute constructive fraud.

SPECIAL FACTS DOCTRINE: IT DEPENDS. Where special circumstances

or facts are present which make in inequitable to
withhold information from the stockholder, the duty
to disclose arises, and concealment is fraud.

Insider Sec 3.8 SRC

"Insider" means
(a) the issuer;
(b) a director or officer (or any person performing similar functions) of, or a person
controlling the issuer;

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(c) a person whose relationship or former relationship to the issuer gives or gave him
access to material information about the issuer or the security that is not generally
available to the public;
(d) A government employee, director, or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
(e) a person who learns such information by a communication from any forgoing
insiders.
11. Contracts
a. By Self-Dealing Directors with the Corporation Sec 32
Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable
under the circumstances. (n)

b. Between Corporations with Interlocking Directors Sec 32

Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.

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Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances. (n)

c. Management Contracts Sec 44

Contract to manage the day-to-day affairs of the corporation in accordance with the
policies laid down by the board of the managed corporation.
BOD can and usually delegate many of its functions but it cant abdicate its
responsibility to act as a governing body by giving absolute power to officers or
others, by way of a management contract or otherwise. It must retain its control over
such officers so that it may recall the delegation of power whenever the interests of
the corporation are seriously prejudiced thereby.

13. Executive Committee Sec 35

The by-laws of a corporation may create an executive committee, composed of not less
than three members of the board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the competence of the board, as
may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
(1) approval of any action for which shareholders approval is also required;
(2) the filing of vacancies in the board;
(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its express terms is not
so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
13. Meetings a. Regular or Special
Regular meetings of the board of directors or trustees of every corporation shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the call of the
president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the

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scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly.

Expert Travel & Tours, Inc. v. CA, G.R. No. 152392, May 26, 2005
The courts may take judicial notice that business transactions may be made by individuals
through teleconferencing. Teleconferencing and videoconferencing of members of board of
directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and
Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such conferences. HOWEVER, in the
case at bar, even given the possibility that Atty. Aguinaldo and SukKyoo Kim participated in a
teleconference along with the respondents Board of Directors,the Court is not convinced that
one was conducted; even if there had been one, the Court isnot inclined to believe that a board
resolution was duly passed specifically authorizing Atty.Aguinaldo to file the complaint and
execute the required certification against forum shopping. Facts and circumstances show that
there was gross failure on the part of company to prove that there was indeed a special
teleconference such as failure to produce a written copy of the board resolution via
teleconference

SEC Memorandum Circular No.15

Series of 2001
To

All Concerned

Subject

Board Meeting Through Teleconferencing or Videoconferencing (Tele/Video Conferencing)

In relation to Section 16 of the Electronic Commerce Act (R.A. 8792) and Section 25 of the Corporation Code of
the Philippines (BP68) the following are the guidelines for the conduct of teleconferencing and videoconferencing (i.e.
conferences or meetings through electronic medium or telecommunications where the participants who are not physically
present are located at different local or international places) of the Board of Directors for the information and guidance of
all concerned:
1.

The Secretary of the meeting shall assume the following responsibilities:

a. to safeguard the integrity of the meeting via tele/videoconferencing
b. to find good tele/videoconference equipment/facilities
c. to record the proceedings and prepare the minutes of the meeting
d. to store for safekeeping and mark the tape recording/s and/or other electronic recording mechanism as
part of the records of the corporation

2.

3.

The Secretary shall send out the notices of the meeting to all directors in accordance with the manner of
giving notice as stated in the corporate by-laws.
The notice shall include the following:
a. Inquiry on whether the director will attend physically or through tele/videoconferencing;
b. Contact number/s of the Secretary and office staff whom the director may call to notify and state whether
he shall be physically present or attend through tele/videoconferencing;
c. Agenda of the meeting;
d. All documents to be discussed in the meeting, including attachments, shall be numbered and duly marked
by the Secretary in such a way that all the directors, physically or electronically present, can easily follow,
refer to the documents and participate in the meeting.

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4.

If the director chooses tele/videoconferencing, he shall give notice of at least five days prior to the
scheduled meeting to the Secretary. The latter shall be informed of his contact number/s. In the same way,
the Secretary shall inform the director concerned of the contact number/s he will call to join the meeting. The
Secretary shall keep the records of the details, and on the date of the scheduled meeting, confirm and note
such details as part of the minutes of the meeting.

5.

In the absence of an arrangement, it is presumed that the director will physically attend the Board meeting.

6.

At the start of the scheduled meeting, a roll call shall be made by the Secretary. Every director and
participant shall state, for the record, the following:
a. Full Name
b. Location
c. For those attending through tele/videoconferencing, he shall confirm that:
i.

he can completely and clearly hear the others who can clearly hear him at the end of the line

ii. state whether he has received the agenda and all the materials for the meeting
iii. specify type of device used
Thereafter, the Secretary shall confirm and note the contact numbers being used by the directors and
participants not physically present. After the roll call, the Secretary may certify the existence of a quorum.
7.

All participants shall identify themselves for the record, before speaking and must clearly hear and/or see
each other in the course of the meeting. If a person fails to identify himself, the Secretary shall quickly state
the identity of the last speaker. If the person speaking is not physically present and the Secretary is not
certain of the identity of the speaker, the Secretary must inquire to elicit a confirmation or correction.
If a motion is objected to and there is a need to vote and divide the Board, the Secretary should call the roll
and note the vote of each director who should identify himself.
If a statement of a director/participant in the meeting via tele/videoconferencing is interrupted or garbled, the
Secretary shall request for a repeat or reiteration, and if need be, the Secretary shall repeat what he heard
the director/participant was saying for confirmation or correction.

8.

The Secretary shall require all the directors who attended the meeting, whether personally or through
tele/videoconferencing, to sign the minutes of the meeting to dispel all doubts on matters taken up during the
meeting.

These guidelines shall take effect fifteen (15) days after publication in two (2) newspapers of general circulation.
Mandaluyong City, Philippines.
November 20, 2001.

i.

When and Where Sec 53

Meetings of directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.

ii.

Notice Sec 53

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Notice of regular or special meetings stating the date, time and place of the meeting must be sent to
every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this requirement, either expressly or
impliedly.

d. Who Presides Sec 54

The president shall preside at all meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise.

e. Quorum Sec 25
Xxxx

xxxx

Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number
of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election
of officers which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Xxxx

xxxx

xxxx

d. Rule on Abstention -

H. Stockholders and Members

1. Rights of a Stockholder and Members

Sec 6, 28, 43&71, 8, 64, 122, 63, 74, 75 & 69.

RIGHTS OF STOCKHOLDERS:
1. Direct or indirect participation in management;
2. Voting rights;
3. Right to remove directors;
5. Right to inspect books and records;
6. Right to be furnished with the most recent financial statement/financial report;
7. Right to recover stocks unlawfully sold for delinquent payment of subscription;
8. Right to file individual suit, representative suit and derivative suits.
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PROPRIETARY RIGHTS OF STOCKHOLDERS

a. Right to dividends;
b. Appraisal right;
c. Right to issuance of stock certificate for fully paid shares;
d. Proportionate participation in the distribution of assets in liquidation;
e. Right to transfer of stocks in corporate books;
f. Pre-emptive right.

OBLIGATIONS OF STOCKHOLDERS:
1. Liability to the corporation for unpaid subscription;
2. Liability to the corporation for interest on unpaid subscription if so required by the bylaws;
3. Liability to the creditors o the corporation for unpaid subscription;
4. Liability for watered stock;
5. Liability for dividends unlawfully paid;
6. Liability for failure to create corporation

REMEDIAL RIGHTS

1. Right to remove directors;

2. Right to inspect books and records;
3. Right to be furnished with the most recent financial statement/financial report;
4. Right to recover stocks unlawfully sold for delinquent payment of subscription;
5. Right to file individual suit, representative suit and derivative suits.

a. Doctrine of Equality of Shares

CIR v CA, CTA and A. Soriano Corp, G.R. No. 108576. January 20, 1999
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares
into common and preferred, and that parts of the common shares of the Don Andres estate and
all of DoNa Carmens shares were exchanged for the whole 150,000 preferred shares.
Thereafter, both the Don Andres estate and DoNa Carmen remained as corporate subscribers
except that their subscriptions now include preferred shares. There was no change in their
proportional interest after the exchange. There was no cash flow. Both stocks had the same par
value. Under the facts herein, any difference in their market value would be immaterial at the
time of exchange because no income is yet realized it was a mere corporate paper transaction.
It would have been different, if the exchange transaction resulted into a flow of wealth, in which
case income tax may be imposed. Reclassification of shares does not always bring any
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substantial alteration in the subscribers proportional interest. But the exchange is different there
would be a shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize
income for tax purposes. A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights
or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on dividends and asset distribution. Both
shares are part of the corporations capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and losses of the enterprise.
Moreover, under the doctrine of equality of shares all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. In this case, the exchange of shares, without more,
produces no realized income to the subscriber. There is only a modification of the subscribers
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.
2. Participation in Management
a. Proxy Sec 58
Proxies must be in writing, signed by the stockholder/member, filed before the scheduled
meeting with the corporate secretary.
- Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than five (5) years at any
one time.
- Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59)
- It must be noted however that directors or trustees cannot vote by proxy at board
meetings. (Sec. 25)
- Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies
via their AOI or by-laws.

b. Voting Trust Sec 59

- Voting trusts must be in writing, notarized, specifying the terms and conditions thereof,
certified copy filed with SEC. Failure to comply with this requirement renders the agreement
ineffective and unenforceable.
- As a general rule, voting trusts are valid for a period not exceeding 5 years at any one
time, and automatically expire at the end of the agreed period unless expressly renewed.
However, in the case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may exceed 5 years but shall automatically expire upon
payment of the loan.
- Voting trusts may be voted by proxy unless the agreement provides otherwise.

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c. Cases When Stockholders Action is Required

i. By a Majority Vote
c. Cases When Stockholders Action is Required:
i. By a Majority Vote
1) to enter into management contract;(sec 44,CCP)
2) to adopt, amend or repeal by-laws; (sec.46,CCP)
3) removal of directors or trustees;(sec.28,CCP)
4) to grant compensation of directors; (sec.30,CCP)
5) consideration for the issuance of stocks; (sec.62,CCP)
Sec 44, 48, 28, 30, 62.

ii. By a Two-Thirds Vote

Sec 16, 103, 48, 37, 38, 39, 40, 42, 44, 28, 32, 34, 77, 96, 116, 118, 119.

1) power to extend or shorten corporate term;

2) increase/decrease Corporate stock;

3) incur or create bonded indebtedness;

4) to deny pre-emptive right;

5) sell, dispose, lease, encumber all or substantially all of corporate assets;

6) to invest in another corporation, business other than primary purpose

7) to declare stock dividends;

8) to enter into management contract.

9) to amend the articles of incorporation

iii. By Cumulative Voting Sec 24

ILLUSTRATION:
Methods of Voting
1.

Straight voting:

If A has 100 shares and there are 5 directors to be elected, he shall

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multiply 100 by five (equals 500) and distribute equally among the five
candidates without preference
2.

Cumulative voting:
If A has 100 shares and there are 5 directors to be elected, he shall
(one candidate)
multiply 100 by five (equals 500) and he can vote the 500 for only one
candidate.

3.

Cumulative voting:
If A has 100 shares, there are 5 directors to be elected, and he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.

How to compute votes needed to get a director elected by cumulative voting:

1.

Freys formula (minimum no. of votes to elect one director)

X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1

2.

Baker & Carys formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1

NOTES

Levels playing field or at least ensures that the minority can elect at least one representative to
the board of directors (BOD)

Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of
the majoritys control

By-laws cannot provide against cumulative voting since this right is mandated by law in Section
24.

3. Proprietary Rights
a. Right to Dividends Sec 43 & 71
Section 43. Power to declare dividends. The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. (16a)
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XXX

XXX

Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to vote or to
representation 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 this Code, until and
unless he pays the amount due on his subscription with accrued interest, and the costs and expenses
of advertisement, if any.
b. Right of Appraisal Sec 81
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)

f.

Right to InspectSec 74 & 75

Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given, whether the meeting
was regular or special, if special its object, those present and absent, and every act done or
ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the
time when any director, trustee, stockholder or member entered or left the meeting must be noted in
the minutes; and on a similar demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or
member on any action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder
or member of the corporation to examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an offense which shall be punishable under
Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a
defense to any action under this section that the person demanding to examine and copy excerpts
from the corporations 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.
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Stock corporations must also keep a book to be known as the stock and transfer book, in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks
in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock corporation is not
precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein provided,
shall be applicable. (51a and 32a; P.B. No. 268.)
Section 75. Right to financial statements. Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall furnish to him its most recent financial
statement, which shall include a balance sheet as of the end of the last taxable year and a profit or
loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the
result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall present
to such stockholders or members a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements
may be certified under oath by the treasurer or any responsible officer of the corporation. (n)

Gokongwei v SEC, G.R. No. L-45911 April 11, 1979

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of
all business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours." The
stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the
necessity of self-protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose germane thereto or in the
interest of the corporation. In other words, the inspection has to be germane to the petitioner's
interest as a stockholder, and has to be proper and lawful in character and not inimical to the
interest of the corporation. The "general rule that stockholders are entitled to full information as
to the management of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of officers or directors or
certain of the stockholders to the exclusion of others." While the right of a stockholder to
examine the books and records of a corporation for a lawful purpose is a matter of law, the right
of such stockholder to examine the books and records of a wholly-owned subsidiary of the
corporation in which he is a stockholder is a different thing. Stockholders are entitled to inspect
the books and records of a corporation in order to investigate the conduct of the management,
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determine the financial condition of the corporation, and generally take an account of the
stewardship of the officers and directors. herein, considering that the foreign subsidiary is
wholly owned by San Miguel Corporation and, therefore, under Its control, it would be more in
accord with equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly owned subsidiary which are in the corporation's possession and control.

g. Pre-Emptive Right Sec 39

Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in
good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in payment of a previously contracted
debt.

e. Right to Vote Sec 6

f. Right to Dividends Sec 43 & 71
g. Right of First Refusal 4. Remedial Rights
- an action brought by a stockholder against the corporation for direct violation of his contractual rights.
b. Representative Suit-one brought by a person on his own behalf of all similarly situated
c. Derivative Suit one brought by one or more stockholders or members in the name and on behalf
of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the
corporation.

Requisites of Derivative suit:

a. Must be a shareholder/member at the time of objectionable acts or transactions unless the
transactions are continuously injurious;
b. Action must be brought in the name of the corporation which must be alleged;
c. Stockholder/member must first make a demand upon the corporation or the management to
sue unless such demand would be futile

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d. the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the
suit.
Note: Interim Rules of Procedures for Intra-Corporate Controversy provides additional
requirements .

Rule 8, Interim Rules of Procedures for Intra-Corporate Controversy

Rule 8
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:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred
and the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the acts or acts complained of; and
(4) The suits is not a nuisance or harassment suit.
In case of nuisance of harassment suit, the court shall forthwith dismiss the case.

Sec. 2. Discontinuance. - A derivative action shall not be discontinued, compromised or settled

without approval of the court. During the pendency of the action, any sale of shares of the
complaining stockholders shall be approved by the court. If the court determines that the
interest of the stockholders or members will be substantially affected by the discontinuance,
compromise or settlement, the court may direct that notice, by publication or otherwise, be
given to the stockholders or members whose interest it determines will be so affected.

LisamEnt v. BDO, G.R. No. 143264, April 23, 2012

The Court enumerated the requisites for filing a derivative suit, as follows:
a) the party bringing the suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the suit.

Reyes v. RTC of Makati, 2008

To determine whether a case involves an intra-corporate controversy, and is
to be heard and decided by the branches of the RTC specifically designated by the
Court to try and decide such cases, two elements must concur: (a) the status or
relationship of the parties; and (2) the nature of the question that is the subject of
their controversy.
The first element requires that the controversy must arise out of intracorporate or partnership relations between any or all of the parties and the
corporation, partnership, or association of which they are stockholders, members or
associates; between any or all of them and the corporation, partnership, or
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association of which they are stockholders, members, or associates, respectively;

and between such corporation, partnership, or association and the State insofar as it
concerns their individual franchises. The second element requires that the dispute
among the parties be intrinsically connected with the regulation of the corporation. If
the nature of the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate controversy.

Sec 5.2 SRC, re: jurisdiction

The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases.
The Commission shall retain jurisdiction over pending cases involving intracorporate disputes
submitted for final resolution which should be resolved within one (I) year from the enactment of
the Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of30 June 2000 until finally disposed.
Presidential Decree No. 902-A Section 5 provides that:
In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving.
a) Devices or schemes employed by or any acts, of the board of directors, business associates,
its officers or partnership, amounting to fraud and misrepresentation which may be detrimental
to the interest of the public and/or of the stockholder, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations.

5. Obligation of a Stockholder

Sec 65, 66 & 67, 31 & 144, 21.

a. Liability to the corporation for unpaid sunscription (secs 67-70 CCP);

b. Liability to the corporation for interest on unpaid subscription if so required by the by laws
(sec 66);
c. Liabilty to the creditors of the corporation for unpaid sunscription (sec 60);
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d. Liability for watered stock (sec 65);

e. Liability for dividends unlawfully paid ( sec 43);and
f.

Liability for failure to creae corppration (sec10).

6. Meetings

Sec 6, 55 & 56.

Meetings of Directors / Trustees

KINDS:
Meetings of the Board of Directors or Trustees may be either regular or
special. (Sec. 49)
REGULAR:
(Sec. 53)

Held monthly, unless otherwise provided in the by-laws.

SPECIAL:

At any time upon call of the president or as provided in the by-

laws.
NOTICE:
Must be sent at least 1 day prior to the scheduled meeting, unless
otherwise provided by the by-laws.
Note:

Notice may be waived expressly or impliedly. (Sec. 53)

WHERE:
otherwise.

Anywhere in or outside the Philippines, unless the by-laws provide

QUORUM:
Generally, a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for the transaction of corporate
business. (Sec. 25)
Exceptions:
(1) If the AOI or by-laws provide for a greater majority;
(2) If the meeting is for the election of officers, which requires the vote of a majority of
all the members of the Board
WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

Meetings of Stockholders / Members

KINDS:
(Sec. 49)

Meetings of stockholders or members may be either regular or special.

REGULAR:
Held annually on a date fixed in the by-laws. If no date is fixed, on any
date in April of every year as determined by the Board of Directors or trustees.
Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior
to the meeting, unless a different period is required by the by-laws.
SPECIAL:

At any time deemed necessary or as provided in the by-laws.

Notice: Written, and sent to all stockholders or members of record at least 1 week prior
to the meeting, unless otherwise provided in the by-laws.
Page 64 of 91

Note: Notice of any meeting may be waived expressly or

impliedly by any SH or member. (Sec. 50)
WHERE:
In the city of municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation. Metro Manila is
considered a city or municipality. (Sec. 51)
QUORUM:
Generally, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock, or a majority of the members.
Exception: If otherwise provided for in the Code or in the
by-laws.
WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

WHAT IS THE EFFECT IF A STOCKHOLDER'S MEETING IS IMPROPERLY HELD OR

CALLED?
Generally, the proceedings had and/or any business transacted shall be void. However,
the proceedings and/or transacted business may still be deemed valid if:
(1) Such proceedings or business are within the powers or authority of the corporation;
and
(2) All the stockholders or members of the corporation were present or duly
represented at the meeting. (Sec. 51)

a. Regular or Special
i. When (sec 50) and Where (Sec 51 & 93)
Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not
so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided,
That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2)
weeks prior to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in
the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange
Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an
order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving
proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or members present have chosen one of their number as
presiding officer.

iii.

Notice Sec 50
REGULAR MEETINGS : shall be sent to all stockholders or members of record at least two (2)
weeks prior to the meeting, unless a different period is required by the by-laws.

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SPECIAL MEETINGS: of stockholders or members shall be held at any time deemed necessary or
as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be
sent to all stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member

b. Who Calls the Meetings Sec 54

The president shall preside at all meetings of the directors or trustee as well as of the
stockholders or members, unless the by-laws provide otherwise
c. Quorum Sec 52
Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the members in
the case of non-stock corporations. It must also be base in the AOI.
d. Minutes of the Meetings

I. Capital Structure
1. Subscription Agreements Sec 60
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription
2. Consideration for Stocks Sec 62
-

Stocks shall not be issued for a consideration less than the par or issued price thereof.

Consideration for the issuance of stock may be any or a combination of any two or more of the
following: (COPAL)
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation (set-off; indebtedness must be
acknowledge by the Board;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

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Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.

The same considerations provided for in this section, insofar as they may be applicable,
may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or the
by-laws, or in the absence thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.

3. Shares of Stock
a. Nature of Stock

Stockholders of F. Guanzon and Sons Inc. v. RD of Manila, G.R. No. L-18216 October 30,
1962

Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property, they do not represent property of the
corporation. 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, but its holder is not the owner of any
part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its
property or assets.
The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be
considered a partition of community property, but rather a transfer or conveyance of the title of its assets to
the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to
transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer
cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It
is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or
conveyance.

b. Subscription Agreements
It is any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed. This is notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (Sec. 60)

Page 67 of 91

WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT?

Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their
claims.

The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.

A subscription contract is INDIVISIBLE (Sec. 64).

A subscription contract subsists as a liability from the time that the subscription is made until
such time that the subscription is fully paid.

c. Consideration for Shares of Stock

WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR ISSUANCE OF SHARES?

(COPAL)

cash;

property actually received by the corporation: must be necessary or convenient

for its use and lawful purposes;

labor performed for or services actually rendered to the corporation

(NOTE: Future services are NOT acceptable!);

previously incurred indebtedness by the corporation;

amounts transferred from unrestricted retained earnings to stated capital;

outstanding shares exchange for stocks in the event of reclassification or

conversion
WHAT FORMS ARE UNACCEPTABLE?

future services
promissory notes
value less than the stated par value

HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED?

It may be fixed as follows:
(1)

In the AOI; or

(2)

By the BOD pursuant to authority conferred upon it by the AOI or the by-laws; or

(3)

In the absence of the foregoing, by the STOCK HOLDERS representing at least a

majority of the outstanding capital stock at a meeting duly called for the purpose
(Sec. 62)

IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE VALUE
THEREOF DETERMINED?
It is initially determined by the incorporators or the Board of Directors, subject to approval
by the SEC. (Sec. 62)

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d. Watered Stock- Stock issued not in exchange for its equivalent either in cash, property, share, stock
dividends, or services. The issued stock must be an original issue.

ii. Liability of Directors for Watered Stocks Sec 65

Any director or officer of a corporation consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in any form other than cash, valued in excess of
its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to
the corporation and its creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same.
iii. Trust Fund Doctrine for Liability for Watered Stocks

In Philippine Trust C., v. Rivera the Supreme Court held "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of
its debts. (Velasco vs. Poizat, 37 Phil., 802). A corporation has no power to release an original
subscriber to its capital stock form the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the capital stock and take place
only in the manner and under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C.J.,
498,620)."
Likewise, under Sec. 65 of the Corporation Code, no distinction is made as to creditors whether
they become such prior to or subsequent to the issuance of the watered stock and fraud is not made an
element. In any event, Sec. 65 is by itself sufficient basis to hold a stockholder liable to any corporate
creditor without need to resorting to any of the discussed theories.
The legal standing of corporate creditors against guilty stockholders and officers for watered
stock is clear in a situation when the corporation is insolvent since then all corporate assets would be
held for the satisfaction of the claims of the creditors, before any distribution is made to the
stockholders. But when the corporation is still a "going concern" and the watering of the stock does not
actually render it insolvent, does Sec. 65 actually grant corporate creditors the legal standing to bring at
that point a suit against the involved stockholder and the guilty officers?
In the payment of property for subscribed shares, Sec. 62 of the Corporation Code provides that
"the valuation thereof shall initially be determined incorporators or the board of directors subject to
approval by the Securities and Exchange Commission." In actual practice the watering of stock is not
supposed to happen because property consideration for subscription is always evaluated by the
Securities and Exchange Commission which often conducts an examination of the involved properties
and appraisal reports are submitted to establish the fair value of such properties. When the Securities
and Exchange Commission approves the valuation it may be difficult to sustain an assertion later on
that there has been watering of the shares. (excerpt from THE TRUST FUND DOCTRINE
UNDER PHILIPPINE CORPORATE SETTING by CESAR L. VILLANUEVA)

e. Situs of the Shares of Stock

Guan v. Samahang Masasaka Inc, GR 42091, Nov. 2, 1935

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Domicile of corporation decisive for purposes of execution, attachment and garnishment of

shares of stock It is a common but not accurate generalization that the situs of shares of stock is at
the domicile of the owner. The term situs is not one of fixed or invariable meaning or usage. Nor
should one lose sight of the difference between the situs of the shares and the situs of the
certificate of shares. The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere. It is a general rule that
for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a
certificate but the domicile of the corporation which is decisive.
f. Classes of Shares of Stock Sec 6, 7, 8, 9.
1.

Common:

share with right to vote

2.
Preferred:
share has preference over dividends and distribution of assets upon
liquidation; right to vote may be restricted (Sec. 6)
3.
Redeemable: share is purchased or taken up by the corporation upon the expiration of
a fixed period (Sec. 8); right to vote may be restricted (Sec. 6)
4.
Treasury Shares: shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors.
NOTES

Stock can also be both preferred and redeemable.

Even though the right to vote of preferred and redeemable shares may be restricted, owners of
these shares can still vote on certain matter provided for in Sec. 6.

SEC requires that where no dividends are declared for three consecutive years, in spite of
available profits, preferred stocks will be given the right to vote until dividends are declared.

4. Payment of Balance of Subscription Sec 66 & 67

a. Call by Board of Directors
The board of directors of any stock corporation may at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated
in the call made by the board. Failure to pay on such date shall render the entire balance due and
payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a
different rate of interest is provided in the by-laws, computed from such date until full payment. If within
thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall
thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of
directors orders otherwise.

b. Notice Requirement
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Notice of said sale, shall be sent to every delinquent stockholder either personally or by
registered mail.
c. Sale of Delinquent Shares Sec 68
DELINQUENCY SALE
(1)

Issuance of Board resolution

The BOD issues a resolution ordering the sale of delinquent stock, specifically
stating the amount due on each subscription plus all accrued interest, and the date,
time and place of the sale.
Note: The sale shall not be less than 30 days nor more than 60 days from the
date the stocks become delinquent.

(2)

Notice of sale and publication

Notice of the date of delinquency sale and a copy of the resolution is sent to every
delinquent stockholder either personally or by registered mail. The notice is likewise
published once a week for 2 consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.

(3)

Sale at public auction

If the delinquent stockholder fails to pay the corporation on or before the date
specified for the delinquency sale, the delinquent stock is sold at public auction to
such bidder who shall offer to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a share.
(4) Transfer and issuance of certificate of stock
The stock so purchased is transferred to such purchaser in the books of the
corporation and a certificate of stock covering such shares is issued.
If there is no bidder at the public auction who offers to pay the full amount of the balance
on the subscription and its attendant costs, the corporation may bid for the shares, and
the total amount due shall be credited as paid in full in the books of the corporation.
Title to all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said corporation in
accordance with the Code.

i.

Effect of Delinquency

1.
The holder thereof loses all his rights as a stockholder except only the
rights to dividends;
2.
Dividends will not be paid to the stockholder but will be applied to the
unpaid balance of his subscription plus costs and expenses. Also, stock
dividends will be withheld until full payment is made.
3.
Such stockholder cannot vote at the election of directors or at any
meeting on any matter proper for stockholder action.
4.

Stockholder cannot be counted as part of the required quorum.

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5.

Stockholder cannot be voted for as director of the corporation.

ii. Call by Resolution of the Board of Directors Sec 68

-it is a resolution or formal declaration of the board that the unpaid subscriptions are due and
payable.
iii. Notice of Sale

iv. Auction Sale and the Highest Bidder

a. The person participating in the delinquency sale who offers to pay the full amount of the
balance of the subscription together with the accrued interests, costs of advertisement and
expenses of sale, for the smallest number of shares.
b. If there is no bidder as mentioned above, the corporation may bid for the same, and the total
amount due shall be credited as paid in full in the books of the corporation. Such shares
shall be considered as treasury shares.

Note: The board is not bound to accept the highest bid unless the contrary appears.
Reason:

In a public sale, the bidder is the one making the offer to purchase which the

corporation is free to accept or reject it.

5. Certificate of Stock
a. Nature of the Certificate
A certificate of stock is not necessary to render one a stockholder in a corporation.
Nevertheless, a certificate of stock is the paper representation or tangible evidence of the stock
itself and of the various interests therein. The certificate is not stock in the corporation but is
merely evidence of the holder's interest and status in the corporation, his ownership of the
shares represented thereby, but is not in law the equivalent of such ownership. It expresses the
contract between the corporation and the SH, but it is not essential to the existence of a share
in stock or the creation of the relation of shareholder to the corporation. (Tan v. SEC, 206
SCRA 740)

b. Uncertificated Shares Sec 3.14 SRC

it is a security evidenced by electronic or similar records.
c. Negotiability

De los Santos v Republic, GR L- 4818 February 28, 1955

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Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner, unless
his own negligence has been such as to create an estoppel against him (Clarke on Corporations,
Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and it is stolen from him, no
title is acquired by an innocent purchaser for value .

i. Requirements for Valid Transfer of Stocks Bitong v. CA, GR 123553, July 13, 1998
Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner, unless his
own negligence has been such as to create an estoppel against him (Clarke on Corporations, Sec. Ed.
p. 415). If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is
acquired by an innocent purchaser for value

d. Issuance

i. Full Payment Sec 64

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.

ii. Payment Pro-RataNava Peers Marketing Corp. and FuaCun v. Summers, GR L-19441, March
27, 1923
The transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is
supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the
Corporation Law. As a rule, the shares which may be alienated are those which are covered by
certificates of stock. The twenty shares in question, however, are not covered by any certificate of stock
in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's
subscription. There is no clear legal duty on the part of the officers of the corporation to register the 20
shares in Nava's name. As no stock certificate was issued to Po; and without the stock certificate,
which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective
only between the parties to the transaction.
e. Lost or Destroyed Certificates Sec 73
The following procedure shall be followed for the issuance by a corporation of new certificates
of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall
file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the
serial number of the certificate and the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem necessary;
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2. After verifying the affidavit and other information and evidence with the books of the
corporation, said corporation shall publish a notice in a newspaper of general circulation published in
the place where the corporation has its principal office, once a week for three (3) consecutive weeks at
the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed.
The notice shall state the name of said corporation, the name of the registered owner and the serial
number of said certificate, and the number of shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication, if no contest has been presented to said
corporation regarding said certificate of stock, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in
such form and with such sureties as may be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the
court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers,
no action may be brought against any corporation which shall have issued certificate of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)

6. Stock and Transfer Book

a. Contents
CONDITION FOR ISSUANCE: payment of full amount of subscription price plus
interest, if any is due (Sec. 64)
CERTIFICATION THAT: person named therein is a holder or owner of a
stated number of shares in the corporation.
INDICATES:

BEARS:

1. kind of shares
2. date of issuance
3. par value, if par value shares
Signatures of the proper officers, usually president
or secretary, as well as the corporate seal

AMOUNT ISSUED: For no more than the number of shares authorized in

articles of incorporation; excess would be void

b. Who May Make Valid Entries

The certificate shall be signed by:
i.

the President or vice-president; and

ii.

countersigned by the secretary or assistant secretary, and sealed with the seal of
corporation.

7. Disposition and Encumbrance of Shares

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a. Allowable Restrictions on the Sale of Shares Sec 98

Restrictions on the right to transfer shares must appear in the articles of incorporation and in the
by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders
or the corporation the option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person.
b. Sale of Partially Paid Shares Sec 63
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation.

c. Sale of a Portion of Shares Not Fully Paid

It is valid between the parties, but not against third persons or corporation since transfer in the
book of corporation is necessary. Said transfer may only be effected when shares of stocks subscribed
are fully paid.
d. Sale of All of Shares Not Fully Paid
No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation.

e. Sale of Fully Paid Shares Sec 63

Shares of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.
f. Requisites of a Valid Transfer Sec 63
In case of shares represented by a certificate, the transfer must strictly comply with the
following conditions:

(1)

The certificates must be signed by the President / Vice-President, countersigned by the

secretary or assistant secretary, and sealed with the seal of the corporation.
A mere typewritten statement advising a SH of the extent of his ownership in a corporation
without qualification and/or authentication cannot be considered as a formal certificate of stock.
(Bitong v. CA, 292 SCRA 503)
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(2)

Delivery of the certificate

There is no issuance of a stock certificate where it is never detached from the stock books
although blanks therein are properly filled up if the person whose name is inserted therein has
no control over the books of the company. (Bitong v. CA, 292 SCRA 503)

(3)

Par value of par value shares / Full subscription of no par value shares must be fully paid.

(4)

Surrender of the original certificate if the person requesting the issuance of a certificate is
a transferee from a SH.

g. Involuntary Dealings with Shares Sec 55, Sec 63

J. Dissolution and Liquidation

1. Modes of Dissolution
a. Voluntary
APPLICATION FOR DISSOLUTION WITH SEC:
i. Where No Creditors Are Affected . Sec 118
If dissolution of a corporation does not prejudice the rights of any creditor having a claim against
it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a
resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of
the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon
call of the directors or trustees after publication of the notice of time, place and object of the meeting for
three (3) consecutive weeks in a newspaper published in the place where the principal office of said
corporation is located; and if no newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each stockholder or member either by
registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the
resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees
and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall
thereupon issue the certificate of dissolution
ii. Where Creditors Are Affected: (sec 119)
a. The petition shall be filed with the SEC;
b. signed by a majority of its board of directors or trustees or other officers having the
management of its affairs;
c.

verified by its president or secretary or one of its directors or trustees;

d.

shall set forth all claims and demands against it; and
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e. that its dissolution was resolved upon by the affirmative vote of 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 at a meeting of its stockholders or members called for that purpose.
iii. By Shortening of Corporate Term sec 120
A voluntary dissolution may be effected by amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation
shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon
approval of the amended articles of incorporation of the expiration of the shortened term, as the case
may be, the corporation shall be deemed dissolved without any further proceedings, subject to the
provisions of this Code on liquidation.

b. Involuntary

i. By Expiration of Corporate Term

ii. Failure to Organize and Commence Business Within 2 Years from Incorporation
iii. Legislative Dissolution Sec 145
No right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of the Corporation Code or of any part
thereof.
iv. Dissolution by the SEC on Grounds under Existing Laws
a. Fraud in procuring a certificate of registration;
b. Serious misrepresentation as to what the corporation can do or is doing to the
prejudice of the general public;
c. Refusal to comply or defiance of any lawful order of the Commission;
d. Continous inoperation for a period of at least 5 years;
e. Failure to file by laws within the required period; and
f.

Failure to file required reports in appropriate forms as determined by the

Commission within the prescribed perios (PD 602-A, sec. 6)

2. Methods of Liquidation
a. By the Corporation Itself
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2 legal steps in corporate dissolution:

i.

termination of the corporate existence; ND

ii.

winding up its affairs, payment of its debt and distribution of its assets among
shareholders or members and other persons interested.

b. Conveyance to a Trustee within a Three-Year Period

c. By Management Committee or Rehabilitation Receiver

Rehabilitation
Upon the appointment of a management committee or a rehabilitation receiver, all
actions for claims against the corporation pending before nay court, tribunal or board shall ipso jure be
suspended. The justification for the automatic stay of all pending actions for claims is to be enable the
management committee or the rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extrajudicial inyerference that might unduly hinder or prevent the rescue of the corporation
(LIngkod Manggagawa sa Rubberworld v. Rubberworld [Phils] Inc., 2007).
GROUNDS FOR APPOINTMENT OF A MANAGEMENT RECEIVER
i.

imminent danger of loss, wastage, dissipation or destruction of assets;

ii.

Paralyzation of business operations of the corporation that may be prejudicial to

the interest of minority stockholders, party-litigants or general public.

GROUNDS FOR APPOINTEMENT OF RECEIVER

i.

necessary to preserve rights of party-litigants; and or

ii.

to protect interest of investing public & creditors.

d. Liquidation after Three Years

A dissolved corporation continous to be a body corporate for 3 years from the time it is
dissolved for the purpose of liquidation or winding up its corporate affairs. After 3 years, recovery of
debts of the corporation may still be effected.
Further, no right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part
thereof.
K. Other Corporations
Page 78 of 91

1. Close Corporations is one whose articles of incorporation provide 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 twenty (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
any of its stock of any class. 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
Corporation Code.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance with the
provisions of this Code. (sec. 96)

a. Characteristics of a Close Corporation- Sec 97

i. Stockholders may act as directors without need of election and thereforeare liable as
directors;
ii. Stockholders who are involved in the management of the corporation are liable in the
same manner as directors are;
iii. Quorum may be greaterthan mere majority;
iv. Transfers of stocks to others, which would increase the umber of stockholders to
more than the maximum are valid;
v. Corporate acts may be binding even without a formal board meeting, if the
stockholder knowledge or ratified the informal action of the others;
vi. Preemptive right extends to all stock issues;
vii. Deadlocks in board may be settled by the SEC, on the written petition by any
stockholder; and
viii. Stockholder may withdraw and avail of his right appraisal.
b. Validity of Restrictions on Transfer of Shares Sec 98
i. Restrictions on the right to transfer shares must appear in
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a. the articles of incorporation;

b.

by-laws;

c.

certificate of stock; otherwise, the same shall not be binding on any

purchaser thereof in good faith.

ii. shall not be more onerous than granting the existing stockholders or the corporation
the option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell his shares to any third person.

c. Issuance or Transfer of Stock in Breach of Qualifying Conditions

d. When Board Meeting is Unnecessary or Improperly Held Sec 101
Unless the by-laws provide otherwise, any action by the directors of a close corporation without
a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all
the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them
makes prompt objection thereto in writing.
If a directors meeting is held without proper call or notice, an action taken therein within the
corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his
written objection with the secretary of the corporation after having knowledge thereof.

f.

Pre-Emptive Right Sec 102

The pre-emptive right of stockholders in close corporations shall extend to all stock to be

issued, including reissuance of treasury shares, whether for money, property or personal services,
or in payment of corporate debts, unless the articles of incorporation provide otherwise
f. Amendment of Articles of Incorporation
g. Deadlocks
In case of irreconcilable disputes among the directors or shareholders, the SEC may be asked
to intervene and the SEC may perform such actions that may be necessary under the circumstances
including the appointment of a of aprovisional director who, as an impartial person will have all the
powers of a duly elected director (not a receiver).
Page 80 of 91

2. Non-Stock Corporations
a. Definition Sec 87
is one where no part of its income is distributable as dividends to its members, trustees, or officers.
c. Purposes Sec 88
Non-stock corporations may be formed or organized for :
i. charitable;
ii.

religious;

iii.

Educational;

iv.

Professional;

v.

Cultural;

vi. Fraternal;
vii.

Literary;

viii. Scientific;
ix. Social
x.

civic service, or

xi. similar purposes, like:

a.

trade,;

b. Industry;
c. Agricultural; and
d.

chambers

c. Treatment of Profits Sec 87(2)

No part of its income is distributable as dividends to its members, trustees, or officers, subject to
the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may
obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was organized, subject to the provisions of this
Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of the code.
d. Distribution of Assets upon Dissolution
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In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its
assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
adequate provision shall be made therefore;
2. 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;
3. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or
conveyed to one or more corporations, societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution
adopted pursuant to this Chapter.

3. Religious Corporations Exclude

4. Foreign Corporations
a. Bases of Authority over Foreign Corporations
i. Consent Sec 125 & 126

ii. Doctrine of Doing Business (related to definition under the Foreign Investments Act, R.A.
No. 7042)
b. Necessity of a License to Do Business

i.

Requisites for Issuance of a License Sec 125 & 126

A. Documentary Requirements (Sec. 125)
(1) BOI certificate
The BOI certificate is issued upon a finding of the Board of Investments that the
business operations of the foreign corp. will contribute to the sound and balanced
development of the national economy on a self-sustaining basis. (See Omnibus
Investments Code, Sec. 48-49)
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NOTE: Applications, if not acted upon within 10 days from official acceptance thereof,
shall be considered automatically approved! (Art. 53, Omnibus Investments Code)
(2) SEC license to do business (Sec. 125)

Application under oath setting forth the information specified in Sec. 125;

Additional information as may be necessary or appropriate to enable the SEC to

determine whether the corporation is entitled to a license to transact business in the
Philippines, and to determine and assess the fees payable;

Duly executed certificate under oath by authorized official/s of the jurisdiction of

the company's incorporation, attesting to the fact that the laws of the country of the
applicant allow Filipino citizens and corporations to do business therein, and that the
applicant is an existing corporation in good standing;

Statement under oath of the president or any other person authorized by the
corporation showing that the applicant is solvent and in good financial condition, and
setting forth the assets and liabilities of the corporation within 1 year immediately prior to
the application.
(3) Certificate from appropriate government agency
NOTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. (Sec. 17)
B. Deposit requirement (Sec. 126)
Within 60 days after the issuance of the license, the licensee shall deposit with the SEC
securities with an actual market value of at least P 100,000.00. These securities are for
the benefit of present and future creditors, and shall consist of any of the following:

Bonds or other evidence of indebtedness of the Government or its

instrumentalities, etc.;

Shares of stock in "registered enterprises" as defined in R.A. 5186;

Shares of stock in domestic corporations registered in the stock exchange;

Shares of stock in domestic insurance companies and banks.

Once the licensee ceases to do business in the Philippines, these deposited securities shall be
returned, upon the licensee's application and proof to the satisfaction of the SEC that the
licensee has no liability to Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
C. Designation of a resident agent (Sec. 128)

ii. Resident Agent Sec 127 & 128

The designation of a resident agent is a condition precedent to the issuance of the license to
transact business in the Philippines.
WHO:
PURPOSE:

A resident of the Philippines.

To be served any summons and other legal processes which may be
served in all actions or other legal proceedings against such corporation.
Service upon such resident shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign corporation at its
home office.
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c. Personality to Sue Sec 133

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.
d. Suability of Foreign Corporations
e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated
Transactions

Sec 133
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.

Merrill Lynch Futures v. CA, GR No. 97816 July 24, 1992

It is settled that unlicensed foreign corporation may not maintain a suit in the
Philippines. However, it would appear quite inequitable for the Laras to evade payment of an
otherwise legitimate indebtedness due and owing to ML FUTURES upon the plea that it should not
have done business in this country in the first place, or that its agent in this country, MLPI, had no
license either to operate as a "commodity and/or financial futures broker."
Considerations of equity dictate that, at the very least, the issue of whether the Laras are in
truth liable to ML FUTURES and if so in what amount, and whether they were so far aware of the
absence of the requisite licenses on the part of ML FUTURES and its Philippine correspondent, MLPI,
as to be estopped from alleging that fact as defense to such liability, should be ventilated and
adjudicated on the merits by the proper trial court.

e. Grounds for Revocation of License Sec 134

The license of a foreign corporation to transact business in the Philippines may be revoked or
suspended by the Securities and Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the Securities and
Exchange Commission a statement of such change as required by this Title;
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4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any
amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation
within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines. (n)

L. Mergers and Consolidations

1. Definition and Concept Sec 76
Two or more corporations may merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be the consolidated
corporation. The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to
as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.

SME Bank Inc v. Gaspar, GR 186641, Oct. 8, 2013

A change of ownership in a business concern is not proscribed bylaw.
There can be no controversy for it is a principle well-recognized, that it is within the employers
legitimate sphere of management control of the business to adopt economic policies or make
some changes or adjustments in their organization or operations that would insure profit to itself
or protect the investment of its stockholders. As in the exercise of such management
Page 85 of 91

prerogative, the employer may merge or consolidate its business with another, or seller dispose
all or substantially all of its assets and properties which may bring about the dismissal or
termination of its employees in the process. Such dismissal or termination should not however
be interpreted in such a manner as to permit the employer to escape payment of termination
pay. For such a situation is not envisioned in the law. It strikes at the very concept of social
justice.
SME Bank continued to be the employer of respondent employees notwithstanding the equity
change in the corporation. This outcome is in line with the rule that a corporation has a
personality separate and distinct from that of its individual shareholders or members, such that
a change in the composition of its shareholders or members would not affect its corporate
liabilities.

CIR v. Bank of Commerce, GR No. 180529, Nov. 25, 2013

In the case at bar, [BOC] purchased identified recorded assets and properties of TRB. In consideration
thereof, [BOC] assumed certain liabilities of TRB which were identified in the Consolidated Statement of Condition as
of August 31, 2001. In this wise, the liabilities of TRB assumed by [BOC] were limited only to those already identified
as of August 31, 2001 amounting in all to Ten Billion Four Hundred One Million Four Hundred Thirty-Six Thousand
Pesos (P10,401, 436,000.00) x x x. More so, liabilities that were not assumed by [BOC] should not be enforced
against it. x x x. (Emphasis supplied.)
1wphi1

xxxx
. Much have been said that the transaction between TRB and [BOC] is not a merger within the contemplation of law.
SC has consistently ruledn that the transaction is one of sale of assets with assumption of identified recorded
liabilities of TRB. As such, the liabilities assumed by [BOC] amounted only to P10,401,436,000.00 with some
enumerated exclusion in the Agreeement. x x x.
46

2. Constituent vs. Consolidated Corporation

Constituent corporations: The parties to a merger or consolidation

Consolidated Corporation: The new corporation created through consolidation.

McLeod v. NLRC, GR 146667, Jan. 23, 2007

There was no merger or consolidation of PMI and SRTI.
Consolidation is the union of two or more existing corporations to form a new corporation called
the consolidated corporation. It is a combination by agreement between two 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.
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.

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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
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.
In the present case, there is no showing that the subject dation in payment involved any corporate merger
or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere
instrumentality of PMI.

3. Plan of Merger or Consolidation Sec 76

Two or more corporations may merge into a single corporation which shall be one of the
constituent corporations or may consolidate into a new single corporation which shall be the
consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as
the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation
in case of merger; and, with respect to the consolidated corporation in case of consolidation, all
the statements required to be set forth in the articles of incorporation for corporations organized
under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.

4. Articles of Merger or Consolidation

The Articles of Merger of Articles of Consolidation shall be executed by each of the constituent
corporations and signed by the president, vice president and certified by the secretary or assistant
secretary of each corporation.

5. Procedure Sec 79 (1), Sec 77

(1)

Board of Directors of the constituent corporations must prepare and approve a

plan of merger or consolidation.
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(2)
(3)
(4)

2/3 vote of OCS of the constituent corporations.

Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and
certified by the secretary / assistant secretary.
Submission to the SEC for approval.

6. Effectivity Sec 79
The articles of merger or of consolidation, signed and certified, shall be submitted to the
Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of
merger or consolidation of banks or banking institutions, building and loan associations, trust
companies, insurance companies, public utilities, educational institutions and other special corporations
governed by special laws, the favorable recommendation of the appropriate government agency shall
first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which time the merger or consolidation shall be effective.

Mindanao Savings & Loan Association v. Willkom, GR 178618, Oct 11, 2010

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives
and continues the combined business, while the rest are dissolved and all their rights,
properties, and liabilities are acquired by the surviving corporation. Although there is a
dissolution of the absorbed or merged 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.
The merger, however, does not become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.
The steps necessary to accomplish a merger or consolidation, as provided for in Sections
76, 77, 78 and 79[ of the Corporation Code, are:
(1) The board of each corporation draws up a plan of merger or consolidation. Such
plan must include any amendment, if necessary, to the articles of incorporation of the
surviving corporation, or in case of consolidation, all the statements required in the
articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks notice must be sent
to all stockholders or members, personally or by registered mail. A summary of the plan
must be attached to the notice. Vote of two-thirds of the members or of stockholders
representing two-thirds of the outstanding capital stock will be needed. Appraisal
rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation.
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(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least two weeks before.
(6) Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the
SEC, subject to its prior determination that the merger is not inconsistent with the Corporation
Code or existing laws. Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation of the appropriate
government agency should first be obtained..
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank
of the Philippines recognized such merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because not only does it bear out SECs
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.[
The same rule applies to consolidation which becomes effective not upon mere agreement of
the members but only upon issuance of the certificate of consolidation by the SEC. When the
SEC, upon processing and examining the articles of consolidation, is satisfied that the
consolidation of the corporations is not inconsistent with the provisions of the Corporation Code
and existing laws, it issues a certificate of consolidation which makes the reorganization
official. The new consolidated corporation comes into existence and the constituent
corporations are dissolved and cease to exist.
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate
corporations. A corporation is an artificial being created by operation of law. It possesses the
right of succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence. It has a personality separate and distinct from the persons composing
it, as well as from any other legal entity to which it may be related. Being separate entities, the
property of one cannot be considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as
its assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the
Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, an
assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property. The certificates of title of the subject properties were
clean and contained no annotation of the fact of assignment. Respondents cannot, therefore, be
faulted for enforcing their claim against FISLAI on the properties registered under its name.
Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not cause the cancellation
of the title to the subject properties of Willkom and Go.
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7. Limitations Sec 79

If, upon investigation, the Securities and Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing shall be given to each constituent corporation at
least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in the
Corporation Code.

8. Effects Sec 80
The merger or consolidation shall have the following effects:

(1)

The constituent corporation shall become a single corporation:

If merger:

the surviving corporation designated in the plan of

merger

If consolidation: the consolidated corporation designated in the plan of

Consolidation.
(2)

The separate existence of the constituent corporations shall cease, except that of
the surviving or consolidated corporation.

(3)

The surviving or consolidated corporation shall possess all rights, privileges,

immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under the Corporation Code.

(4)

The surviving or consolidated corporation shall thereupon and thereafter possess

all the rights, privileges, immunities and franchises of each of the constituent
corporations;

(5)

All property (real or personal) and all receivables due on whatever account
(including subscriptions to shares and other choses in action), and all and every
other interest of, or belong to, or due to each constituent corporation, shall be
deemed transferred and vested in such surviving or consolidated
corporation without further act or deed.

(6)

The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any
of such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. (Note: The merger or consolidation does not impair the
rights of creditors or liens upon the property of any such constituent corporations.)

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