Corporation Code Finals Reviewer Outline 3 7

CORPORATION CODE – FINALS REVIEWER (ATTY. M.I.
P ROMERO) DIATO-DULCE
4. The form for proxies of stockholders and members and the manner of voting
OUTLINE 3 them;;
5. The qualifications, duties and compensation of directors or trustees, officers
Vll. INTERNAL ORGANIZATION OF CORPORATIONS and employees;;
6. The time for holding the annual election of directors of trustees and the mode
1) By-laws – Sec. 36 (5);; Secs. 46, 47, 48 or manner of giving notice thereof;;
Section 36. Corporate powers and capacity. – Every corporation incorporated under 7. The manner of election or appointment and the term of office of all officers
this Code has the power and capacity: other than directors or trustees;;
8. The penalties for violation of the by-laws;;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to 9. In the case of stock corporations, the manner of issuing stock certificates;;
amend or repeal the same in accordance with this Code;; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)
TITLE V BY LAWS
Section 46. Adoption of by-laws. – Every corporation formed under this Code must, Section 48. Amendments to by-laws. – The board of directors or trustees, by a majority
within one (1) month after receipt of official notice of the issuance of its certificate of vote thereof, and the owners of at least a majority of the outstanding capital stock, or
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for at least a majority of the members of a non-stock corporation, at a regular or special
its government not inconsistent with this Code. For the adoption of by-laws by the meeting duly called for the purpose, may amend or repeal any by-laws or adopt new
corporation the affirmative vote of the stockholders representing at least a majority of by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
the outstanding capital stock, or of at least a majority of the members in case of non- (2/3) of the members in a non-stock corporation may delegate to the board of directors
stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided,
or members voting for them and shall be kept in the principal office of the corporation, That any power delegated to the board of directors or trustees to amend or repeal any
subject to the inspection of the stockholders or members during office hours. A copy by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
thereof, duly certified to by a majority of the directors or trustees countersigned by the owning or representing a majority of the outstanding capital stock or a majority of the
secretary of the corporation, shall be filed with the Securities and Exchange members in non-stock corporations, shall so vote at a regular or special meeting.
Commission which shall be attached to the original articles of incorporation. Whenever any amendment or new by-laws are adopted, such amendment or new by-
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted laws shall be attached to the original by-laws in the office of the corporation, and a copy
and filed prior to incorporation;; in such case, such by-laws shall be approved and thereof, duly certified under oath by the corporate secretary and a majority of the
signed by all the incorporators and submitted to the Securities and Exchange directors or trustees, shall be filed with the Securities and Exchange Commission the
Commission, together with the articles of incorporation. same to be attached to the original articles of incorporation and original by-laws.
In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this The amended or new by-laws shall only be effective upon the issuance by the
Code. Securities and Exchange Commission of a certification that the same are not
The Securities and Exchange Commission shall not accept for filing the by-laws or any inconsistent with this Code. (22a and 23a)
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a certificate of the a) Concept of by-laws
appropriate government agency to the effect that such by-laws or amendments are in • By laws are subordinate to the AOI as well as to the Corporation code and related
accordance with law. (20a) statutes
• The By-laws of a corporation are the rules and regulations or private laws
Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this enacted by the corporation to regulate, govern and control its own actions, affairs
Code, other special laws, and the articles of incorporation, a private corporation may and concerns and of its stockholders or members and directors and officers in
provide in its by-laws for: relation thereto and among themselves in their relation to the corporation.
1. The time, place and manner of calling and conducting regular or special • The By-laws are in effect written into the charter and in this sense, they become
meetings of the directors or trustees;;
part of the fundamental law of the corporation, and the corporation, its directors,
2. The time and manner of calling and conducting regular or special meetings
officers and members are bound by and must comply with them.
of the stockholders or members;;
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;;
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CORPORATION CODE – FINALS REVIEWER (ATTY. M.I.P ROMERO) DIATO-DULCE
• It can neither enlarge the rights and powers conferred by the charter nor restrict d. The form for proxies of stockholders and members and the manner of voting
the duties and liabilities imposed thereby, and in case it attempts to do so, the them;;
charter will prevail. (The mandatory formalities for proxies are provided for under Section 58 of
• The provisions of the By-laws should be distinguished from resolutions of the the corporation code and sections 20 to 20.5 of the securities regulation
Board. A provision in the By-laws is a permanent rule of action and mode of code.)
conduct of corporate affairs while a Resolution ordinarily applies only to a single e. The qualifications, duties and compensation of directors or trustees, officers
act of a corporation. Where the Resolution of the directors is inconsistent with and employees;;
the By-laws, the By-laws will prevail. (The corporate officers, other than the President, Treasurer or Corporate
Secretary, may be specifically identified in the By-laws)
b) By-laws vs. Articles of Incorporation f. The time for holding the annual election of directors of trustees and the mode
AOI By-Laws or manner of giving notice thereof;;
(In the absence of provisions in the By-laws, the rules provided for under
Nature Condition precedent in the Condition subsequent;; its section 53 apply.)
acquisition of corporate existence absence merely furnishes a g. The manner of election or appointment and the term of office of all officers
ground for the revocation of the other than directors or trustees;;
franchise (The manner of election of directors may not be provided for because the
Purpose Constitutes the charter or Merely rules and regulations provision on election of directors is mandatory.
fundamental law of the corporation adopted by the corporation h. The penalties for violation of the by-laws;;
Time of Executed before incorporation Executed within 1 month after (If there is no penalty provided for in the By-laws, the corporation is not
execution receipt of official notice of the precluded from using any other remedy provided by the law.)
issuance of its certificate of i. In the case of stock corporations, the manner of issuing stock certificates;; and
incorporation by the SEC (However, the same cannot restrict or affect vested rights of stockholders.
Thus, stockholders may not be deprived of their right to transfer their shares)
Amendment Amended by the majority of the May be amended by a majority
j. Such other matters as may be necessary for the proper or convenient
directors/ trustees and vote of the BOD and majority vote
transaction of its corporate business and affairs.
stockholders representing 2/3 of of outstanding capital stock or a
the outstanding capital stock, or majority of the members in non-
2/3 of the members in case of non- stock corporation d) Procedure for adoption –
stock corporation (b.1) before incorporation – the by-laws must be signed and approved by all
the incorporators and filed with the SEC together with the AOI
Delegation Power to amend/repeal articles Power to amend or repeal by-laws

of power to cannot be delegated by the or adopt new by-laws may be
(b.2) after incorporation – the affirmative vote of the stockholders representing
amend stockholders/members to the delegated by the 2/3 of the
at least a majority of the outstanding capital stock, or of at lest a majority of the
BOD/trustees outstanding capital stock or 2/3 of
members shall be necessary. The by-laws shall be signed by the stockholders
the members in the case of non-
or members voting for them.
stock corporation

e) Effect of non-adoption
c) Contents of by-laws – Sec. 47
• Effect of non-filing” the 30 day period to file the by-laws is not mandatory
a. The time, place and manner of calling and conducting regular or special
• Failure to submit à does not automatically dissolve the corporation. It merely is
meetings of the  directors or trustees;;
a ground for suspension or revocation of its charter after proper notice and
b. The time and manner of calling and conducting regular or special meetings of
hearing. It is at the very least a DE FACTO CORPORATION whose existence
the stockholders or members;;
may be collaterally attacked.
(In default of provisions in the By-laws, the rules provided for in Sections 50
• The SC explained that the law itself reflects the intent to attach a directory, and
and 51 shall govern.)
not mandatory, meaning for the word “must” in the first sentence of Section 46.
c. The required quorum in meetings of stockholders or members and the manner
The second paragraph likewise rule out mandatory compliance with the
of voting therein;;
requirement of filing the by-laws “within one (1) month after receipt of official
(In the absence of a provision in the By-laws fixing a different quorum, the
notice of the issuance of its certificate of incorporation by the Securities and
quorum shall consist of the stockholders representing a majority of the
Exchange Commission”. It necessarily follows that failure to file the by-laws
outstanding capital stock or a majority of the members in case of non-stock
within that period does not imply the “demise” of the corporation.
corporations.)
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- The delegated power shall be considered revoked whenever stockholders
f) Requisites for validity owning or representing majority of the outstanding capital stock or a majority of
1. Must not be contrary to the law the members in a non-stock corporation SHALL SO VOTE AT A REGULAR OR
2. Must not be contrary to morals and public policy SPECIAL MEETING
3. Must not impair obligations and contracts
Loyola Grand Villas v. CA (1997) 276 SCRA 681
4. Must be general and uniform in their operation and not directed against
particular individuals Although the Corporation Code requires the filing of by-laws, it does not expressly provide
5. Must be consistent with the charter or articles of incorporation for the consequences of the non-filing of the same within the period provided for in Section
6. Must be reasonable and not arbitrary or oppressive 46. However, such omission has been rectified by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC of which state: "SEC. 6. In order to
g) Binding effect of by-laws effectively exercise such jurisdiction, the Commission shall possess the following powers:
Members and - Have the force of contract between the members . . . (1) to suspend, or revoke, after proper notice and hearing, the franchise or certificate
Shareholders themselves of registration of corporations, partnerships or associations, upon any of the grounds
- There is a conclusive presumption that they know the provided by law, including the following: . . . Failure to file by-laws within the required
provisions of the corporate by-laws by the fact of their period
being such is charged with notice of by-laws. If he remains
actually ignorant of the provisions, he does so at his peril There can be no automatic corporate dissolution simply because the incorporators failed
Corporate - They are bound and must comply with them unless and to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code.
Directors and until they are charged (internal rules) There is no outright "demise" private of corporate existence. Proper notice and hearing
Officers - Subordinate employees without actual knowledge of the are cardinal components of due process in any democratic institution, agency or society.
by-laws are not bound In other words, the incorporators must be given the chance to explain their neglect or
Third - They are not bound to know the by-laws unless they have omission and remedy the same.
Persons notice, actual or constructive knowledge
Fleischer v. BoticaNolasco 47 Phil. 583 (1925)
h) Amendment of by-laws and effectivity date
- There are 2 ways to amend the by-laws The holder of shares, as owner of personal property, is at liberty, under said section, to
1. The majority of the board of directors or trustees and the owners of at least dispose of his stocks in favor of whomsoever he pleases, without any other limitation in
a majority of the outstanding capital stock, or at least a majority of the this respect, than the general provisions of law.
members of a non-stock corporation at a regular or special meeting duly Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock
called for the purpose, may amend or repeal any by law or adopt new by
should take into consideration the specific provisions of section 35 of Act No. 1459, and
laws
said by-law should be made to harmonize with said provisions. It should not be
2. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in inconsistent therewith.
a non- stock corporation may delegate to the board BOD or trustees the
power to amend or repeal any by-laws or adopt new by laws As a general rule, the by-laws of a corporation are valid if they are reasonable and
- It shall be effective upon the issuance by the SEC of a certification that the calculated to carry into effect the objects of the corporation, and are not contradictory to
same are not inconsistent with the Code the general policy of the laws of the land

i) Delegation of power to amend B/L The only restraint imposed by the Corporation Law upon transfer of shares is found in
st
- The power to adopt the 1 or ORIGINAL BY-LAWS cannot be delegated to the section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid,
BOD or trustees except as between the parties, until the transfer is entered and noted upon the books of
- ONLY the power to adopt new by-laws and the amend the by-laws can be validly the corporation so as to show the names of the parties to the transaction, the date of the
delegated. The board alone can amend the By-laws if there was prior delegation transfer, the number of the certificate, and the number of shares transferred." This
of such power by the stockholders. The owners of 2/3 of the outstanding capital restriction is necessary in order that the officers of the corporation may know who are the
stock or 2/3 of the members on a non-stock corporation may delegate to the stockholders, which is essential in conducting elections of officers, in calling meeting of
board of directors or trustees the power to amend or repeal the by-laws or to stockholders, and for other purposes. but any restriction of the nature of that imposed in
adopt ne By-laws. the by-law now in question, is ultra vires, violative of the property rights of shareholders,
and in restraint of trade.
Revocation of delegated power NOTE: The Corporation Code allows reasonable transfer restriction in close corporations.
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a particular office. Even when the members of the association may have formally adopted
Govt. of P. I. v. El Hogar Filipino 50 Phil. 399 (1927) the provision, their action would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law.
First. No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corporation Law
which prohibits forced surrender of unmatured stocks except in case of dissolution.
Thomson v. CA (298 SCRA 280)
Second. No. Unless the law or the charter of the corporation expressly provides that an
office shall become at the expiration of the term of office for which the officer was elected, Authority granted to a corporation to regulate the transfer of its stock does not empower it
to restrict the right of a stockholder to transfer his shares, but merely authorizes the
the general rule is to allow the officer to hold over until his successor is duly qualified.
MERE FAILURE OF A CORPORATION TO ELECT OFFICERS DOES NOT TERMINATE adoption of regulations as to the formalities and procedure to be followed in effecting
THE TERM OF EXISTINGOFFICERS AND DISSOLVE THE CORPORATION. transfer.

Third. Yes. Since the Corporation Law does not prescribe the rate of compensation, the
power to fix compensation lies with the corporation. The remedy is in the hands of the Petitioner is obligated to transfer the MPG shares to the nominee of AmCham as he is
stockholders. merely holding the shares in trust. When AmCham paid the purchase price for the share
but Thomson was given legal title thereto, a resulting trust is presumed as a matter of law.
Fourth. Yes. The Corporation Law gives the corporation the power to provide As an officer of AMCHAM, petitioner occupied a fiduciary position in the business of
qualifications of its directors and the requirement of security from them for the proper AmCham. The respondent’s purpose in acquiring the share was to provide additional
discharge of the duties of their office. incentive to its chosen executive. Although the share was placed in the name of the
petitioner, his title is limited to usufruct, that is, to enjoy the facilities and privileges of such
membership. Such arrangement reflects a trust relationship governed by the law and
Gokongwei Jr. v. SEC, et al.89 SCRA 336 (1979) equity.
It is recognized by all authorities that 'every corporation has the inherent power to adopt Salafranca v. Philamlife Homeowners Asso.300 SCRA 469
by-laws 'for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference to the Although the right to amend by-laws lies solely in the discretion of the employer, this
management of its affairs.'" At common law, the rule was "that the power to make and being in the exercise of management prerogative or business judgment, such right
adopt by-laws was inherent in every corporation as one of its necessary and inseparable cannot impair the obligation of existing contracts or rights or undermine the right to
legal incidents. security of tenure of a regular employee. Otherwise, it would enable an employer to
remove any employee from employment by the simple expediency of amending its by-
Any person "who buys stock in a corporation does so with the knowledge that its affairs laws and providing the position shall cease to exist upon occurrence of a specified
are dominated by a majority of the stockholders and that he impliedly contracts that the event. Finally, we cannot simply ignore private respondents malicious scheme to remove
will of the majority shall govern in all matters within the limits of the act of incorporation petitioner from his position, which is contrary to good customs and effected in an
and lawfully enacted by-laws and not forbidden by law." oppressive manner, thus warranting an award of moral and exemplary damages to the
petitioner.
Under section 22 of the same law, the owners of the majority of the subscribed capital
stock may amend or repeal any by-law or adopt new by-laws. Common Law Limitations on By-Laws – it cannot be contrary to law and Articles of
Incorporation
It is a settled that corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the corporation's Board of China Banking Corp. v. CA (270 SCRA 503)
Directors. ".An amendment which renders ineligible, or if elected, subjects to removal, a
director if he be also a director in a corporation whose business is in competition with or In order to be bound, the third party must have acquired knowledge of the pertinent by-
is antagonistic to the other corporation is valid." laws at the time the transaction or agreement between said third party and the shareholder
was entered into, in this case, at the time the pledge agreement was executed. VGCCI
could have easily informed petitioner of its by-laws when it sent notice formally recognizing
Grace Christian HS v. CA (GR 108905;; Oct. 23, 1997) petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's
Sections 28 and 29 of the Corporation Law require members of the boards of directors of belated notice of said by-law s at the time of foreclosure will not suffice. The ruling of the
SEC en banc is particularly instructive:
corporations to be elected. The board of directors of corporations must be elected from
among the stockholders or members. There may be corporations in which there are By-laws signifies the rules and regulations or private laws enacted by the corporation to
unelected members in the board but it is clear that in the examples cited by petitioner the regulate, govern and control its own actions, affairs and concerns and its stockholders or
unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold members and directors and officers with relation thereto and among themselves in their
4
relation to it. In other words, by-laws are the relatively permanent and continuing rules of laws. Termination of membership shall have the effect of extinguishing all rights
action adopted by the corporation for its own government and that of the individuals of a member in the corporation or in its property, unless otherwise provided in
composing it and having the direction, management and control of its affairs, in whole or the articles of incorporation or the by-laws. (Emphasis supplied)
in part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982
Ed.)
A share can only be deemed delinquent and sold at public auction only upon the
The purpose of a by-law is to regulate the conduct and define the duties of the members failure of the stockholder to pay the unpaid subscription. Delinquency in monthly club
towards the corporation and among themselves. They are self-imposed and, although dues was merely an ordinary debt enforceable by judicial action in a civil case. A provision
adopted pursuant to statutory authority, have no status as public law. (Ibid.) creating a lien upon shares of stock for unpaid debts, liabilities, or assessments of
stockholders to the corporation, should be embodied in the Articles of Incorporation, and
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, not merely in the by-laws. Moreover, the by-laws of petitioner should have provided
except when they have knowledge of the provisions either actually or constructively. In the formal notice and hearing procedure before a member’s share may be seized and
case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law sold.
restricting the transfer of shares cannot have any effect on the the transferee of the shares
in question as he "had no knowledge of such by-law when the shares were assigned to
him. He obtained them in good faith and for a valuable consideration. He was not a privy The procedure for stock corporation’s recourse on unpaid subscription is not
to the contract created by the by-law between the shareholder . . . and the Botica Nolasco, applicable in member’s shares in a non-stock corporation.
Inc. Said by-law cannot operate to defeat his right as a purchaser."
The Commission en banc also believes that for the exception to the general accepted rule PMI Colleges v. NLRC 277 SCRA 462 (1997)
that third persons are not bound by by-laws to be applicable and binding upon the
pledgee, knowledge of the provisions of the VGCCI By- laws must be acquired at the time PMI Colleges never even presented a copy of the by-laws to prove the existence of such
the pledge agreement was contracted. Knowledge of said provisions, either actual or provision. The contract could not be invalid just because the signatory thereon was not
constructive, at the time of foreclosure will not affect pledgee's right over the pledged the Chairman of the Board which allegedly violated petitioner's by-laws. Since by-laws
share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts operate merely as internal rules among the stockholders, they cannot affect or prejudice
that when the principal obligation becomes due, the things in which the pledge or third persons who deal with the corporation, unless they have knowledge of the same."
mortgage consists maybe alienated for the payment to the creditor. No proof appears on record that private respondent ever knew anything about the
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against provisions of said by-laws. In fact, petitioner itself merely asserts the same without even
which the corporation holds any unpaid claim shall be transferable in the books of the bothering to attach a copy or excerpt thereof to show that there is such a provision. How
corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid can it now expect the Labor Arbiter and the NLRC to believe it? That this allegation has
claim arising from unpaid subscription, and not to any indebtedness which a subscriber or never been denied by private respondent does not necessarily signify admission of its
stockholder may owe the corporation arising from any other transaction." In the case at existence because technicalities of law and procedure and the rules obtaining in the courts
bar, the subscription for the share in question has been fully paid as evidenced by the of law do not strictly apply to proceedings of this nature.
issuance of Membership Certificate No. 1219. What Calapatia owed the corporation were
merely the monthly dues. Hence, the aforequoted provision does not apply. Sawadjaan v. CA 459 SCRA 516 (2005)
A corporation which has failed to file its by-laws within the prescribed period does not ipso
Valley Golf Club v. Vda. De Caram 585 SCRA 218 (2009) ***Same as Case in facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate
Outline 2
of Registration of Corporations, details the procedures and remedies that may be availed
WON a non-stock corporation seize and dispose of the membership share of a fully- of before an order of revocation can be issued. There is no showing that such a procedure
paid member on account of its unpaid debts to the corporation when it is authorized has been initiated in this case. The AIIBP was created by Rep. Act No. 6848. It has a main
to do so under the corporate by-laws but not by the Articles of Incorporation? office where it conducts business, has shareholders, corporate officers, a board of
directors, assets, and personnel. It is, in fact, here represented by the Office of the
Government Corporate Counsel, the principal law office of government-owned
Title XI on Non-Stock Corporations of the Corporation Code dealing with the corporations, one of which is respondent bank. At the very least, by its failure to submit its
termination of membership in a non-stock corporation such as Valley Golf. by-laws on time, the AIIBP may be considered a de facto corporation whose right to
exercise corporate powers may not be inquired into collaterally in any private suit to which
SEC. 91. Termination of membership.—Membership shall be terminated in the such corporations may be a party.
manner and for the causes provided in the articles of incorporation or the by- SMC v. Mandaue Packing Products 467 SCRA 107 (2005)
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Under Section 3, Rule VI of Department Order No. 9, it is the submission of these same the directors or trustees of all corporations organized under this Code must be residents
documents to the Regional Office or Bureau that operates to vest legal personality on the of the Philippines.
local/chapter. There is no doubt that on 15 June 1998, or the date respondent filed its
petition for certification election, attached thereto were respondent’s constitution, the Section 25. Corporate officers, quorum. – Immediately after their election, the directors
names and addresses of its officers, and the charter certificate issued by the national of a corporation must formally organize by the election of a president, who shall be a
union FFW. director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided for
However, respondent never submitted a separate by-laws, nor does it appear that in the by-laws. Any two (2) or more positions may be held concurrently by the same
respondent ever intended to prepare a set thereof. Section 1(c), Rule VI, Book V person, except that no one shall act as president and secretary or as president and
of Department Order No. 9 provides that the submission of both a constitution and a set treasurer at the same time.
of by-laws is required, or at least an indication that the local/chapter is adopting the
constitution and by-laws of the federation or national union. A literal reading of the The directors or trustees and officers to be elected shall perform the duties enjoined on
provision might indicate that the failure to submit a specific set of by-laws is fatal to the them by law and the by-laws of the corporation. Unless the articles of incorporation or
recognition of the local/chapter. However, a critical examination of respondent’s the by-laws provide for a greater majority, a majority of the number of directors or
constitution reveals that it is sufficiently comprehensive in establishing the necessary rules trustees as fixed in the articles of incorporation shall constitute a quorum for the
for its operation. These premises considered, there is clearly no need for a separate set transaction of corporate business, and every decision of at least a majority of the
of by-laws to be submitted by respondent. 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
2) Commencement of Business ---- Sec. 22 majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Section 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation. – If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from the
date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its OUTLINE 4
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)
STOCK NON-STOCK
This provision shall not apply if the failure to organize, commence the transaction of its DEFINITION A corporation with capital A corporation that does not
businesses or the construction of its works, or to continuously operate is due to causes stock divided into shares and issue stocks and does not
beyond the control of the corporation as may be determined by the Securities and is authorized to distribute to distribute dividends to their
Exchange Commission. holders thereof such shares members
dividends or allotments of the
surplus profits on the basis of
the shares held (3)
3) Election of Directors & Officers --- Sec. 23 and 25
PURPOSE Primarily to make profits for its May be formed or organized
shareholders for charitable, religious,
Section 23. The board of directors or trustees. – Unless otherwise provided in this educational, professional,
Code, the corporate powers of all corporations formed under this Code shall be cultural, fraternal, literary,
exercised, all business conducted and all property of such corporations controlled and scientific, social, civic service
held by the board of directors or trustees to be elected from among the holders of or similar purposes like trade,
stocks, or where there is no stock, from among the members of the corporation, who industry, agricultural and like
shall hold office for one (1) year until their successors are elected and qualified. (28a) chambers, or any
Every director must own at least one (1) share of the capital stock of the corporation of combination thereof (88)
which he is a director, which share shall stand in his name on the books of the DISTRIBUTION OF Profit is distributed to Whatever incidental profit
corporation. Any director who ceases to be the owner of at least one (1) share of the PROFIT shareholders made is not distributed
capital stock of the corporation of which he is a director shall thereby cease to be a among its members but is
director. Trustees of non-stock corporations must be members thereof. A majority of used for furtherance of its
purpose. AOI or by laws may
6
provide for the distribution of municipality where the
its assets among its members principal office of the
upon dissulition. Before then, corporation is located (51)
no profit may be made by the TRANSFERABILITY Transferable Generally non-transferable
members OF INTEREST OR since membership and all
COMPOSITION Stockholders Members MEMBERSHIP rights arising therefrom are
SCOPE OF RIGHT Each stockholder votes Each member, regardless of personal. However the AOI or
TO VOTE according to the proportion of class, is entitle to 1 vote by-laws can provide
his shares I the corporation. unless such right to vote has otherwise (90)
No shares may be deprived of been limited, broadened or DISTRIBUTION OF Sec 94
voting rights except those denied in the AOI or by- ASSETS IN CASE
classified and issued as laws(89) OF DISSOLUTION
“preferred” or “redeemable”
shares and as otherwise Vlll. CAPITAL STRUCTURE OF CORPORATIONS
provided by the code(6) A. Concepts:
WHO EXERCISE Board of Directors or trustees Members of the Corporation
CORPORATE 1) Capital vis-à-vis Capital Stock
POWERS CAPITAL CAPITAL STOCK
VOTING BY PROXY May be denied by the AOI or Cannot be denied It is the value of the actual property or It is the amount fixed in the corporate
the by-laws estate of the corporation whether in charter to be subscribed and paid in
VOTIN BY MAIL May be authorized by the by- Not possible money or property. cash, kind or property at the organization
laws with the approval of and of the corporation or afterwards and upon
under the conditions which the corporation is to conduct its
prescribed by the SEC (89) operation
GOVERNING Board of Directors or Trustees Board of trustees, which may
BOARD consisting of 5-15 directors / consist of more than 15 2) Shares of Stock vis-à-vis Stock Certificate
trustees trustees unless otherwise
provided by the AOI or by- Shares of Stock Stock Certificate
laws (92) Nature Unit of interest in a corporation Evidence of the holder’s
TERM OF Directors/trustees shall hold Board classified in such a ownership of the stock and of his
DIRECTORS OR office for 1 year and until their way that the term of office of right as a shareholder
TRUSTEES successors are elected and 1/3 of their number shall Classification Incorporeal intangible property Concrete and tangible
qualified (23) expired every year. Condition for May be issued by the corporation May be issued ONLY if the
Subsequent elections of Issuance even if the subscription is not subscription is fully paid
trustees comprising 1/3 of the fully paid
board shall be held annually,
and trustess so elected shall
3) Authorized Capital Stock – it is the amount fixed in the AOI that may be subscribed
have a term of 3 years
and paid by the stockholders of the corporation
ELECTION OF Officers are elected by the Officers may directly be
OFFICERS Board of Directors (25) except elected by the members
in close corporations where UNLESS the AOI or by-laws 4) Subscribed Capital Stock – it is the total amount of the capital stock subscribed
the stockholders themselves provide otherwise (92) whether fully paid or not.
may elect the officers (97)
PLACE OF Any place within the Generally, the meetings must
5) Paid-in Capital – it is the amount paid by the stockholders on subscriptions from
MEETINGS Philippines, if provided for by be held at the principal office
unissued shares of the corporation
the by-laws (93) of the corporation if
practicable. If not then,
anyplace in the city or
7
6) Outstanding Capital Stock – Sec. 137 - it is the portion of the capital stock issued A subscription contract necessarily involves the corporation as one of the contracting
to subscribers whether fully paid or partially paid – as long as there is a binding parties since the subject matter of the transaction is property owned by the corporation its
subscription contract – except treasury shares. shares of stock. Thus, the Tius did not contract in their personal capacities with the Ongs
since they were not selling any of their own shares to them. It was FLADC that did. Said

action will nevertheless still not prosper since rescission will violate the Trust Fund
7) Watered stock - Sec. 65 Doctrine and the procedures for the valid distribution of assets and property under the
Section 65. Liability of directors for watered stocks. – Any director or officer of a Corporation Code.
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 The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
fair value, or who, having knowledge thereof, does not forthwith express his objection in Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
writing and file the same with the corporate secretary, shall be solidarily, liable with the constitute a fund to which the creditors have a right to look for the satisfaction of their
stockholder concerned to the corporation and its creditors for the difference between the claims. This doctrine is the underlying principle in the procedure for the distribution of
fair value received at the time of issuance of the stock and the par or issued value of the capital assets, embodied in the Corporation Code, which allows the distribution of
same. corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock, (2) purchase of redeemable shares by the
B. Trust Fund Doctrine - vis-à-vis corporate assets corporation, regardless of the existence of unrestricted retained earnings, and (3)
- vis-à-vis subscribed capital stock 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
Trust Fund Doctrine corporate assets are held as a trust fund for the benefit of
unless the stringent requirements therefor are complied with.
shareholders and creditors and that the corporate officers have
a fiduciary duty to deal with them properly. In the instant case, the rescission of the Pre-Subscription Agreement will effectively
Corporate Assets Things that are resources owned by a company and which have result in the unauthorized distribution of the capital assets and property of the corporation,
future economic value that can be measured and can be thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
expressed in dollars. Examples include cash, investments, subscription agreement is not one of the instances when distribution of capital assets and
accounts receivable, inventory, supplies, land, buildings, property of the corporation is allowed.
equipment, and vehicles.
Subscribed Capital it is the total amount of the capital stock subscribed whether Halley v. Printwell, Inc. G.R. 157549;; May 30, 2011
Stock fully paid or not. The stockholders personally benefited from the operations of the corporation even though
they never paid their subscriptions in full. The stockholders cannot now claim the doctrine
of corporate fiction otherwise (to deny creditors to collect from SH) it would create an
Phil. Trust Co. v. Rivera 44 Phil. 469 injustice because creditors would be at a loss (limbo) against whom it would assert the
right to collect.
“It is established doctrine that subscription to the capital of a corporation constitute a find

to which creditors have a right to look for satisfaction of their claims and that the assignee
On piercing the veil:
in insolvency can maintain an action upon any unpaid stock subscription in order to realize
Although the corporation has a personality separate and distinct from its SH, such
assets for the payment of its debts. A corporation has no power to release an original
personality is merely a legal fiction (for the convenience and to promote the ends of justice)
subscriber to its capital stock from the obligation of paying for his shares, without a
which may be disregarded by the courts if it is used as a cloak or cover for fraud,
valuable consideration for such release;; and as against creditors a reduction of the capital
justification of a wrong, or an alter ego for the sole benefit of the SH.
stock can take place only in the manner an under the conditions prescribed by the statute

or the charter or the articles of incorporation”
As to the Trust Fund Doctrine:
Under which corporate debtors might look to the unpaid subscriptions for the satisfaction
Ong Yong v. Tiu G.R. 144476;; 4/8/2003 of unpaid corporate debts. Subscriptions to the capital of a corporation constitutes a trust
fund for the payment of the creditors (by mere analogy) In reality, corporation is a simple
A subscription contract as defined under Section 60, Title VII of the Corporation Code:
debtor.
Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed shall be deemed a subscription within the meaning of this
Moreover, the corporation has no legal capacity to release an original subscriber to its
Title, notwithstanding the fact that theparties refer to it as a purchase or some other
capital stock from the obligation of paying for his shares, in whole or in part, without
contract
valuable consideration, or fraudulently, to the prejudice of the creditors.

8
The creditor is allowed to maintain an action upon any unpaid subscriptions and Common COMMON SHARES
thereby steps into the shoes of the corporation for the satisfaction of its debt. and - Basic class of stock ordinarily and usually issued without
Preferred extraordinary rights and privileges, and the owners thereof
C. Doctrine of Equality of Shares Shares are entitled to a pro rata share in the profits of the corporation
Sec. 6, par.5 and in its assets upon dissolution and, likewise, in the
Section 6. Classification of shares. management of its affairs without preference or advantage
Except as otherwise provided in the articles of incorporation and stated in the whatsoever.
certificate of stock, each share shall be equal in all respects to every other share. - They have voting rights EXCEPT: delinquent shares and
founder’s shares where the exclusive voting rights are

granted to them for a period not exceeding 5 years.
Castillo v. Balinghasay Oct. 18, 2004 [G.R. No. 150976. October 18, 2004.]
PREFERRED SHARES
- Shares with a stated par value which entitle the holder thereof
One of the rights of a stockholder is the right to participate in the control and management to certain preferences over the holders of common stock. The
of the corporation that is exercised through his vote. The right to vote is a right inherent in preference may be: as to asset, as to dividends, as may be
and incidental to the ownership of corporate stock, and as such is a property right. The determined by the BOD when so authorized to.
stockholder cannot be deprived of the right to vote his stock nor may the right be - May be deprived of voting rights in the AOI
essentially impaired, either by the legislature or by the corporation, without his consent, Redeemable Redeemable shares may be issued by the corporation when expressly
through amending the charter, or the by-laws. shares so provided in the articles of incorporation. They may be purchased or
Section 6 of the Corporation Code being deemed written into Article VII of the Articles of taken up by the corporation upon the expiration of a fixed period,
Incorporation of MCPI, it necessarily follows that unless Class "B" shares of MCPI stocks regardless of the existence of unrestricted retained earnings in the
are clearly categorized to be "preferred" or "redeemable" shares, the holders of said Class books of the corporation, and upon such other terms and conditions as
"B" shares may not be deprived of their voting rights. Note that there is nothing in the may be stated in the articles of incorporation, which terms and
Articles of Incorporation nor an iota of evidence on record to show that Class "B" shares conditions must also be stated in the certificate of stock representing
were categorized as either "preferred" or "redeemable" shares. The only possible said shares.
conclusion is that Class "B" shares fall under neither category and thus, under the law,
are allowed to exercise voting rights. Cannot be taken when the company is insolvent or it would cause
insolvency
D. Classification of Shares – Rationale Treasury Treasury shares are shares of stock which have been issued and fully
- Sec. 6, 7, 8, 9 Shares paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means.
Par and No PAR VALUE SHARES Such shares may again be disposed of for a reasonable price fixed by
Par value - Shares with a value fixed in the AOI and the certificate of stock the board of directors
Shares – to fix the minimum subscription or issue price of the shares, Share in
rd
Shares held by a 3 person to be released only upon the performance
thus assuring creditors that the corporation would receive a escrow of a condition or the happening of a condition or the happening of a
minimum amount for its stocks certain event contained in the agreement
NO PAR VALUE SHARES
- Shares having no par value. The issued value will be fixed by Escrow deposit makes the depository a trustee under express trust
the BOD and stated in the certificate or articles of
incorporation. No par value stockholders have the same right Grantee or holder is not yet the owner of the shares before the the
as holders of par value stocks – this may be converted into fulfillment of the condition
par value shares by amending the AOI Over-issued Stock issued in excess of the authorized capital stock. Its issuance is
Voting and VOTING SHARES stocks / considered null and void.
Non-Voting - Shares with a right to vote. There shall always be a class or Spurious
Shares series of shares which have complete voting rights. stocks
NON VOTING SHARES Watered Stocks of a corporation issued for less than their par or issued value or
- Shares without right to vote. This is allowable in the case of Stock in any other form other than cash valued in excess of its fall value.
redeemable shares and preferred shares. (SEE SECTION 6 Convertible Share that is changeable by the stockholder from one class to another
FOR INSTANCES THIS SHARES ARE ENTITLED TO VOTE Shares at a certain price and within a certain period
– MEMORIZE)
9
Fractional A share with a value of less than one full share directors. In short, the term “capital” in Section 11, Article XII of the Constitution refers
Share only to shares of stock that can vote in the election of directors.
Promotion Shares issued to promoters or those in some way interested in the To construe broadly the term “capital” as the total outstanding capital stock,
share company, for incorporating the company, or for services rendered in including both common and non-voting preferred shares, grossly contravenes the intent
the launching or promoting the welfare of the company. and letter of the Constitution that the “State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.” A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to control
Delpher Trades Corp. v. IAC (1988) 157 SCRA 349 of the public utility.
"The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed.” It is significant that the FILIPINO - FOREIGN OWNERSHIP
Pachecos took no par value shares in exchange for their properties. It is to be stressed The Constitution expressly declares as State policy the development of an economy
that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of "effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
the corporation. In effect, the Delpher Trades Corporation is a business conduit of the explicitly reserves the ownership and operation of public utilities to Philippine nationals,
Pachecos. What they really did was to invest their properties and change the nature of who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations
their ownership from unincorporated to incorporated form by organizing Delpher Trades or associations at least 60 percent of whose capital with voting rights belongs to Filipinos.
Corporation to take control of their properties and at the same time save on inheritance The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by
taxes. Philippine citizens or Philippine nationals, mere legal title is not enough to meet the
The "Deed of Exchange" of property between the Pachecos and Delpher Trades required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
Corporation cannot be considered a contract of sale. There was no transfer of actual voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
ownership interests by the Pachecos to a third party. The Pacheco family merely changed interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers
their ownership from one form to another. The ownership remained in the same hands. to shares with voting rights, as well as with full beneficial ownership. This is precisely
Hence, the private respondent has no basis for its claim of a light of first refusal under the because the right to vote in the election of directors, coupled with full beneficial ownership
lease contract. of stocks, translates to effective control of a corporation. Thus, "the 60-40 ownership
requirement in favor of
- issued price Filipino citizens must apply separately to each class of shares, whether common,
- “deemed fully paid and non-assessable” preferred non-voting, preferred voting or any other class of shares." This guarantees that
- The stock must be fully paid by the holder, in an amount set by the Board of the “controlling interest” in public utilities always lies in the hands of Filipino citizens.
Directors and not less than the par value of the stock. This means each
stockholder must pay an amount equal to at least the par value of the stock for Relate to SEC Memo Circ. 8, s2013 (Guidelines in Fil-Foreign ownership)
the stock to be validly issued. Under the Circular, for purposes of determining compliance with the nationality
restrictions, the required percentage of Filipino ownership shall be applied to both (a)

the total number of outstanding shares of stock entitled to vote in the election of
E. OTHER CASES ---
directors, and (b) the total number of outstanding shares of stock, whether or not
Gamboa v. Teves, et al (GR 176579;; 6/28/ 2011 and 10/ 9/ 2012)
entitled to vote in the election of directors. On the other hand, corporations covered by
CAPITAL:
special laws providing for specific citizenship requirements shall continue to be guided
Any other construction of the term "capital" in Section 11, Article XII of the Constitution
by the provisions of those special laws. The corporate secretaries of covered
contravenes the letter and intent of the Constitution. Any other meaning of the term
corporations are directed to monitor compliance with the provisions of the Circular.
"capital" openly invites alien domination of economic activities reserved exclusively to

Philippine nationals. Therefore, respondents' interpretation will ultimately result in handing
The SEC provided for a one-year grace period to enable all corporations to comply with
over effective control of our national economy to foreigners in patent violation of the
its new Circular, failing which, the corporation shall be subjected to administrative
Constitution, making Filipinos second-class citizens in their own country.
sanctions under the FIA, as amended.
Considering that common shares have voting rights which translate to control,
as opposed to preferred shares which usually have no voting rights, the term “capital” in Republic Planters Bank v. Agana ( GR 51765;; Mar. 3, 1997)
Section 11, Article XII of the Constitution refers only to common shares. However, if the
preferred shares also have the right to vote in the election of directors, then the term While the stock certificate does allow redemption, the option to do so was clearly vested
“capital” shall include such preferred shares because the right to participate in the control in the bank. The redemption therefore is clearly the type known as "optional". Thus, except
or management of the corporation is exercised through the right to vote in the election of as otherwise provided in the stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel or refuse the redemption
10
of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It an existing corporation or a corporation still to be formed shall be deemed a subscription
is a settled doctrine in statutory construction that the word "may" denotes discretion, and within the meaning of this Title, notwithstanding the fact that the parties refer to it as a
cannot be construed as having a mandatory effect. The redemption of said shares cannot purchase or some other contract. (n)
be allowed. The Central Bank made a finding that the Bank has been suffering from
chronic reserve deficiency, and that such finding resulted in a directive, issued on 31 Section 61. Pre-incorporation subscription. – A subscription for shares of stock of a
January 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting corporation still to be formed shall be irrevocable for a period of at least six (6) months
Chairman of the Board of the bank prohibiting the latter from redeeming any preferred from the date of subscription, unless all of the other subscribers consent to the revocation,
share, on the ground that said redemption would reduce the assets of the Bank to the or unless the incorporation of said corporation fails to materialize within said period or
prejudice of its depositors and creditors. Redemption of preferred shares was prohibited within a longer period as may be stipulated in the contract of subscription: Provided, That
for a just and valid reason. The directive issued by the Central Bank Governor was no pre-incorporation subscription may be revoked after the submission of the articles of
obviously meant to preserve the status quo, and to prevent the financial ruin of a banking incorporation to the Securities and Exchange Commission. (n)
institution that would have resulted in adverse repercussions, not only to its depositors
and creditors, but also to the banking industry as a whole. The directive, in limiting the Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration
exercise of a right granted by law to a corporate entity, may thus be considered as an less than the par or issued price thereof. Consideration for the issuance of stock may be
exercise of police power. any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;;
Both Section 16 of the Corporation Law and Section 43 of the present Corporation Code 2. Property, tangible or intangible, actually received by the corporation and
prohibit the issuance of any stock dividend without the approval of stockholders, necessary or convenient for its use and lawful purposes at a fair valuation equal
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or to the par or issued value of the stock issued;;
special meeting duly called for the purpose. These provisions underscore the fact that 3. Labor performed for or services actually rendered to the corporation;;
payment of dividends to a stockholder is not a matter of right but a matter of consensus. 4. Previously incurred indebtedness of the corporation;;
Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay 5. Amounts transferred from unrestricted retained earnings to stated capital;; and
interest before dividends are paid to common stockholders, is legal only when construed 6. Outstanding shares exchanged for stocks in the event of reclassification or
as requiring payment of interest as dividends from net earnings or surplus only. conversion.
Where the consideration is other than actual cash, or consists of intangible
COCOFED v. RP (GR Nos. 177857-58;; 178193;; 180705 promulgated Sept. 17, 2009) property such as patents of copyrights, the valuation thereof shall initially be
re conversion of shares determined by the incorporators or the board of directors, subject to approval by
Court APPROVES the conversion of the 753,848,312 SMC (San Miguel Corporation) the Securities and Exchange Commission.
Common Shares registered in the name of CIIF (Coconut Industry Investment Fund Shares of stock shall not be issued in exchange for promissory notes or future
companies) companies to SMC SERIES 1 PREFERRED SHARES of 753,848,312, the service.
converted shares to be registered in the names of CIIF companies in accordance with the The same considerations provided for in this section, insofar as they may be
terms and conditions specified in the conversion offer set forth in SMC’s Information applicable, may be used for the issuance of bonds by the corporation.
Statement and appended as Annex "A" of COCOFED’s Urgent Motion to Approve the The issued price of no-par value shares may be fixed in the articles of
Conversion of the CIIF SMC Common Shares into SMC Series 1 Preferred Shares. The incorporation or by the board of directors pursuant to authority conferred upon it
preferred shares shall remain in custodia legis and their ownership shall be subject to the by the articles of incorporation or the by-laws, or in the absence thereof, by the
final ownership determination of the Court. Until the ownership issue has been resolved, stockholders representing at least a majority of the outstanding capital stock at a
the preferred shares in the name of the CIIF companies shall be placed under meeting duly called for the purpose. (5 and 16)
sequestration and PCGG management
Section 63. Certificate of stock and transfer of shares. – The capital stock of stock
The net dividend earnings and/or redemption proceeds from the Series 1 Preferred corporations shall be divided into shares for which certificates signed by the president or
Shares shall be deposited in an escrow account with the Land Bank of the Philippines or vice president, countersigned by the secretary or assistant secretary, and sealed with the
the Development Bank of the Philippines. seal of the corporation shall be issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be transferred by delivery of the certificate or
F. STOCKS & STOCKHOLDERS 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,
Sec. 60 -73, 137, 90 until the transfer is recorded in the books of the corporation showing the names of the
TITLE VII STOCKS AND STOCKHOLDERS parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
Section 60. Subscription contract. – Any contract for the acquisition of unissued stock in
11

No shares of stock against which the corporation holds any unpaid claim shall be Unless the delinquent stockholder pays to the corporation, on or before the date specified
transferable in the books of the corporation. (35) (***Take note – discussion) for the sale of the delinquent stock, the balance due on his subscription, plus accrued
interest, costs of advertisement and expenses of sale, or unless the board of directors
Section 64. Issuance of stock certificates. – No certificate of stock shall be issued to a otherwise orders, said delinquent stock shall be sold at public auction to such bidder who
subscriber until the full amount of his subscription together with interest and expenses (in shall offer to pay the full amount of the balance on the subscription together with accrued
case of delinquent shares), if any is due, has been paid. (37) interest, costs of advertisement and expenses of sale, for the smallest number of shares
or fraction of a share. The stock so purchased shall be transferred to such purchaser in
Section 65. Liability of directors for watered stocks. – Any director or officer of a the books of the corporation and a certificate for such stock shall be issued in his favor.
corporation consenting to the issuance of stocks for a consideration less than its par or The remaining shares, if any, shall be credited in favor of the delinquent stockholder who
issued value or for a consideration in any form other than cash, valued in excess of its shall likewise be entitled to the issuance of a certificate of stock covering such shares.
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 Should there be no bidder at the public auction who offers to pay the full amount of the
stockholder concerned to the corporation and its creditors for the difference between the balance on the subscription together with accrued interest, costs of advertisement and
fair value received at the time of issuance of the stock and the par or issued value of the expenses of sale, for the smallest number of shares or fraction of a share, the corporation
same. (n) may, subject to the provisions of this Code, bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Title to all the shares of
Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the stock covered by the subscription shall be vested in the corporation as treasury shares
corporation interest on all unpaid subscriptions from the date of subscription, if so and may be disposed of by said corporation in accordance with the provisions of this
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in Code. (39a-46a)
the by-laws, such rate shall be deemed to be the legal rate. (37)
Section 69. When sale may be questioned. – No action to recover delinquent stock sold
Section 67. Payment of balance of subscription. – Subject to the provisions of the can be sustained upon the ground of irregularity or defect in the notice of sale, or in the
contract of subscription, the board of directors of any stock corporation may at any time sale itself of the delinquent stock, unless the party seeking to maintain such action first
declare due and payable to the corporation unpaid subscriptions to the capital stock and pays or tenders to the party holding the stock the sum for which the same was sold, with
may collect the same or such percentage thereof, in either case with accrued interest, if interest from the date of sale at the legal rate;; and no such action shall be maintained
any, as it may deem necessary. unless it is commenced by the filing of a complaint within six (6) months from the date of
sale. (47a)
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 Section 70. Court action to recover unpaid subscription. – Nothing in this Code shall
the date stated in the call made by the board. Failure to pay on such date shall render prevent the corporation from collecting by action in a court of proper jurisdiction the
the entire balance due and payable and shall make the stockholder liable for interest at amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a)
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 Section 71. Effect of delinquency. – No delinquent stock shall be voted for or be entitled
date no payment is made, all stocks covered by said subscription shall thereupon become to vote or to representation at any stockholder’s meeting, nor shall the holder thereof be
delinquent and shall be subject to sale as hereinafter provided, unless the board of entitled to any of the rights of a stockholder except the right to dividends in accordance
directors orders otherwise. (38) 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.
(***TAKE NOTE HOW***) Section 68. Delinquency sale. – The board of directors may, (50a)
by resolution, order the sale of delinquent stock and shall specifically state the amount
due on each subscription plus all accrued interest, and the date, time and place of the Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which
sale which shall not be less than thirty (30) days nor more than sixty (60) days from the are not delinquent shall have all the rights of a stockholder. (n)
date the stocks become delinquent.
Section 73. Lost or destroyed certificates. – The following procedure shall be followed
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent for the issuance by a corporation of new certificates of stock in lieu of those which have
stockholder either personally or by registered mail. The same shall furthermore be been lost, stolen or destroyed:
published once a week for two (2) consecutive weeks in a newspaper of general 1. The registered owner of a certificate of stock in a corporation or his legal
circulation in the province or city where the principal office of the corporation is located. representative shall file with the corporation an affidavit in triplicate setting forth,
12
if possible, the circumstances as to how the certificate was lost, stolen or corporation. What the records show is that the respondent corporation deducted the
destroyed, the number of shares represented by such certificate, the serial amount due to petitioner from the amount receivable from him for the unpaid
number of the certificate and the name of the corporation which issued the same. subscriptions. Set-off was without lawful basis, if not premature. But, assuming that there
He shall also submit such other information and evidence which he may deem was a call for payment, the answer is still in the negative. The NLRC cannot set it off
necessary;; against the wages and other benefits due petitioner.
2. After verifying the affidavit and other information and evidence with the books National Exchange vs Dexter 51 Phil. 601 (1928)
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 In the absence of restrictions in its character, a corporation, under its general power to
office, once a week for three (3) consecutive weeks at the expense of the contract, has the power to accept subscriptions upon any special terms not prohibited by
registered owner of the certificate of stock which has been lost, stolen or positive law or contrary to public policy, provided they are not such as to require the
destroyed. The notice shall state the name of said corporation, the name of the performance of acts which are beyond the powers conferred upon the corporation by its
registered owner and the serial number of said certificate, and the number of character, and provided they do not constitute a fraud upon other subscribers or
shares represented by such certificate, and that after the expiration of one (1) stockholders, or upon persons who are or may become creditors of the corporation.
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 A provision in the Corporation states: ". . . no corporation shall issue stock or bonds except
be barred and said corporation shall cancel in its books the certificate of stock in exchange for actual cash paid to the corporation or for property actually received by it
which has been lost, stolen or destroyed and issue in lieu thereof new certificate at a fair valuation equal to the par value of the stock or bonds so issued."
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 Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a
such form and with such sureties as may be satisfactory to the board of directors, stipulation such as that now under consideration, in a stock subcription, is illegal, for this
in which case a new certificate may be issued even before the expiration of the stipulation obligates the subscriber to pay nothing for the shares except as dividends may
one (1) year period provided herein: Provided, That if a contest has been accrue upon the stock. In the contingency that dividends are not paid, there is no liability
presented to said corporation or if an action is pending in court regarding the at all. This is a discrimination in favor of the particular subscriber, and hence the stipulation
ownership of said certificate of stock which has been lost, stolen or destroyed, the is unlawful.
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 2) Unpaid subscriptions -----
which has been lost, stolen or destroyed. Velasco vs Poizat 37 Phil. 802 (1918)

**** Except in case of fraud, bad faith, or negligence on the part of the corporation A stock subscription is a contract between the corporation on one side, and the subscriber
and its officers, no action may be brought against any corporation which shall on the other, and courts will enforce it for or against either. It is a rule, accepted by the
have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant Supreme Court of the United States that a subscription for shares of stock does not require
to the procedure above-described. (R.A. 201a) an express promise to pay the amount subscribed, as the law implies a promise to pay on
the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a
1) Consideration for shares ----- stock subscription is subsisting liability from the time the subscription is made, since it
Garcia v. Lim Chu Sing 59 Phil. 562 (1934) requires the subscriber to pay interest quarterly from that date unless he is relieved from
NO. A share of stock or the certificate thereof is not indebtedness to the owner nor such liability by the by-laws of the corporation. The subscriber is as much bound to pay
evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not the amount of the share subscribed by him as he would be to pay any other debt, and the
creditors of the corporation. right of the company to demand payment is no less incontestable.

The capital stock of a corporation is a trust fund to be used more particularly for the The provisions of the Corporation Law (Act No. 1459) give recognition of two remedies for
security of the creditors of the corporation who presumably deal with it on the credit of its the enforcement of stock subscriptions. The first and most special remedy given by the
capital. statute consists in permitting the corporation to put up the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this case the provisions of
Apodaca v. NLRC 172 SCRA 442 section 38 to 48, inclusive, of the Corporation Law are applicable and must be followed.
the unpaid subscriptions are not due and payable until a call is made by the corporation
for payment. Private respondents have not presented a resolution of the board of directors It is generally accepted doctrine that the statutory right to sell the subscriber's stock is
of respondent corporation calling for the payment of the unpaid subscriptions. It does not merely a remedy in addition to that which proceeds by action in court;; and it has been held
even appear that a notice of such call has been sent to petitioner by the respondent
13
that the ordinary legal remedy by action exists even though no express mention thereof is Settled is the rule that nothing in this act shall prevent the directors from collecting, by
made in the statute. action in any court of proper jurisdiction, the amount due on any unpaid subscription,
together with accrued interest and costs and expenses incurred.

Lingayen Gulf Electric vs Baltazar93 Phil. 404 (1953) Lumanlan vs Cura 59 Phil. 746 (1934)
G.R. No. L-4824 G.R. No. L-6244 June 30, 1953
Bank of the Philippine Islands appeared in this case as assignee in the "Involuntary
In the case of Velasco v. Poizat, the corporation therein was insolvent, thus the unpaid Insolvency of Dizon & Co., Inc, they were appointed as such in a Civil Case in the CFI of
subscriptions are payable on demand and are immediately recoverable in an action Manila. It is therefore evident that there are still other creditors of Dizon & Co., Inc. This
instituted by the assignee. Plaintiff corporation in this case is not insolvent, and the being the case that corporation has a right to collect all unpaid stock subscriptions and
prevailing Corporation Code at the time mandatorily requires that publication, and not any other amounts which may be due it.
mere personal demand, before it can be said that any call on the payment of unpaid It is established doctrine that subscriptions to the capital of a corporation
subscriptions could be validly made. The reason for the mandatory provision is not only constitute a fund to which the creditors have a right to look for satisfaction of
to assure notice to all subscribers, but also to assure equality and uniformity in the their claims and that the assignee in insolvency can maintain an action upon
assessment on stockholders. any unpaid stock subscription in order to realize assets for the payment of its
debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
Release from payment of unpaid subscribed stock must be made by all the stockholders.
In this case, one of the defences interposed by the defendant is that there was a resolution . . . the Corporation Law clearly recognizes that a stock subscription is a
adopted by the stockholders releasing holders of unpaid subscribers of stock from subsisting liability from the time the subscription is made, since it requires the
payment thereof;; making the demand of the plaintiff corporation for the remaining unpaid subscriber to pay interest quarterly from that date unless he is relieved from
subscribed shares of stock to be without authority. This defence is largely ineffectual. The such liability by the by-laws of the corporation. The subscriber is as much
court held that before such a release may be made, the stockholders must agree to do so bound to pay the amount of the share subscribed by him as he would be to pay
unanimously. This was not the case, as the trial court had found that there were at least any other debt, and the right of the company to demand payment is no less
7 stockholders missing from the meeting where the aforementioned resolution was incontestable. (Velasco vs. Poizat, 37 Phil., 802, 805.)
adopted. The only instances where a release from such obligation to pay are 1) a bona
fide compromise, 2) a set off of debt due from the corporation, and 3) a consideration from China Banking Corp. v. CA GR 117604 (Mar. 26, 1997)
the corporation. The defendant possesses none of these exceptions;; thus he cannot be
said to have been released from the payment of his unpaid subscribed shares of stock. No. The Supreme Court held that Sec. 63 of the Corporation Code which provides that
"no shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation" cannot be utilized by VGCCI. The term
Da Silva vs Aboitiz 44 Phil. 755 (1923) "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any
When condition of payment provided for in the by-laws indebtedness which a subscriber or stockholder may owe the corporation arising from any
other transaction." In the case at bar, the subscription for the share in question has been
Provision of article 46 of the said by-laws maybe regarded as a contract between the fully paid as evidenced by the issuance of Membership Certificate No. 1219. What
defendant corporation and its stockholders , yet as it is only to the board of directors of Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted
the corporation that said articles gives the authority or right to apply on the payment of provision does not apply.
unpaid subscription. Although, the by-laws provide that unpaid subscriptions may be paid
from such dividends The defendant corporation, through its board of directors, made use
of its discretionary power, taking advantage of the first of the two remedies: delinquency 3) Rights of Unpaid Shares ---- Indivisibility of Subscription
sale or specific performance. On the other hand, the plaintiff has no right whatsoever
under the provision of the above cited article 46 of the said by-laws to prevent the board ***FuaCun doctrine prevails. Baltazar abandoned.***
of directors from following, for that purpose, any other method than that mentioned in the
said article, for the very reason that the same does not give the stockholders any right in FuaCun v. Summers, et al.44 Phil. 704(1923)
connection with the determination of the question whether or not there should be deducted
from the 70 per cent of the profit distributable among the stockholders such amount as The Supreme Court ruled that in the absence of special agreement to the contrary, a
may be deemed fit for the payment of subscriptions due and unpaid. subscriber for a certain number of shares of stock does not, upon payment of one-half of
the subscription price, become entitled to the issuance of certificates for one-half the
number of shares subscribed for;; the subscriber's right consists only in an equity entitling
14
him to a certificate for the total number of shares subscribed for by him upon payment of o Take note or look at the AOI or by-laws when unpaid shares should be
the remaining portion of the subscription price. paid
- FUA CUN CASE à even he partially paid à all his shares become delinquent
NOTE: - EXCEPTION TO CALL: when the subscription contract has a date for payment
- Indivisibility of subscription à partial payment = equity of right à NO NEED for a call
- No right at all except to receive CASH dividends à dividends could be used to
Baltazar v. Lingayen Gulf 14 SCRA 522(1965) offset but it shall include cost of the share + interest + other expenses
(publication, advertisement, etc)
The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun - Stock Dividends à NOT ENTITLED to stock dividends until full payment of
v. Summers case, because it was the practice and procedure, since the inception of the unpaid subscription + all expenses before he receives the stock dividends.
corporation, to issue certificates of stock to its individual subscribers for unpaid shares of
stock and gave voting power to shares of stock fully paid. And even though no agreement APPLICATION OF BALTAZAR AND FUA CUN CASE
existed, the ruling in said case does not now reflect the correct view on the matter, for FACTS:
better than an agreement or practice, there is the law, which renders the said case of Fua - Php 1 / share
Cun-Summers, obsolescent. - 1000 shares = Php 1000
- Paid only Php 600 of the 1000 pesos
In the cases at bar, the defendant-corporation had chosen to apply payments by its BALTAZAR CASE
stockholders to definite shares of the capital stock of the corporation and had fully paid
capital stock shares certificates for said payments;; its call for payment of unpaid 100 shares / box
subscription and its declaration of delinquency for non-payment of said call affecting only
the remaining number of shares of its capital stock for which no fully paid capital stock P A I D
shares certificates have been issued, "and only these have been legally shorn of their
voting rights by said declaration of delinquency" (amended decision).
à STOCK CERTIFICATE WILL BE ISSUED à only as to the paid portion = Php
600 worth of shares
Nava v. Peers Mktg. Corp.76 SCRA 65(1976)
Shares of stock may be transferred by delivery to the transferee of the certificate properly FUA CUN CASE
indorsed. "Title may be vested in the transferee by delivery of the certificate with a written
assignment or indorsement thereof" There should be compliance with the mode of
transfer prescribed by law.
The usual practice is for the stockholder to sign the form on the back of the stock
certificate. The certificate may thereafter be transferred from one person to another. If the à This would look like as if no share was fully paid.
holder of the certificate desires to assume the legal rights of a shareholder to enable him à Php 600 is allocated to all as if not paid à NOT ISSUE STOCK
to vote at corporate elections and to receive dividends, he fills up the blanks in the form CERTIFICATE
by inserting his own name as transferee. Then he delivers the certificate to the secretary
of the corporation so that the transfer may be entered in the corporation's books. The IF THE CORPORATION CODE ADOPTS 1 of the METHOD (Fua vs Baltazar) à it cannot
certificate is then surrendered and a new one issued to the transferee. The assignment of to its advantage afterwards change its method à FUA CUN method prevails
corporate shares is effective only between the parties to the transaction if not complied
with the mode of transfer subscribed. 4) Nature/Function of Stock Certificates ----

NOTE:
A quasi negotiable instrument, it may be transferred by INDORSMENT, coupled with
RIGHTS OF UNPAID SHARES
delivery but the holder thereof takes it without prejudice to such rights or defenses as
- Unpaid shareholder unless declared a delinquent à has all the right of a
the registered owner or transferor’s creditor may have under the law except insofar as
shareholder (dividends, vote, etc.)
such rights or defenses are subject to the limitations imposed by their principles
- Cannot apply dividend on the unpaid shares until consent of unpaid
governing estoppels
shareholder/stockholder is given (dividends CANNOT BE AUTOMATICALLY be

used to offset the unpaid portion of his shares)
Tan v. SEC (206 SCRA 740)
DELIQUENT SHARES
- When there is already a “CALL” by the BOD for payment of unpaid shares
15
A certificate of stock is the paper representative or tangible evidence of the stock 5) Proof of Ownership of Shares ----
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 Nautica Canning Corp. Yumul GR 164588 (Oct. 19, 2005)
the share represented thereby, but is not in law the equivalent of such ownership. It The validity of its incorporation is not affected when such individual gives nominal
expresses the contract between the corporation and the stockholder, but is not essential ownership of only one share of stock to each of the other four incorporators. This is not
to the existence of a share in stock or the nation of the relation of shareholder to the necessarily illegal. But, this is valid only between or among the incorporators privy to the
corporation. agreement. It does bind the corporation which, at the time the agreement is made, was
A certificate of stock is not a negotiable instrument. "Although it is sometime non-existent. Thus, incorporators continue to be stockholders of a corporation unless,
regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, subsequent to the incorporation, they have validly transferred their subscriptions to the
coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof real parties in interest.
takes it without prejudice to such rights or defenses as the registered owner/s or A transfer of shares of stock not recorded in the stock and transfer book of the
transferor’s creditor may have under the law, except insofar as such rights or defenses corporation is non-existent as far as the corporation is concerned. As between the
are subject to the limitations imposed by the principles governing estoppel." corporation on one hand, and its shareholders and third persons on the other, the
While Sec. 47 (9) of the Corporation Code grants to stock corporations the corporation looks only to its books for the purpose of determining who its shareholders
authority to determine in the by-laws the "manner of issuing certificates" of shares of stock, are. It is only when the transfer has been recorded in the stock and transfer book that a
however, the power to regulate is not the power to prohibit, or to impose unreasonable corporation may rightfully regard the transferee as one of its stockholders. From this time,
restrictions of the right of stockholders to transfer their shares. To uphold the cancellation the consequent obligation on the part of the corporation to recognize such rights as it is
of a stock certification as null and void for lack of delivery of the cancelled "mother" mandated by law to recognize arises.
certificate whose endorsement was deliberately withheld by petitioner, is to prescribe
certain restrictions on the transfer of stock in violation of the Corporation Code as the only Lao v. Lao GR 170585 (Oct 6, 2008)
law governing transfer of stocks. NO. The mere inclusion as shareholder of petitioners in the General Information Sheet of
PFSC is insufficient proof that they are shareholders of the company. The information in
NOTE: Issuance of the Stock Certificate à presumption of having fully paid the the document will still have to be correlated with the corporate books of PFSC. As between
subscription the General Information Sheet and the corporate books, it is the latter that is controlling

EXCEPTION TO THE DELIVERY RULE FOR TRANFER OF SHARES: A certificate of stock is the evidence of a holder's interest and status in a corporation. It is
Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where a written instrument signed by the proper officer of a corporation stating or acknowledging
this Court held, that: that the person named in the document is the owner of a designated number of shares of
But delivery is not essential where it appears that the persons sought to be held as its stock. It is prima facie evidence that the holder is a shareholder of a corporation.
stockholders are officers of the corporation, and have the custody of the stock book
. . . (67 Phi. 36). NOTE: LIST OF PROOF

Furthermore, there is a necessity to delineate the function of the stock itself from the actual
a.) Records, however, disclose that petitioners have no certificates of shares in their
name. A certificate of stock is the evidence of a holder's interest and status in a
delivery or endorsement of the certificate of stock itself as is the question in the instant
corporation. It is a written instrument signed by the proper officer of a corporation
case. A certificate of stock is not necessary to render one a stockholder in corporation.
stating or acknowledging that the person named in the document is the owner of
24
a designated number of shares of its stock. It is prima facie evidence that the
Nevertheless, a certificate of stock is the paper representative or tangible evidence of the
holder is a shareholder of a corporation.
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, b.) written document that there was a sale of shares
his ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but is
c.) deed of assignment, or any similar instrument
à Absent a written document, petitioners must prove, at the very least,
not essential to the existence of a share in stock or the nation of the relation of shareholder possession of the certificates of shares in the name of the alleged seller.
to the corporation.

OTHER WAYS OF CONSTRUCTIVE DELIVERY:
a.) public instrument 6) Restrictions on Transfer of Shares ---
b.) enjoyment of the prerogatives of ownership with full knowledge and consent of Fleischer v. BoticaNolasco (1925) 47 Phil. 583
the original owner

16
The holder of shares, as owner of personal property, is at liberty, under said section, to in the absence of such power, cannot ordinarily inquire into or pass upon the legality of
dispose of them in favor of whomsoever he pleases, without any other limitation in this the transactions by which its stock passes from one person to another, nor can it question
respect, than the general provisions of law. Therefore, a stock corporation in adopting a the consideration upon which a sale is based.
by-law governing transfer of shares of stock should take into consideration the specific
provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize Whenever a corporation refuses to transfer and register stock in cases like the
with said provisions. It should not be inconsistent therewith. present, mandamuswill lie to compel the officers of the corporation to transfer said stock
in the books of the corporation.
The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, NOTE:
except as between the parties, until the transfer is entered and noted upon the books of à Restriction to transfer should be written or printed in the by-laws / AOI / certificate à at
the corporation so as to show the names of the parties to the transaction, the date of the the back is the indorsmenent of the stock certificate
transfer, the number of the certificate, and the number of shares transferred." This à RIGHT OF FIRST REFUSAL TO BUY STOCKS à MUST be written in the AOI/ by-
restriction is necessary in order that the officers of the corporation may know who are the laws or stock certificate (open / close corporation)
stockholders, which is essential in conducting elections of officers, in calling meeting of
stockholders, and for other purposes. but any restriction of the nature of that imposed in 7) Validity of Transfers / Registration of Shares
the by-law now in question, is ultra vires, violative of the property rights of shareholders, Razon v. IACGR 74306 (March 16, 1992)
and in restraint of trade. The petitioner failed in both instances. The petitioner did not present any by-laws which
could show that the 1,500 shares of stock were effectively transferred to him. In the
Thomson v. CA(298 SCRA 280) absence of the corporation's by-laws or rules governing effective transfer of shares of
The beneficiary of a trust has beneficial interest in the trust property, while a creditor has stock, the provisions of the Corporation Law are made applicable to the instant case.
merely a personal claim against the debtor. In trust, there is a fiduciary relation between
a trustee and a beneficiary, but there is no such relation between a debtor and creditor. The law is clear that in order for a transfer of stock certificate to be effective, the certificate
While a debt implies merely an obligation to pay a certain sum of money, a trust refers to must be properly indorsed and that title to such certificate of stock is vested in the
a duty to deal with a specific property for the benefit of another. If a creditor-debtor transferee by the delivery of the duly indorsed certificate of stock. Since the certificate of
relationship exists, but not a fiduciary relationship between the parties, there is no express stock covering the questioned 1,500 shares of stock registered in the name of the late
trust. However, it is understood that when the purported trustee of funds is entitled to use Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the
them as his or her own (and commingle them with his or her own money), a debtor-creditor questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did
relationship exists, not a trust. not require an indorsement of the certificate of stock in view of his intimate friendship with
the late Juan Chuidian can not overcome the failure to follow the procedure required by
Moreover, petitioner failed to present evidence to support his allegation of being merely a law or the proper conduct of business even among friends. To reiterate, indorsement of
debtor when the private respondent paid the purchase price of the MPC share. Applicable the certificate of stock is a mandatory.
here is the rule that a trust arises in favor of one who pays the purchase money of property
in the name of another, because of the presumption that he who pays for a thing intends
a beneficial interest therein for himself. Torres v. CA (278 SCRA 793)

Rural Bank of Salinas, Inc. v. CA (210 SCRA 510) The shortage of 972 shares would not be valid ground for respondent Torres to unilaterally
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984
hear and decide cases involving intracorporate controversies. An intra-corporate wherein he voluntarily assigned to TORMIL real properties covered by TCT No. 374079
controversy has been defined as one which arises between a stockholder and the (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively. A comparison of the
corporation. There is neither distinction, qualification, nor any exception whatsoever. The number of shares that respondent Torres received from TORMIL by virtue of the "deeds
case at bar involves shares of stock, their registration, cancellation and issuances thereof of assignment" and the stock certificates issued by the latter to the former readily shows
by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to that TORMIL had substantially performed what was expected of it. In fact, the first two
adjudicate. issuances were in satisfaction to the properties being revoked by respondent Torres.
Hence, the shortage of 972 shares would never be a valid ground for the revocation of the
A corporation, either by its board, its by-laws, or the act of its officers, cannot create deeds covering Pasay and Quezon City properties.
restrictions in stock transfers, because: Restrictions in the traffic of stock must have their
source in legislative enactment, as the corporation itself cannot create such impediment. Moreover, we agree with the contention of the Solicitor General that the shortage of shares
By-laws are intended merely for the protection of the corporation, and prescribe regulation, should not have affected the assignment of the Makati and Pasay City properties which
not restriction;; they are always subject to the charter of the corporation. The corporation, were executed in 13 and 24 July 1984 and the consideration for which have been duly
17
paid or fulfilled but should have been applied logically to the last assignment of property party. Hence, because of this conflict in ownership rights, a mandatory injunction can
— Judge Torres' Ayala Fund shares — which was executed on 29 August 1984. not lie.

Rural Bank of Lipa GR 124535 (Sept. 28, 2001) Lim Tay v. CA GR 126891 (Aug. 5, 1998)
We have uniformly held that for a valid transfer of stocks, there must be strict compliance
with the mode of transfer prescribed by law. The requirements are: Mandamus will not issue to establish a legal right, but only to enforce one that is already
clearly established. Moreover, the duty of a corporate secretary to record transfers of
(a) There must be delivery of the stock certificate;; stocks is ministerial. However, he cannot be compelled to do so when the transferee's title
to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons to foreclosure and sale, does not acquire ownership rights over the pledged shares and
legally authorized to make the transfer;; and thus cannot compel the corporate secretary to record his alleged ownership of such
shares on the basis merely of the contract of pledge.
(c) To be valid against third parties, the transfer must be recorded in the books of the
corporation. Also, his possession as a pledgee cannot ripen into ownership by prescription.
While the assignment may be valid and binding on the petitioners and private Ponce v. Alsons Cement GR 139802 ( Dec. 10, 2002)
respondents, it does not necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor A transfer of shares of stock not recorded in the stock and transfer book of the corporation
be voted for, and will not be entitled to dividends, insofar as the assigned shares are is non-existent as far as the corporation is concerned. As between the corporation on the
concerned. Parenthetically, the private respondents cannot, as yet be deprived of their one hand, and its shareholders and third persons on the other, the corporation looks only
rights as stockholders, until and unless the issue of ownership and transfer of the shares to its books for the purpose of determining who its shareholders are. It is only when the
in question is resolved with finality. transfer has been recorded in the stock and transfer book that a corporation may rightfully
regard the transferee as one of its stockholders.
The rule is that the delivery of the stock certificate duly endorsed by the owner is the
operative act of transfer of shares from the lawful owner to the transferee. Title may be Hence, without such recording, the transferee may not be regarded by the corporation as
vested in the transferee only by delivery of the duly indorsed certificate of stock. one among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with the
It may be argued that despite non-compliance with the requisite endorsement and requirements of Sec. 64 of the Corporation code.
delivery, the assignment was valid between the parties, meaning the private respondents
as assignors and the petitioners as assignees. While the assignment may be valid and Consequently, the corporation cannot be compelled by the transferee to record the
binding on the petitioners and private respondents, it does not necessarily make the transfer.The situation would be different if the petitioner was himself the registered owner
transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the of the stock which he sought to transfer to a third party, for then he would be entitled to
status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, the remedy of mandamus.
insofar as the assigned shares are concerned. Parenthetically, the private respondents
cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of Hager v. Bryan 19 PHIL 138 (1911)
ownership and transfer of the shares in question is resolved with finality. The Supreme Court denied the writ. Petitioner did not have the right to demand the
transfer since he was not the stockholder of record. This was proven by the fact that the
Rivera v. Florendo144 SCRA 647(1986) said shares were still registered under the name of Bryan-Landon
The Supreme Court denied the writ of preliminary mandatory injunction and remanded the Company. Furthermore, even the latter did not demand from the company the transfer of
case to the lower court for a trial on the merits. As found in Sec. 63 of the Corporation said shares. Neither did it give by way of a special power of attorney to petitioner the
Code, shares of stock may be transferred by delivery of the certificate after indorsement authority to effect such a transfer. Hence, there is no clear and legal obligation upon the
by the owner or his attorney-in-fact or other person legally authorized to make the respondent that will justify the issuance of a writ to compel the latter to perform a transfer.
transfer. By this provision it is evident that Rivera’s indorsement must be obtained before
any transfer of the questioned shares is effected. As a general rule, as between the corporation on the one hand, and its shareholders and
third persons on the other, the corporation looks only to its books for the purpose of
On the matter of jurisdiction, the SEC does not have jurisdiction of the case since the determining who its shareholders are, so that a mere indorsee of a stock certificate,
dispute is not an intra-corporate controversy. What it simply involves is a conflict on the claiming to be the owner, will not necessarily be recognized as such by the corporation
ownership of a group of shares between the registered owner and an outside
18
and its officers, in the absence of express instructions of the registered owner to make
such transfer to the indorsee, or a power of attorney authorizing such transfer. "SEC. 63. x x x 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,
Bitong v. CA 292 SCRA 503 except as between the parties, until the transfer is recorded in the books of the corporation
Sec. 63 of the Corp Code that no transfer shall be valid except as between the parties x x x."
until the transfer is recorded in the books of the corporation, and upon its recording the
corporation is bound by it and is estopped to deny the fact of transfer of said shares, this "Said Section (Sec. 35 of Act 1459, [now Sec. 63 of the Corporation Code]) contemplates
provision is not conclusive even against the corporation but are prima facie evidence only. no restriction as to whom the stocks may be transferred. It does not suggest that any
Parol evidence may be admitted to supply the omissions in the records, explain discrimination may be created by the corporation in favor of, or against a certain
ambiguities, or show what transpired where no records were kept, or in some cases where purchaser. The owner of shares, as owner of personal property, is at liberty, under said
such records were contradicted. Besides, the provision envisions a formal certificate of section to dispose them in favor of whomever he pleases, without limitation in this respect,
stock which can be issued only upon compliance with certain requisites: than the general provisions of law. x x x"
(1) certificates must be signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the The only limitation imposed by Section 63 of the Corporation Code is when the corporation
corporation, holds any unpaid claim against the shares intended to be transferred, which is absent
(2) delivery of the certificate;; here.
(3) the par value, as to par value shares, or the full subscription as to no par
value shares, must be first fully paid;; A corporation, either by its board, its by-laws, or the act of its officers, cannot create
(4) the original certificate must be surrendered where the person requesting the restrictions in stock transfers, because:
issuance of a certificate is a transferee from a stockholder.
"x x x Restrictions in the traffic of stock must have their source in legislative enactment,
These considerations are founded on the basic principle that stock issued without as the corporation itself cannot create such impediment. By-laws are intended merely for
authority and in violation of the law is void and confers no rights on the person to whom it the protection of the corporation, and prescribe regulation, not restriction;; they are always
is issued and subjects him to no liabilities. Where there is an inherent lack of power in the subject to the charter of the corporation. The corporation, in the absence of such power,
corporation to issue the stock, neither the corporation nor the person to whom the stock cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock
is issued is estopped to question its validity since an estoppel cannot operate to create passes from one person to another, nor can it question the consideration upon which a
stock which under the law cannot have existence. sale is based. x x x"

Abejo v. De la Cruz 149 SCRA 654 (1987) The right of a transferee/assignee to have stocks transferred to his name is an inherent
NO. As pointed out by the Abejos, Pocket Bell is not a close corporation, and no restriction right flowing from his ownership of the stocks. Thus:
over the free transferability of the shares appears in the Articles of Incorporation, as well "Whenever a corporation refuses to transfer and register stock in cases like the present,
as in the bylaws and the certificates of stock themselves, as required by law for the mandamus will lie to compel the officers of the corporation to transfer said stock in the
enforcement of such restriction. As the SEC maintains, "There is no requirement that a books of the corporation."
stockholder of a corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his rights as 8) Unauthorized Transfers ----
such stockholder." This is because the SEC by express mandate has "absolute Santamaria vs. Hongkong89 Phil. 780 (1951)
jurisdiction, supervision and control over all corporations" and is called upon to enforce The facts of the case justify the conclusion that she was negligent. She
the provisions of the Corporation Code, among which is the stock purchaser’s right to delivered the certificate, which was endorsed in blank, to Campos without
secure the corresponding certificate in his name under the provisions of Sec 65 of the
having taken any precaution. She did not ask the Batangas Minerals to
code.
cancel it and instead, issue another in her name. In failing to do so, she
Lee v. Trocino, et al. GR 164648 (June 19, 2009) clothed Campos with apparent title to the shares represented by the
certificate. By her misplaced confidence in Campos, she made possible the
The pendency of a case involving the petitioner and Peña does not affect the registrability wrong done. She was therefore estopped from asserting title thereto for it is
of the shares of stock bought at execution sale, although the registration is without well-settled that “where one of the innocent parties must suffer by reason of
prejudice to the proceedings to determine the liability of the parties as against each other,
a wrongful or unauthorized act, the loss must fall on the one who first trusted
specifically between Urban Bank, its directors and officers (which includes petitioner), and
Peña. the wrongdoer.”
19
defenses as the registered owner or credit
The subject certificate is what is known as a street certificate. Upon its face, may have under the law, except, in so far
the holder is entitled to demand its transfer into his name from the issuing as such right or defenses are subject to
the limitations by the principles governing
corporation. The bank is not obligated to look beyond the certificate to estoppel
ascertain the ownership of the stock. A certificate of stock, endorsed in blank,
is deemed quasi-negotiable, and as such, the transferee thereof is justified
in believing that it belongs to the transferor. Guy v. Guy GR 189486 (Sept. 5, 2012)

When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is
De los Santos vs. McGrath96 Phil. 577(1955) termed as "street certificate," so that upon its face, the holder is entitled to demand
De los Santos’ sole evidence that he purchased the said shares was his own its transfer in his name from the issuing corporation.
unverified testimony. The alleged vendors of the shares of stock, who could
have verified the allegation, were already dead. Further, the receipt that might Stock certificates endorsed in blank were stolen from the possession of the beneficial
have proven the sale was said to have been lost in a fire. On the other hand, owners thereof constraining this Court to declare the transfer void for lack of delivery and
want of value, the same cannot apply to Gilbert because the stock certificates which
it was shown that the shares of stock were registered in the records of
Gilbert endorsed in blank were in the undisturbed possession of his parents who were the
Lepanto in the name of Madrigal, the trustee of Matsui;; that Matsui was beneficial owners thereof and who themselves as such owners caused the transfer in their
subsequently given possession of the corresponding stock certificates, names. Indeed, even if Gilbert’s parents were not the beneficial owners, an endorsement
though endorsed in blank;; and, that Matsui had neither sold, conveyed nor in blank of the stock certificates coupled with its delivery, entitles the holder thereof to
alienated these to anybody. demand the transfer of said stock certificates in his name from the issuing corporation.

One thing is clear. It was established before the trial court, affirmed by the Court of
It is the rule that if the owner of the certificate has endorsed it in blank, and is
Appeals, that Lincoln Continental held the disputed shares of stock of Northern Islands
stolen, no title is acquired by an innocent purchaser of value. This is so merely in trust for the Guy sisters.
because even though a stock certificate is regarded as quasi-negotiable, in
the sense that it may be transferred by endorsement, coupled with delivery, 9) Collateral Transfers ---
the holder thereof takes it without prejudice to such rights or defenses as the Uson v. Diosomito (61 Phil. 535;; 1935)
registered owner or credit may have under the law, except in so far as such
The transfer of the 75 shares in the North Electric Co., Inc made by the defendant
rights or defenses are subject to the limitations imposed by the principles
Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on
governing estoppel. 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of stock
will still stood in the name of Diosomito on the books of the corp. Sec. 35 provides that
NOTE: “No transfer, however, is valid, except as between the parties, until the transfer is entered
- transferee has no greater right than the transferor and noted upon the books of the corporation so as to show the names of the parties to
- GENERAL RULE: if quasi negotiable à santa maria may go to the bank the transaction, the date of the transfer, the number of the certificate, and the number of
rd
o EXCEPT: if owner is negligent and causes the loss à 3 person shares transferred.”
or transferee now has a better right
All transfers of shares not so entered are invalid as to attaching or execution creditors of
NOTE: the assignors, as well as to the corporation and to subsequent purchasers in good faith,
SANTA MARIA CASE DE LOS SANTOS and indeed, as to all persons interested, except the parties to such transfers.
A certificate of stock, indorsed in blank, is Although a stock certificate is sometimes NOTE:
deemed a quasi- negotiable and as such regarded as quasi negotiable, in the - NEED REGISTRATION: if not yet in possession of the mortgagee or pledgee
the transferee thereof is justified in sense that it may be transferred by - NOT NEED REGISTRATION: if in possession of pledgee or mortgagee
believing that it belongs to the holder and endorsement, coupled with delivery it is
transferor well settled that the instrument is non- Chua Guan vs. SamahangMagsasaka62 Phil. 473 (1935)
negotiable, because the holder thereof The Supreme Court ruled that the attaching creditors are entitled to priority
takes it without prejudice to such rights or
over the defectively registered mortgage of the appellant. The court argues
20
that the registration in the register of deeds must be done both at the place stock, in exchange for property needed for corporate purposes or in payment of a
where the owner is domiciled and at the place where the principal office of previously contracted debt.
the corporation is located. The purpose of this is to give sufficient
constructive of any claim or encumbrance over the recorded shares to third Section 102. Pre-emptive right in close corporations. – The pre-emptive right of
stockholders in close corporations shall extend to all stock to be issued, including
persons. Furthermore, any share still standing in the name of the debtor on reissuance of treasury shares, whether for money, property or personal services, or in
the books of the corporation will be liable to seizure by attachment or levy on payment of corporate debts, unless the articles of incorporation provide otherwise.
execution at the instance of other creditors. Thus, the game here is to have
the highest or most preferred priority over any pledged or mortgaged shares. Purpose;; when given;; waiver – this right may be waived
Distinguish from Right of First Refusal.
NOTE: The provision of the Chattel Mortgage Law (Act No. 1508) providing
for delivery of mortgaged property to the mortgagee as a mode of constituting Right of first refusal Pre-emptive right
a chattel mortgage is no longer valid in view of the Civil Code provision Not deemed given until written in the AOI Deemed READ into the contract
/ by-laws
defining such as a pledge. This is the default

Chemphil Export & Import v. CA (Dec. 12, 1995)
Distinguish from pre-emptive right in a close corp
The Supreme Court ruled that the attachment lien acquired by the bank consortium is valid

and effective even as against the buyer (FCI) and its assignee (CEIC), notwithstanding

the fact that said attachment lien was not registered in the corporate books of Chemphil.
Makati Sports Club, Inc. v. ChengGR 178523 (June 16, 2010)
"Both the Revised Rules of Court and the Corporation Code", according to the Court, "do
not require annotation in the corporation’s stock and transfer book for the attachment of Mc Foods did not violate Section 30 (e) of MSCI’s Amended By-Laws on its pre-emptive
shares of stock to be valid and binding on the corporation and third party." rights. When Mc Foods offered for sale one Class "A" share of stock to MSCI for the latter
to exercise its pre-emptive right as required by Section 30 (e) of MSCI's Amended By-
Consequently, when FCI purchased the shares of stock from Mr. Garcia, it purchased Laws, it legally had the right to do so since it was already an owner of a Class "A" share
them subject to the attachment lien of the bank consortium. In this regard, the High Court by virtue of its payment and the Deed of Absolute Share, notwithstanding the fact that the
explained that a preliminary attachment is a security for the satisfaction of whatever stock certificate was issued only on January 5, 1996.
judgment may be obtained by the attaching creditor in a court action, which continues until
the judgment debt is fully satisfied. A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not a stock in the corporation but is
NOTE: merely evidence of the holder's interest and status in the corporation, his ownership of the
- Among the three cases mentioned, settled is the rule that the attaching creditor share represented thereby. It is not in law the equivalent of such ownership. It expresses
enjoys priority to the shares of stock as against a subsequent lawful buyer. the contract between the corporation and the stockholder, but is not essential to the
rd
- Mortgage in order to bind 3 person must be registered in the place where the existence of a share of stock or the nature of the relation of shareholder to the corporation.
property is located and resident of the owner
- Attachment à proper service of summons
Mc Foods properly complied with the requirement of Section 30 (e) of the Amended By-
- WHEN DO WE NEED TO REGISTER THE TRANSFER?
Laws on MSCI's pre-emptive rights. Without doubt, MSCI failed to repurchase Mc Foods'
o need NOT be registered if it is absolute transfer Class "A" share within the thirty (30) day pre-emptive period as provided by the Amended
o Collateral transfer needs to be registered By-Laws.

lX. PRE-EMPTIVE RIGHT – Sec. 39 and 102
32 days after December 28, 1995, when MSCI received Mc Foods' letter of offer to sell
Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation
the share, that Mc Foods and Hodreal executed the Deed of Absolute Sale over the said
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 share of stock. Neither can MSCI argue that Mc Foods was not yet a registered owner of
articles of incorporation or an amendment thereto: Provided, That such pre-emptive right the share of stock when the latter offered it for resale, in order to void the transfer from Mc
shall not extend to shares to be issued in compliance with laws requiring stock offerings Foods to Hodreal. The corporation's obligation to register is ministerial upon the buyer's
acquisition of ownership of the share of stock. The corporation, either by its board, its by-
or minimum stock ownership by the public;; or to shares to be issued in good faith with
laws, or the act of its officers, cannot create restrictions in stock transfers.
the approval of the stockholders representing two-thirds (2/3) of the outstanding capital

21
NOTE: this case is right of first refusal not pre emptive right
Section 84. When right to payment ceases. – No demand for payment under this Title
X. APPRAISAL RIGHT – Secs. 81- 86;; relate to Sec. 42 and 105 may be withdrawn unless the corporation consents thereto. If, however, such demand
for payment is withdrawn with the consent of the corporation, or if the proposed
TITLE X APPRAISAL RIGHT corporate action is abandoned or rescinded by the corporation or disapproved by the
**** Memorize instances when this can be invoked *** Section 81. Instances of Securities and Exchange Commission where such approval is necessary, or if the
appraisal right. – Any stockholder of a corporation shall have the right to dissent and Securities and Exchange Commission determines that such stockholder is not entitled
demand payment of the fair value of his shares in the following instances: to the appraisal right, then the right of said stockholder to be paid the fair value of his
1. In case any amendment to the articles of incorporation has the effect of shares shall cease, his status as a stockholder shall thereupon be restored, and all
changing or restricting the rights of any stockholder or class of shares, or of dividend distributions which would have accrued on his shares shall be paid to him. (n)
authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;; Section 85. Who bears costs of appraisal. – The costs and expenses of appraisal shall
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other be borne by the corporation, unless the fair value ascertained by the appraisers is
disposition of all or substantially all of the corporate property and assets as approximately the same as the price which the corporation may have offered to pay the
provided in the Code;; and stockholder, in which case they shall be borne by the latter. In the case of an action to
3. In case of merger or consolidation. (n) recover such fair value, all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive payment was unjustified.
Section 82. How right is exercised. – The appraisal right may be exercised by any (n)
stockholder who shall have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the date on which the Section 86. Notation on certificates;; rights of transferee. – Within ten (10) days after
vote was taken for payment of the fair value of his shares: Provided, That failure to demanding payment for his shares, a dissenting stockholder shall submit the
make the demand within such period shall be deemed a waiver of the appraisal right. certificates of stock representing his shares to the corporation for notation thereon that
If the proposed corporate action is implemented or affected, the corporation shall pay such shares are dissenting shares. His failure to do so shall, at the option of the
to such stockholder, upon surrender of the certificate or certificates of stock corporation, terminate his rights under this Title. If shares represented by the
representing his shares, the fair value thereof as of the day prior to the date on which certificates bearing such notation are transferred, and the certificates consequently
the vote was taken, excluding any appreciation or depreciation in anticipation of such cancelled, the rights of the transferor as a dissenting stockholder under this Title shall
corporate action. cease and the transferee shall have all the rights of a regular stockholder;; and all
dividend distributions which would have accrued on such shares shall be paid to the
If within a period of sixty (60) days from the date the corporate action was approved by transferee. (n)
the stockholders, the withdrawing stockholder and the corporation cannot agree on the
fair value of the shares, it shall be determined and appraised by three (3) disinterested Section 42. Power to invest corporate funds in another corporation or business or for
persons, one of whom shall be named by the stockholder, another by the corporation, any other purpose. – Subject to the provisions of this Code, a private corporation may
and the third by the two thus chosen. The findings of the majority of the appraisers shall invest its funds in any other corporation or business or for any purpose other than the
be final, and their award shall be paid by the corporation within thirty (30) days after primary purpose for which it was organized when approved by a majority of the board
such award is made: Provided, That no payment shall be made to any dissenting of directors or trustees and ratified by the stockholders representing at least two-thirds
stockholder unless the corporation has unrestricted retained earnings in its books to (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in
cover such payment: and Provided, further, That upon payment by the corporation of the case of non-stock corporations, at a stockholder’s or member’s meeting duly called
the agreed or awarded price, the stockholder shall forthwith transfer his shares to the for the purpose. Written notice of the proposed investment and the time and place of
corporation. (n) 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
Section 83. Effect of demand and termination of right. – From the time of demand for the post office with postage prepaid, or served personally: Provided, That any
payment of the fair value of a stockholder’s shares until either the abandonment of the dissenting stockholder shall have appraisal right as provided in this Code: Provided,
corporate action involved or the purchase of the said shares by the corporation, all however, That where the investment by the corporation is reasonably necessary to
rights accruing to such shares, including voting and dividend rights, shall be suspended accomplish its primary purpose as stated in the articles of incorporation, the approval
in accordance with the provisions of this Code, except the right of such stockholder to of the stockholders or members shall not be necessary. (17 1/2a)
receive payment of the fair value thereof: Provided, That if the dissenting stockholder
is not paid the value of his shares within 30 days after the award, his voting and dividend Section 105. Withdrawal of stockholder or dissolution of corporation. – In addition and
rights shall immediately be restored. (n) without prejudice to other rights and remedies available to a stockholder under this
22
Title, any stockholder of a close corporation may, for any reason, compel the said corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of
corporation to purchase his shares at their fair value, which shall not be less than their creditors is null and void
par or issued value, when the corporation has sufficient assets in its books to cover its

debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities and Exchange Commission, OUTLINE 5
compel the dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted. OUTLINE #5
--------------------------------------

BUSORG2 OUTLINE 5 (2016)
Marcus v. RH Macy 74 N.E. 2D 228 (1947)
Prof. M.I.P. Romero

Xl. CORPORATE POWERS
The Court held that Marcus may invoke her appraisal right. The aggregate 1) Express, Implied, Inherent - Sections 36 to 45
number of shares having voting rights equal to those of common shares was
TITLE IV POWERS OF CORPORATIONS
substantially increased and thereby the voting power of each common share
outstanding prior to the meeting was altered or limited by the resulting pro Section 36. Corporate powers and capacity. – Every corporation incorporated
rata diminution of its potential worth as a factor in the management of the under this Code has the power and capacity:
corporate affairs. Considering that she held diminished voting power;; that
1. To sue and be sued in its corporate name;;
she notified the corporation of her objection;; that her shares were voted
against the amendment—these were sufficient to qualify her to invoke her 2. Of succession by its corporate name for the period of time stated in the articles
statutory appraisal right. of incorporation and the certificate of incorporation;;

3. To adopt and use a corporate seal;;
NOTE:
- In order to invoke there must be attendance and a negative vote in 4. To amend its articles of incorporation in accordance with the provisions of this
order to invoke this right Code;;
- To express dissent, must be physically present and express dissent
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
on the voting. repeal the same in accordance with this Code;;

Turner v. Lorenzo Shipping GR 157479 Nov. 24, 2010 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
Clearly, the right of appraisal may be exercised when there is a fundamental change in stocks to subscribers and to sell treasury stocks in accordance with the provisions
the charter or articles of incorporation substantially prejudicing the rights of the of this Code;; and to admit members to the corporation if it be a non-stock
stockholders. It does not vest unless objectionable corporate action is taken. It serves the corporation;;
purpose of enabling the dissenting stockholder to have his interests purchased and to
retire from the corporation. No payment shall be made to any dissenting stockholder 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
unless the corporation has unrestricted retained earnings in its books to cover the and otherwise deal with such real and personal property, including securities and
payment. In case the corporation has no available unrestricted retained earnings in its bonds of other corporations, as the transaction of the lawful business of the
books, Section 83 of the Corporation Code provides that if the dissenting stockholder is corporation may reasonably and necessarily require, subject to the limitations
not paid the value of his shares within 30 days after the award, his voting and dividend prescribed by law and the Constitution;;
rights shall immediately be restored. The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the shares of stocks of the 8. To enter into merger or consolidation with other corporations as provided in this
withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets Code;;
of a corporation are regarded as equity in trust for the payment of corporate creditors, who
are preferred in the distribution of corporate assets. The creditors of a corporation have 9. To make reasonable donations, including those for the public welfare or for
the right to assume that the board of directors will not use the assets of the corporation to hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
purchase its own stock for as long as the corporation has outstanding debts and liabilities.
There can be no distribution of assets among the stockholders without first paying
23
corporation, domestic or foreign, shall give donations in aid of any political party or allotted to each stock-holder if such increase is for the purpose of making effective
candidate or for purposes of partisan political activity;; stock dividend therefor authorized;;
10. To establish pension, retirement, and other plans for the benefit of its directors, (4) Any bonded indebtedness to be incurred, created or increased;;
trustees, officers and employees;; and
(5) The actual indebtedness of the corporation on the day of the meeting;;
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. (13a) (6) The amount of stock represented at the meeting;; and
Section 37. Power to extend or shorten corporate term. – A private corporation may (7) The vote authorizing the increase or diminution of the capital stock, or the
extend or shorten its term as stated in the articles of incorporation when approved incurring, creating or increasing of any bonded indebtedness.
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 Any increase or decrease in the capital stock or the incurring, creating or increasing
stock or by at least two-thirds (2/3) of the members in case of non-stock of any bonded indebtedness shall require prior approval of the Securities and
corporations. Written notice of the proposed action and of the time and place of the Exchange Commission.
meeting shall be addressed to each stockholder or member at his place of
One of the duplicate certificates shall be kept on file in the office of the corporation
residence as shown on the books of the corporation and deposited to the addressee
and the other shall be filed with the Securities and Exchange Commission and
in the post office with postage prepaid, or served personally: Provided, That in case
attached to the original articles of incorporation. From and after approval by the
of extension of corporate term, any dissenting stockholder may exercise his
Securities and Exchange Commission and the issuance by the Commission of its
appraisal right under the conditions provided in this code. (n)
certificate of filing, the capital stock shall stand increased or decreased and the
Section 38. Power to increase or decrease capital stock;; incur, create or increase incurring, creating or increasing of any bonded indebtedness authorized, as the
bonded indebtedness. – No corporation shall increase or decrease its capital stock certificate of filing may declare: Provided, That the Securities and Exchange
or incur, create or increase any bonded indebtedness unless approved by a majority Commission shall not accept for filing any certificate of increase of capital stock
vote of the board of directors and, at a stockholder’s meeting duly called for the unless accompanied by the sworn statement of the treasurer of the corporation
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or lawfully holding office at the time of the filing of the certificate, showing that at least
diminution of the capital stock, or the incurring, creating or increasing of any bonded twenty-five (25%) percent of such increased capital stock has been subscribed and
indebtedness. Written notice of the proposed increase or diminution of the capital that at least twenty-five (25%) percent of the amount subscribed has been paid
stock or of the incurring, creating, or increasing of any bonded indebtedness and of either in actual cash to the corporation or that there has been transferred to the
the time and place of the stockholder’s meeting at which the proposed increase or corporation property the valuation of which is equal to twenty-five (25%) percent of
diminution of the capital stock or the incurring or increasing of any bonded the subscription: Provided, further, That no decrease of the capital stock shall be
indebtedness is to be considered, must be addressed to each stockholder at his approved by the Commission if its effect shall prejudice the rights of corporate
place of residence as shown on the books of the corporation and deposited to the creditors.
addressee in the post office with postage prepaid, or served personally.
Non-stock corporations may incur or create bonded indebtedness, or increase the
A certificate in duplicate must be signed by a majority of the directors of the same, with the approval by a majority vote of the board of trustees and of at least
corporation and countersigned by the chairman and the secretary of the two-thirds (2/3) of the members in a meeting duly called for the purpose.
stockholders’ meeting, setting forth:
Bonds issued by a corporation shall be registered with the Securities and Exchange
(1) That the requirements of this section have been complied with;; Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)
(2) The amount of the increase or diminution of the capital stock;;
Section 39. Power to deny pre-emptive right. – All stockholders of a stock
(3) If an increase of the capital stock, the amount of capital stock or number of corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of
shares of no-par stock thereof actually subscribed, the names, nationalities and shares of any class, in proportion to their respective shareholdings, unless such
residences of the persons subscribing, the amount of capital stock or number of no- right is denied by the articles of incorporation or an amendment thereto: Provided,
par stock subscribed by each, and the amount paid by each on his subscription in That such pre-emptive right shall not extend to shares to be issued in compliance
cash or property, or the amount of capital stock or number of shares of no-par stock 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
24
two-thirds (2/3) of the outstanding capital stock, in exchange for property needed 2. To collect or compromise an indebtedness to the corporation, arising out of
for corporate purposes or in payment of a previously contracted debt. unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold
during said sale;; and
Section 40. Sale or other disposition of assets. – Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, under the provisions of this Code. (a)
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, Section 42. Power to invest corporate funds in another corporation or business or
which may be money, stocks, bonds or other instruments for the payment of money for any other purpose. – Subject to the provisions of this Code, a private corporation
or other property or consideration, as its board of directors or trustees may deem may invest its funds in any other corporation or business or for any purpose other
expedient, when authorized by the vote of the stockholders representing at least than the primary purpose for which it was organized when approved by a majority
two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, of the board of directors or trustees and ratified by the stockholders representing at
by the vote of at least to two-thirds (2/3) of the members, in a stockholder’s or least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3)
member’s meeting duly called for the purpose. Written notice of the proposed action of the members in the case of non-stock corporations, at a stockholder’s or
and of the time and place of the meeting shall be addressed to each stockholder or member’s meeting duly called for the purpose. Written notice of the proposed
member at his place of residence as shown on the books of the corporation and investment and the time and place of the meeting shall be addressed to each
deposited to the addressee in the post office with postage prepaid, or served stockholder or member at his place of residence as shown on the books of the
personally: Provided, That any dissenting stockholder may exercise his appraisal corporation and deposited to the addressee in the post office with postage prepaid,
right under the conditions provided in this Code. or served personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the
A sale or other disposition shall be deemed to cover substantially all the corporate investment by the corporation is reasonably necessary to accomplish its primary
property and assets if thereby the corporation would be rendered incapable of purpose as stated in the articles of incorporation, the approval of the stockholders
continuing the business or accomplishing the purpose for which it was incorporated. or members shall not be necessary. (17 1/2a)
After such authorization or approval by the stockholders or members, the board of Section 43. Power to declare dividends. - The board of directors of a stock
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, corporation may declare dividends out of the unrestricted retained earnings which
exchange, mortgage, pledge or other disposition of property and assets, subject to shall be payable in cash, in property, or in stock to all stockholders on the basis of
the rights of third parties under any contract relating thereto, without further action outstanding stock held by them: Provided, That any cash dividends due on
or approval by the stockholders or members. 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
Nothing in this section is intended to restrict the power of any corporation, without stockholder until his unpaid subscription is fully paid: Provided, further, That no
the authorization by the stockholders or members, to sell, lease, exchange, stock dividend shall be issued without the approval of stockholders representing not
mortgage, pledge or otherwise dispose of any of its property and assets if the same less than two-thirds (2/3) of the outstanding capital stock at a regular or special
is necessary in the usual and regular course of business of said corporation or if the meeting duly called for the purpose. (16a)
proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business. 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
In non-stock corporations where there are no members with voting rights, the vote definite corporate expansion projects or programs approved by the board of
of at least a majority of the trustees in office will be sufficient authorization for the directors;; or (2) when the corporation is prohibited under any loan agreement with
corporation to enter into any transaction authorized by this section. 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
Section 41. Power to acquire own shares. – A stock corporation shall have the can be clearly shown that such retention is necessary under special circumstances
power to purchase or acquire its own shares for a legitimate corporate purpose or obtaining in the corporation, such as when there is need for special reserve for
purposes, including but not limited to the following cases: Provided, That the probable contingencies. (n)
corporation has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired: Section 44. Power to enter into management contract. – No corporation shall
conclude a management contract with another corporation unless such contract
1. To eliminate fractional shares arising out of stock dividends;; 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
25
members in the case of a non-stock corporation, of both the managing and the Synthesizing Section 40 and the previous rulings of this Court, it is apparent
managed corporation, at a meeting duly called for the purpose: Provided, That (1) that the business-enterprise transfer rule applies when two requisites concur:
where a stockholder or stockholders representing the same interest of both the (a) the transferor corporation sells all or substantially all of its assets to
managing and the managed corporations own or control more than one-third (1/3) another entity;; and
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 (b) the transferee corporation continues the business of the transferor
corporation also constitute a majority of the members of the board of directors of corporation. Both requisites are present in this case.
the managed corporation, then the management contract must be approved by the
Based on these factual findings, the Court is convinced that MADCI indeed
stockholders of the managed corporation owning at least two-thirds (2/3) of the total
had assets consisting of 120 hectares of landholdings in Magalang, Pampanga, to be
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the
developed into a golf course, pursuant to its primary purpose. Because of its alleged
members in the case of a non-stock corporation. No management contract shall be
violation of the MOA, however, MADCI was made to transfer all its assets to the
entered into for a period longer than five years for any one term.
petitioners. No evidence existed that MADCI subsequently acquired other lands for
The provisions of the next preceding paragraph shall apply to any contract whereby its development projects. Thus, MADCI, as a real estate development corporation,
a corporation undertakes to manage or operate all or substantially all of the was left without any property to develop eventually rendering it incapable of
business of another corporation, whether such contracts are called service continuing the business or accomplishing the purpose for which it was incorporated.
contracts, operating agreements or otherwise: Provided, however, That such Section 40 must apply.
service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into for Consequently, the transfer of the assets of MADCI to the petitioners should
such periods as may be provided by the pertinent laws or regulations. (n) have complied with the requirements under Section 40. Nonetheless, the present
petition is not concerned with the validity of the transfer;; but the respondent's claim
Section 45. Ultra vires acts of corporations. – No corporation under this Code shall of refund of his P650,000.00 payment for golf and country club shares. Both the CA
possess or exercise any corporate powers except those conferred by this Code or and the RTC ruled that MADCI and Sangil were liable.
by its articles of incorporation and except such as are necessary or incidental to the
On the question of whether the petitioners must also be held solidarily liable
exercise of the powers so conferred. (n)
to Yu, the Court answers in the affirmative.
While the Corporation Code allows the transfer of all or substantially all of
Y-1 Leisure v, Yu GR 207161;; Sept. 8, 2015 the assets of a corporation, the transfer should not prejudice the creditors of the
Nell Doctrine: assignor corporation. Under the business-enterprise transfer, the petitioners have
consequently inherited the liabilities of MADCI because they acquired all the assets
Generally, where one corporation sells or otherwise
of the latter corporation. The continuity of MADCI's land developments is now in the
transfers all of its assets to another corporation, the latter is
hands of the petitioners, with all its assets and liabilities. There is absolutely no
not liable for the debts and liabilities of the transferor, except:
certainty that Yu can still claim its refund from MADCI with the latter losing all its
1. Where the purchaser expressly or impliedly agrees to assets. To allow an assignor to transfer all its business, properties and assets without
assume such debts;; the consent of its creditors will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert his claim
2. Where the transaction amounts to a consolidation or against the petitioners as transferees of the assets.
merger of the corporations;;
The MOA cannotprejudice respondent
3. Where the purchasing corporation is merely a
continuation of the selling corporation;; and The MOA, which contains a provision that Sangil undertook to redeem
MADCI proprietary shares sold to third persons or settle in full all their claims for
4. Where the transaction is entered into fraudulently in refund of payments, should not prejudice respondent Yu. The CA correctly ruled that
order to escape liability for such debts. such provision constituted novation under Article 1293 of the Civil Code. When there
The Nell Doctrine states the general rule that the transfer of all the assets of is a substitution of debtors, the creditor must consent to the same;; otherwise, it shall
a corporation to another shall not render the latter liable to the liabilities of the not in any way affect the creditor. In this case, it was established that Yu's consent
transferor. If any of the above-cited exceptions are present, then the transferee was not secured in the execution of the MOA. Thus, insofar as the respondent was
corporation shall assume the liabilities of the transferor. concerned, the debtor remained to be MADCI. And given that the assets and
business of MADCI have been transferred to the petitioners, then the latter shall be
liable.
26
Free and Harmless Clause corporate acts that may be performed outside of the scope of the powers
The petitioners, however, are not left without recourse as they can invoke expressly conferred if they are necessary to promote the interest or welfare
the free and harmless clause under the MOA. In business-enterprise transfer, it is of the corporation.
possible that the transferor and the transferee may enter into a contractual stipulation
stating that the transferee shall not be liable for any or all debts arising from the National Power Corp. v. Vera (1989) 170 SCRA 721
business which were contracted prior to the time of transfer. Such stipulations are To carry out the national policy of total electrification of the country, the NPC was created
valid, but only as to the transferor and the transferee. These stipulations, though, are and empowered not only to construct, operate and maintain power plants, reservoirs,
not binding on the creditors of the business enterprise who can still go after the transmission lines, and other works, but also to exercise such powers and do such things
transferee for the enforcement of the liabilities. as may be reasonably necessary to carry out the business and purposes for which it was
organized, or which, from time to time, may be declared by the Board to be necessary,
In the present case, the MOA stated that Sangil undertook to redeem MADCI useful, incidental or auxiliary to accomplish said purpose.
proprietary shares sold to third persons or settle in full all their claims for refund of
payments. While this free and harmless clause cannot affect respondent as a creditor, In determining whether or not an NPC act falls within the purview of the above provision,
the petitioners may resort to this provision to recover damages in a third-party the Court must decide whether or not a logical and necessary relation exists between the
complaint. Whether the petitioners would act against Sangil under this provision is act questioned and the corporate purpose expressed in the NPC charter. For if that act is
their own option. one which is lawful in itself and not otherwise prohibited, and is done for the purpose of
serving corporate ends, and reasonably contributes to the promotion of those ends in a
2) Ultra Vires Doctrine --- Sec. 45;; Legal Consequences substantial and not in a remote and fanciful sense, it may be fairly considered within the
corporation's charter powers.
Section 45. Ultra vires acts of corporations. – No corporation under this Code shall

possess or exercise any corporate powers except those conferred by this Code or
Govt. of the P.I.v. El Hogar Filipino 50 Phil. 399
by its articles of incorporation and except such as are necessary or incidental to the
The by-law is of course a patent nullity, since it is in direct conflict with the latter part of
exercise of the powers so conferred. (n)
section 187 of the Corporation Law, which expressly declares that the board of directors
shall not have the power to force the surrender and withdrawal of unmatured stock except
in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is
ULTRA VIRES ACTS ILLEGAL ACT agreed that this provision of the by-laws has never been enforced, and in fact no attempt
AS TO NATURE Not necessarily unlawful, but Unlawful, against the law, has ever been made by the board of directors to make use of the power therein conferred.
outside the pwers of the morals, public policy, and It appears, however, that no annual meeting of the shareholders called since that date
corporation public order has been attended by a sufficient number of shareholders to constitute a quorum, with the
AS TO Can be ratified, expressly or Cannot be ratified because result that the provision referred to has no been eliminated from the by-laws, and it still
SUSCEPTIBILITY impliedly by the stockholders there are void ab initio stands among the by-laws of the association, notwithstanding its patent conflict with the
TO because such acts are merely law.
RATIFICATION voidable
AS TO THE Can bind the parties if wholly or Cannot bind the parties NOTE: This case is an example of how the implied powers concept may be used to justify
BINDING partly executed on the basis of certain acts of a corporation.
EFFECT estoppel
A quo warranto proceeding instituted by the Government against El Hogar, a building and
RP v. Acoje Mining (1963) 7 SCRA 631 loan association, to deprive it of its corporate franchise.
The corporate act was a necessary corollary to promote the interest and welfare of the
corporation. This is further bolstered by the fact that the opening of the post was upon the • El Hogar held title to real property for a period in excess of 5 years in good faith;;
request of the company for the convenience and benefit of its employees, and not an idea hence this cause will not prosper.
of the Director of Posts. Thus, having benefited from the agreement, the corporation is • El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess
estopped from raising the defense that the said corporate act by its board in conforming of its reasonable requirements, held valid because, it was found to be necessary
to the condition imposed by the Director of Posts is ultra vires. and legally acquired and developed.
• El Hogar leased some office space in its bldg.;; it administered and managed
While as a rule an ultra vires act is one committed outside the object for which properties belonging to delinquent stockholders;; and managed properties of its
a corporation is created as defined by the law of its organization and therefore stockholders even if such were not mortgaged to them.
beyond the powers conferred upon it by law, there are however certain
27
Held: first two valid, but the third is ultra vires because the Harden was a stockholder of Balatoc and he contends that this contract violated the
administration of property in that manner is more befitting of the business of a Corporation Law which restricts the acquisition of interest by a mining corporation in
real estate agent or trust company and not of a building and loan association. another mining corporation. The provision was adopted by the lawmakers with a sole view
• Compensation to the promoter and organizer allegedly excessive and to the public policy that should control in the granting of mining rights. Furthermore, the
unconscionable. penalties imposed in what is now section 190 (A) of the Corporation Law for the violation
Held: Court cannot dwell on the issue since the promoter is not a party of the prohibition in question are of such nature that they can be enforced only by a
in the proceeding and it is the corp. or its stockholders who may bring a complaint criminal prosecution or by an action of quo warranto. but these proceedings can be
on such. maintained only by the Attorney-General in representation of the Government.
• Issuance of special shares did not affect El Hogar's character as a building and
loan association nor make its loans usurious. Bissel v. Michigan Southern 22 NY 258;; 1860
NO. The contract between the two corporations was an ultra vires act. However, it is not
• Corporate policy of using a depreciation rate of 10 % per annum is not excessive,
one tainted with illegality, therefore, the accompanying rights and obligations based on
because according to the SC, the by-laws expressly authorizes the BOD to
the contract of carriage between them and the plaintiff cannot be avoided by raising such
determine each year the amount to be written down upon the expenses of
a defense. They cannot invoke the violation of the law of their state as a defense to escape
installation and the property of the corp.
responsibility, they are still liable.
• The Corp. Law does not expressly grant the power of maintaining reserve funds
but such power is implied. All business enterprises encounter periods of gains Gokongwei Jr. v. SEC, et al. 89 SCRA 336 (1979)
and losses, and its officers would usually provide for the creation of a reserve to SMC is merely protecting its interest from Gokongwei, who owns companies in direct
act as a buffer for such circumstances. competition with SMC’s business. Although in the strict and technical sense, directors of
• That loans issued to member borrowers are being used for purposes other than a private corporation are not regarded as trustees, there cannot be any doubt that their
the bldg. of homes not invalid because there is no statute which expressly character is that of a fiduciary insofar as the corporation and the stockholders as a body
declares that loans may be made by these associations solely for the purpose of are concerned. As agents entrusted with the management of the corporation for the
bldg. homes. collective benefit of the stockholders, they occupy a fiduciary relation, and in this sense
• Sec. 173 of the Corp. Law provides that "any person" may become a stockholder the relation is one of trust. It springs from the fact that directors have the control and
on a bldg. and loan association. The word "person" is used on a broad sense guidance of corporate affairs and property;; hence of the property interests of the
including not only natural persons but also artificial persons. stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof
Pirovano, et al v. De la Rama (1954) 96 Phil. 335
Power to Make Donations It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
The Articles of Incorporation of Dela Rama Steamship provided that under (g) the taking advantage of the information which he acquires as director to promote his individual
company may invest and deal with moneys of the company not immediately required, in or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that
such a manner as from time to time may be determined, and under (i)… to lend money or the questioned amendment of the by-laws was made.
to aid in any other manner any person association, or corporation of which any obligation
or in which any interest is held by the corporation or in the affairs of prosperity of which Certainly, where two corporations are competitive in a substantial sense, it would seem
the corporation has a lawful interest. improbable, if not impossible, for the director, if he were to discharge effectively his duty,
to satisfy his loyalty to both corporations and place the performance of his corporation
The corporation was thus given broad and almost unlimited powers to carry out the duties above his personal concerns.
purposes for which it was organized. The word “deal” is broad enough to include any
manner of disposition, and thus the donation comes within the scope of this broad power. XlI. CONTROL & MANAGEMENT
The company was in fact very much solvent as it was able to declare and issue dividends 1) Board of Directors/Trustees
to its stockholders, and shows that the excess funds which were not needed by the a) Sections 23, 27 (qualifications/disqualifications)
company which was donated to the children was justified under the AOI. Under the second TITLE III BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
broad power, the corporation knew well its scope such that none lifted a finger to dispute
its validity. The company gave the donation not only because it was indebted to him but Section 23. The board of directors or trustees. – Unless otherwise provided in this
also because it was fit and proper to make provisions for the children and out of a sense Code, the corporate powers of all corporations formed under this Code shall be
of gratitude. 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
Harden, et al v. Benguet (1933) 58 Phil. 141
28
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 NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the conduct of
qualified. (28a) teleconferencing and videoconferencing.

Every director must own at least one (1) share of the capital stock of the corporation -- RA 8792 and SEC MEMO Circ. 15 (Nov. 30, 2001)
of which he is a director, which share shall stand in his name on the books of the REPUBLIC ACT NO. 8792 June 14, 2000
corporation. Any director who ceases to be the owner of at least one (1) share of
the capital stock of the corporation of which he is a director shall thereby cease to AN ACT PROVIDING FOR THE RECOGNITION AND USE OF ELECTRONIC
be a director. Trustees of non-stock corporations must be members thereof. A COMMERCIAL AND NON-COMMERCIAL TRANSACTIONS AND DOCUMENTS,
majority of the directors or trustees of all corporations organized under this Code PENALTIES FOR UNLAWFUL USE THEREOF, AND FOR OTHER PURPOSES
must be residents of the Philippines.
Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:
Section 27. Disqualification of directors, trustees or officers. – No person convicted PART I SHORT TITLE AND DECLARATION OF POLICY
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 Section 1. Short Title - This Act shall be known as the "Electronic Commerce Act
date of his election or appointment, shall qualify as a director, trustee or officer of of 2000."
any corporation. (n)
Section 2. Declaration of Policy - The State recognizes the vital role of information
and communications technology (ICT) in nation-building;; the need to create an
Ramirez v. Orientalist Co. & Fernandez 38 Phil 634 information-friendly environment which supports and ensures the availability,
Although there were no evidence as to the authority of Ramon Fernandez to enter into diversity and affordability of ICT products and services;; the primary responsibility of
said contract, the Court had observed that when the defendant corporation failed to the private sector in contributing investments and services in telecommunications
question the validity of the contract, it resulted to eliminating the question of his authority and information technology;; the need to develop, with appropriate training programs
from the case. This is a case where an officer of a corporation has made a contract in its and institutional policy changes, human resources for the information technology
name, that the corporation should be required, if it denies his authority, to state such age, a labor force skilled in the use of ICT and a population capable of operating
defense in its answer. By this means the plaintiff is apprised of the fact that the agent's and utilizing electronic appliances and computers;; its obligation to facilitate the
authority is contested;; and he is given an opportunity to adduce evidence showing either transfer and promotion of technology;; to ensure network security, connectivity and
that the authority existed or that the contract was ratified and approved. Failure to question neutrality of technology for the national benefit;; and the need to marshal, organize
such timely and appropriately question such authority results to the admission of such and deploy national information infrastructures, comprising in both
fact. telecommunications network and strategic information services, including their
interconnection to the global information networks, with the necessary and
Expert Travel & Tours, Inc v. CA 459 SCRA 147 appropriate legal, financial, diplomatic and technical framework, systems and
In this age of modern technology, the courts may take judicial notice that business facilities.
transactions may be made by individuals through teleconferencing. teleconferencing and
videoconferencing of members of board of directors of private corporations is a reality, in PART II ELECTRONIC COMMERCE IN GENERAL
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 CHAPTER I
complied with related to such conferences.
GENERAL PROVISIONS

HOWEVER, in the case at bar, even given the possibility that Atty. Aguinaldo and Suk Section 3. Objective - This Act aims to facilitate domestic and international
Kyoo Kim participated in a teleconference along with the respondent’s Board of Directors, dealings, transactions, arrangements agreements, contracts and exchanges and
the Court is not convinced that one was conducted;; even if there had been one, the Court storage of information through the utilization of electronic, optical and similar
is not inclined to believe that a board resolution was duly passed specifically authorizing medium, mode, instrumentality and technology to recognize the authenticity and
Atty. Aguinaldo to file the complaint and execute the required certification against forum reliability of electronic documents related to such activities and to promote the
shopping. Facts and circumstances show that there was gross failure on the part of universal use of electronic transaction in the government and general public.
company to prove that there was indeed a special teleconference such as failure to
produce a written copy of the board resolution via teleconference.
29
Section 4. Sphere of Application - This Act shall apply to any kind of data message (i) "Originator" refers to a person by whom, or on whose behalf, the electronic
and electronic document used in the context of commercial and non-commercial document purports to have been created, generated and/or sent. The term does not
activities to include domestic and international dealings, transactions, include a person acting as an intermediary with respect to that electronic document.
arrangements, agreements contracts and exchanges and storage of information.
(j) "Service provider" refers to a provider of -
Section 5. Definition of Terms - For the purposes of this Act, the following terms are
defined, as follows: i. On-line services or network access or the operator of facilities therefor, including
entities offering the transmission, routing, or providing of connections for online
(a) "Addressee" refers to a person who is intended by the originator to receive the communications, digital or otherwise, between or among points specified by a user,
electronic data message or electronic document. The term does not include a of electronic documents of the user's choosing;; or
person acting as an intermediary with respect to that electronic data message or
electronic data document. ii. The necessary technical means by which electronic documents of an originator
may be stored and made accessible to designated or undesignated third party.
(b) "Computer" refers to any device or apparatus which, by electronic, electro-
mechanical, or magnetic impulse, or by other means, is capable of receiving, Such service providers shall have no authority to modify or alter the content of the
recording, transmitting, storing, processing, retrieving, or producing information, electronic data message or electronic document received or to make any entry
data, figures, symbols or other modes of written expression according to therein on behalf of the originator, addressee or any third party unless specifically
mathematical and logical rules or of performing any one or more of these functions. authorized to do so, and who shall retain the electronic document in accordance
with the specific request or as necessary for the purpose of performing the services
(c) "Electronic Data Message" refers to information generated, sent, received or it was engaged to perform.
stored by electronic, optical or similar means.
CHAPTER II LEGAL RECOGNITION OF ELECTRONIC WRITING OR
(d) "Information and Communications System" refers to a system intended for and DOCUMENT AND DATA MESSAGES
capable of generating, sending, receiving, storing, or otherwise processing
electronic data messages or electronic documents and includes the computer Section 6. Legal Recognition of Electronic Data Messages - Information shall not
system or other similar device by or in which data is recorded or stored and any be denied legal effect, validity or enforceability solely on the grounds that it is in the
procedures related to the recording or storage of electronic data message or data message purporting to give rise to such legal effect, or that it is merely referred
electronic document. to in that electronic data message.
(e) "Electronic Signature" refers to any distinctive mark, characteristic and/or sound Section 7. Legal Recognition of Electronic Documents - Electronic documents shall
in electronic form, representing the identity of a person and attached to or logically have the legal effect, validity or enforceability as any other document or legal writing,
associated with the electronic data message or electronic document or any and -
methodology or procedures employed or adopted by a person and executed or
adopted by such person with the intention of authenticating or approving an (a) Where the law requires a document to be in writing, that requirement is met by
electronic data message or electronic document. an electronic document if the said electronic document maintains its integrity and
reliability and can be authenticated so as to be usable for subsequent reference, in
(f) "Electronic Document" refers to information or the representation of information, that -
data, figures, symbols or other modes of written expression, described or however
represented, by which a right is established or an obligation extinguished, or by i. The electronic document has remained complete and unaltered, apart from the
which a fact may be prove and affirmed, which is receive, recorded, transmitted, addition of any endorsement and any authorized change, or any change which
stored, processed, retrieved or produced electronically. arises in the normal course of communication, storage and display;; and
(g) "Electronic Key" refers to a secret code which secures and defends sensitive ii. The electronic document is reliable in the light of the purpose for which it was
information that cross over public channels into a form decipherable only with a generated and in the light of all relevant circumstances.
matching electronic key.
(b) Paragraph (a) applies whether the requirement therein is in the form of an
(h) "Intermediary" refers to a person who in behalf of another person and with obligation or whether the law simply provides consequences for the document not
respect to a particular electronic document sends, receives and/or stores provides being presented or retained in its original from.
other services in respect of that electronic data message or electronic document.
30
(c) Where the law requires that a document be presented or retained in its original (1) Where the law requires information to be presented or retained in its original
form, that requirement is met by an electronic document if - form, that requirement is met by an electronic data message or electronic document
if;;
i. There exists a reliable assurance as to the integrity of the document from the time
when it was first generated in its final form;; and (a) the integrity of the information from the time when it was first generated in its
final form, as an electronic data message or electronic document is shown by
ii. That document is capable of being displayed to the person to whom it is to be evidence aliunde or otherwise;; and
presented: Provided, That no provision of this Act shall apply to vary any and all
requirements of existing laws on formalities required in the execution of documents (b) where it is required that information be resented, that the information is capable
for their validity. of being displayed to the person to whom it is to be presented.
For evidentiary purposes, an electronic document shall be the functional equivalent (2) Paragraph (1) applies whether the requirement therein is in the form of an
of a written document under existing laws. obligation or whether the law simply provides consequences for the information not
being presented or retained in its original form.
This Act does not modify any statutory rule relating to admissibility of electronic data
massages or electronic documents, except the rules relating to authentication and (3) For the purpose of subparagraph (a) of paragraph (1):
best evidence.
(a) the criteria for assessing integrity shall be whether the information has remained
Section 8. Legal Recognition of Electronic Signatures. - An electronic signature on complete and unaltered, apart from the addition of any endorsement and any
the electronic document shall be equivalent to the signature of a person on a written change which arises in the normal course of communication, storage and display ;;
document if that signature is proved by showing that a prescribed procedure, not and
alterable by the parties interested in the electronic document, existed under which
- (b) the standard of reliability required shall be assessed in the light of purposed for
which the information was generated and in the light of all the relevant
(a) A method is used to identify the party sought to be bound and to indicate said circumstances.
party's access to the electronic document necessary for his consent or approval
through the electronic signature;; Section 11. Authentication of Electronic Data Messages and Electronic
Documents. - Until the Supreme Court by appropriate rules shall have so provided,
(b) Said method is reliable and appropriate for the purpose for which the electronic electronic documents, electronic data messages and electronic signatures, shall be
document was generated or communicated, in the light of all circumstances, authenticated by demonstrating, substantiating and validating a claimed identity of
including any relevant agreement;; a user, device, or another entity is an information or communication system, among
other ways, as follows;;
(c) It is necessary for the party sought to be bound, in or order to proceed further
with the transaction, to have executed or provided the electronic signature;; and (a) The electronic signature shall be authenticated by proof than a letter , character,
number or other symbol in electronic form representing the persons named in and
(d) The other party is authorized and enabled to verify the electronic signature and attached to or logically associated with an electronic data message, electronic
to make the decision to proceed with the transaction authenticated by the same. document, or that the appropriate methodology or security procedures, when
applicable, were employed or adopted by such person, with the intention of
Section 9. Presumption Relating to Electronic Signatures - In any proceedings authenticating or approving in an electronic data message or electronic document;;
involving an electronic signature, it shall be presumed that -
(b) The electronic data message or electronic document shall be authenticated by
(a) The electronic signature is the signature of the person to whom it correlates;; and proof that an appropriate security procedure, when applicable was adopted and
employed for the purpose of verifying the originator of an electronic data message
(b) The electronic signature was affixed by that person with the intention of signing
and/or electronic document, or detecting error or alteration in the communication,
or approving the electronic document unless the person relying on the electronically
content or storage of an electronic document or electronic data message from a
signed electronic document knows or has noticed of defects in or unreliability of the
specific point, which, using algorithm or codes, identifying words or numbers,
signature or reliance on the electronic signature is not reasonable under the
encryptions, answers back or acknowledgement procedures, or similar security
circumstances.
devices.
Section 10. Original Documents. -
31
The supreme court may adopt such other authentication procedures, including the (a) The requirement in any provision of law that certain documents be retained in
use of electronic notarization systems as necessary and advisable, as well as the their original form is satisfied by retaining them in the form of an electronic data
certificate of authentication on printed or hard copies of the electronic document or message or electronic document which -
electronic data messages by electronic notaries, service providers and other duly
recognized or appointed certification authorities. (i) Remains accessible so as to be usable for subsequent reference;;
The person seeking to introduce an electronic data message or electronic document (ii) Is retained in the format in which it was generated, sent or received, or in a format
in any legal proceeding has the burden of proving its authenticity by evidence which can be demonstrated to accurately represent the electronic data message or
capable of supporting a finding that the electronic data message or electronic electronic document generated, sent or received;;
document is what the person claims it be.
(iii) Enables the identification of its originator and addressee, as well as the
In the absence of evidence to the contrary, the integrity of the information and determination of the date and the time it was sent or received.
communication system in which an electronic data message or electronic document
is recorded or stored may be established in any legal proceeding - (b) The requirement referred to in paragraph (a) is satisfied by using the services of
a third party, provided that the conditions set fourth in subparagraph s (i), (ii) and
a.) By evidence that at all material times the information and communication system (iii) of paragraph (a) are met.
or other similar device was operating in a manner that did not affect the integrity of
the electronic data message and/or electronic document, and there are no other Section 14. Proof by Affidavit. - The matters referred to in Section 12, on
reasonable grounds to doubt the integrity of the information and communication admissibility and Section 9, on the presumption of integrity, may be presumed to
system, have been established by an affidavit given to the best of the deponent's knowledge
subject to the rights of parties in interest as defined in the following section.
b.) By showing that the electronic data message and/or electronic document was
recorded or stored by a party to the proceedings who is adverse in interest to the Section 15. Cross - Examination.
party using it;; or
(1) A deponent of an affidavit referred to in Section 14 that has been introduced in
c.) By showing that the electronic data message and/or electronic document was evidence may be cross-examined as of right by a party to the proceedings who is
recorded or stored in the usual and ordinary course of business by a person who is adverse in interest to the party who has introduced the affidavit or has caused the
not a party to the proceedings and who did not act under the control of the party affidavit to be introduced.
using the record.
(2) Any party to the proceedings has the right to cross-examine a person referred
Section 12. Admissibility and Evidential Weight of Electronic Data Message or to in section 11, paragraph 4, sub paragraph c.
Electronic Document. - In any legal proceedings, nothing in the application of the
CHAPTER III. COMMUNICATION OF ELECTRONIC DATA MESSAGES OR
rules on evidence shall deny the admissibility of an electronic data message or
electronic document in evidence - ELECTRONIC DOCUMENTS
(a) On the sole ground that it is in electronic form;; or Section 16. Formation of Validity of Electronic Contracts.
(b) On the ground that it is not in the standard written form, and the electronic data (1) Except as otherwise agreed by the parties, an offer, the acceptance of an offer
message or electronic document meeting, and complying with the requirements and such other elements required under existing laws for the formation of contracts
under Sections 6 or 7 hereof shall be the best evidence of the agreement and may be expressed in, demonstrated and proved by means of electronic data
transaction contained therein. messages or electronic documents and no contract shall be denied validity or
enforceability on the sole ground that it is in the form of an electronic data message
In assessing the evidential weight of an electronic data message or electronic or electronic document, or that any or all of the elements required under existing
document, the reliability of the manner in which it was generated, stored or laws for the formation of contracts is expressed, demonstrated and proved by
communicated, the reliability of the manner in which its originator was identified, means of electronic data messages or electronic documents.
and other relevant factors shall be given due regard.
(2) Electronic transactions made through networking among banks, or linkages
Section 13. Retention of Electronic Data Message or Electronic Document. - thereof with other entities or networks, and vice versa, shall be deemed
Notwithstanding any provision of law, rule or regulation to the contrary - consummated upon the actual dispensing of cash or the debit of one account and
the corresponding credit to another, whether such transaction is initiated by the
32
depositor or by an authorized collecting party: Provided, that the obligation of one (5) Where an electronic data message or electronic document is that of the
bank, entity, or person similarly situated to another arising therefrom shall be originator or is deemed to be that of the originator, or the addressee is entitled to
considered absolute and shall not be subjected to the process of preference of act on that assumption, then, as between the originator and the addressee, the
credits. addressee is entitled to regard the electronic data message or electronic document
as received as being what the originator intended to send, and to act on that
Section 17. Recognition by Parties of Electronic Data Message or Electronic assumption. The addressee is not so entitled when it knew or should have known,
Document. - As between the originator and the addressee of an electronic data had it exercised treasonable care or used any agreed procedure, that the
message or electronic document, a declaration of will or other statement shall not transmission resulted in any error in the electronic data message or electronic
be denied legal effect, validity or enforceability solely on the ground that it is in the document as received.
form of an electronic data message.
(6) The addressee is entitled to regard each electronic data message or electronic
Section 18. Attribution of Electronic Data Message. - document received as a separate electronic data message or electronic document
and to act on that assumption, except to the extent that it duplicates another
(1) An electronic data message or electronic document is that of the originator if it electronic data message or electronic document and the addressee knew or should
was sent by the originator himself. have known, had it exercised reasonable care or used any agreed procedure, that
the electronic data message or electronic document was a duplicate.
(2) As between the originator and the addressee, an electronic data message or
electronic document is deemed to be that of the originator if it was sent: Section 19. Error on Electronic Data Message or Electronic Document. - The
addressee is entitled to regard the electronic data message or electronic document
(a) by a person who had the authority to act on behalf of the originator with respect
received as that which the originator intended to send, and to act on that
to that electronic data message or electronic document;; or
assumption, unless the addressee knew or should have known, had the addressee
(b) by an information system programmed by, or on behalf of the originator to exercised reasonable care or used the appropriate procedure -
operate automatically.
(a) That the transmission resulted in any error therein or in the electronic document
(3) As between the originator and the addressee, an addressee is entitled to regard when the electronic data message or electronic document enters the designated
an electronic data message or electronic document as being that of the originator, information system, or
and to act on that assumption, if:
(b) That electronic data message or electronic document is sent to an information
(a) in order to ascertain whether the electronic data message or electronic system which is not so designated by the addressee for the purposes.
document was that of the originator, the addressee properly applied a procedure
Section 20. Agreement on Acknowledgement of Receipt of Electronic Data
previously agreed to by the originator for that purpose;; or
Messages or Electronic Documents. - The following rules shall apply where, on or
(b) the electronic data message or electronic document as received by the before sending an electronic data message or electronic document, the originator
addressee resulted from the actions of a person whose relationship with the and the addressee have agreed, or in that electronic document or electronic data
originator or with any agent of the originator enabled that person to gain access to message, the originator has requested, that receipt of the electronic document or
a method used by the originator to identify electronic data messages as his own. electronic data message be acknowledged:
(4) Paragraph (3) does not apply: a.) Where the originator has not agreed with the addressee that the
acknowledgement be given in a particular form or by a particular method, an
(a) as of the time when the addressee has both received notice from the originator acknowledgement may be given by or through any communication by the
that the electronic data message or electronic document is not that of the originator, addressee, automated or otherwise, or any conduct of the addressee, sufficient to
and has reasonable time to act accordingly;; or indicate to the originator that the electronic data message or electronic document
has been received.
(b) in a case within paragraph (3) sub-paragraph (b), at any time when the
addressee knew or should have known, had it exercised reasonable care of used b.) Where the originator has stated that the effect or significance of the electronic
any agreed procedure, that the electronic data message or electronic document data message or electronic document is conditional on receipt of the
was not that of the originator. acknowledgement thereof, the electronic data message or electronic document is
treated as though it has never been sent, until the acknowledgement is received.
33
c.) Where the originator has not stated that the effect or significance of the electronic transmit or received his electronic data message or electronic document. This rule
data message or electronic document is conditional on receipt of the shall also apply to determine the tax situs of such transaction.
acknowledgement, and the acknowledgement has not been received by the
originator within the time specified or agreed or, if no time has been specified or For the purpose hereof -
agreed, within the reasonable time, the originator may give notice to the addressee
stating that no acknowledgement has been received and specifying a reasonable a. If the originator or addressee has more than one place of business, the place of
time by which the acknowledgement must be received;; and if the acknowledgement business is that which has the closest relationship to the underlying transaction or,
is not received within the time specified in subparagraph (c), the originator may, where there is no underlying transaction, the principal place of business.
upon notice to the addressee, treat the electronic document or electronic data as
b. If the originator or the addressee does not have a place of business, reference is
though it had never been sent, or exercise any other rights it may have.
to be made to its habitual residence;; or
Section 21. Time of Dispatch of Electronic Data Messages or Electronic
c. The "usual place of residence" in relation to a body corporate, means the place
Documents. - Unless otherwise agreed between the originator and the addressee,
where it is incorporated or otherwise legally constituted.
the dispatch of an electronic data message or electronic document occurs when it
enters an information system outside the control of the originator or of the person Section 24. Choice of Security Methods. - Subject to applicable laws and /or rules
who sent the electronic data message or electronic document on behalf of the and guidelines promulgated by the Department of Trade and Industry with other
originator. appropriate government agencies, parties to any electronic transaction shall be free
to determine the type of level of electronic data message and electronic document
Section 22. Time of Receipt of Electronic Data Messages or Electronic Documents.
security needed, and to select and use or implement appropriate technological
- Unless otherwise agreed between the originator and the addressee, the time of
methods that suit their need.
receipt of an electronic data message or electronic document is as follows:
PART III ELECTRONIC COMMERCE IN SPECIFIC AREAS
a.) If the addressee has designated an information system for the purpose of
receiving electronic data message or electronic document, receipt occurs at the CHAPTER I.
time when the electronic data message or electronic document enters the
designated information system: Provide, however, that if the originator and the CARRIAGE OF GOODS
addressee are both participants in the designated information system, receipt
occurs at the time when the electronic data message or electronic document is Section 25. Actions Related to Contracts of Carriage of Goods. - Without
retrieved by the addressee;; derogating from the provisions of part two of this law, this chapter applies to any
action in connection with, or in pursuance of, a contract of carriage of goods,
b.) If the electronic data message or electronic document is sent to an information including but not limited to:
system of the addressee that is not the designated information system, receipt
occurs at the time when the electronic data message or electronic document is (a) (i) furnishing the marks, number, quantity or weight of goods;;
retrieved by the addressee;;
(ii) stating or declaring the nature or value of goods;;
c.) If the addressee has not designated an information system, receipt occurs when
the electronic data message or electronic document enters an information system (iii) issuing a receipt for goods;;
of the addressee.
(iv) confirming that goods have been loaded;;
These rules apply notwithstanding that the place where the information system is
located may be different from the place where the electronic data message or (b) (i) notifying a person of terms and conditions of the contract;;
electronic document is deemed to be received.
(ii) giving instructions to a carrier;;
Section 23. Place of Dispatch and Receipt of Electronic Data Messages or
(c) (i) claiming delivery of goods;;
Electronic Documents. - Unless otherwise agreed between the originator and the
addressee, an electronic data message or electronic document is deemed to be (ii) authorizing release of goods;;
dispatched at the place where the originator has its place of business and received
at the place where the addressee has its place of business. This rule shall apply (iii) giving notice of loss of, or damage to goods;;
even if the originator or addressee had used a laptop other portable device to
34
(d) giving any other notice or statement in connection with the performance of the years from the date of the effectivity of this Act, all departments, bureaus, offices
contract;; and agencies of the government, as well as all government-owned and -controlled
corporations, that pursuant to law require or accept the filling of documents, require
(e) undertaking to deliver goods to a named person or a person authorized to claim that documents be created, or retained and/or submitted, issue permits, licenses or
delivery;; certificates of registration or approval, or provide for the method and manner of
payment or settlement of fees and other obligations to the government, shall -
(f) granting, acquiring, renouncing, surrendering, transferring or negotiating rights
in goods;; (a) accept the creation, filing or retention of such documents in the form of electronic
data messages or electronic documents;;
(g) acquiring or transferring rights and obligations under the contract.
(b) issue permits, licenses, or approval in the form of electronic data messages or
Section 26. Transport Documents. - (1) Where the law requires that any action electronic documents;;
referred to contract of carriage of goods be carried out in writing or by using a paper
document, that requirement is met if the action is carried out by using one or more (c) require and/or accept payments, and issue receipts acknowledging such
data messages or electronic documents. payments, through systems using electronic data messages or electronic
documents;; or
(2) Paragraph (1) applies whether the requirement there in is in the form of an
obligation or whether the law simply provides consequences for failing either to (d) transact the government business and/or perform governmental functions using
carry out the action in writing or to use a paper document. electronic data messages or electronic documents, and for the purpose, are
authorized to adopt and promulgate, after appropriate public hearing and with due
(3) If a right is to be granted to, or an obligation is to be acquired by, one person publication in newspapers of general circulation, the appropriate rules, regulations,
and no person, and if the law requires that, in order to effect this, the right or or guidelines, to, among others, specify -
obligation must be conveyed to that person by the transfer, or use of, a paper
document, that requirement is met if the right or obligation is conveyed by using one 1) the manner and format in which such electronic data messages or electronic
or more electronic data messages or electronic documents unique;; documents shall be filed, created, retained or issued;;
(4) For the purposes of paragraph (3), the standard of reliability required shall be 2) where and when such electronic data messages or electronic documents have
assessed in the light of the purpose for which the right or obligation was conveyed to signed, the use of an electronic signature, the type of electronic signature
and in the light of all the circumstances, including any relevant agreement. required;;
(5) Where one or more data messages are used to effect any action in 3) the format of an electronic data message or electronic document and the manner
subparagraphs (f) and (g) of Section 25, no paper document used to effect any such the electronic signature shall be affixed to the electronic data message or electronic
action is valid unless the use of electronic data message or electronic document document;;
has been terminated and replaced by the used of paper documents. A paper
document issued in these circumstances shall contain a statement of such 4) the control processes and procedures as appropriate to ensure adequate
termination. The replacement of the electronic data messages or electronic integrity, security and confidentiality of electronic data messages or electronic
documents by paper documents shall not affect the rights or obligation of the parties documents or records of payments;;
involved.
5) other attributes required to electronic data messages or electronic documents or
(6) If a rule of laws is compulsorily applicable to a contract of carriage of goods payments;; and
which is in, or is evidenced by, a paper document, that rule shall not be inapplicable
to such a contract of carriage of goods which is evidenced by one or more electronic 6) the full or limited use of the documents and papers for compliance with the
data messages or electronic documents by reason of the fact that the contract is government requirements: Provided, that this Act shall be itself mandate any
evidenced by such electronic data messages or electronic documents instead of by department of the government, organ of state or statutory corporation to accept or
a paper document. issue any document in the form of electronic data messages or electronic
documents upon the adoption, promulgation and publication of the appropriate
PART IV ELECTRONIC TRANSACTIONS IN GOVERNMENT rules, regulations or guidelines.
Section 27. Government Use of Electronic Data Messages, Electronic Documents Section 28. RPWEB To Promote the Use of Electronic Documents or Electronic
and Electronic Signatures. - Notwithstanding any law to the contrary, within two (2) Data Messages In Government and to the General Public. - Within two (2) years
35
from the effectivity of this Act, there shall be installed an electronic online network PART V FINAL PROVISIONS
in accordance with Administrative Order 332 and House of Representatives
Resolution 890, otherwise known as RPWEB, to implement Part IV of this Act to Section 30. Extent of Liability of a Service Provider. - Except as otherwise provided
facilitate the open, speedy and efficient electronic online transmission, conveyance in this Section, no person or party shall be subject to any civil or criminal liability in
and use of electronic data messages or electronic documents amongst all respect of the electronic data message or electronic document for which the person
government departments, agencies, bureaus, offices down to the division level and or party acting as a service provider as defined in Section 5 merely provides access
to the regional and provincial offices as practicable as possible, government owned if such liability is founded on -
and controlled corporations, local government units, other public instrumentalities,
universities, colleges and other schools, and universal access to the general public. (a) The obligations and liabilities of the parties under the electronic data message
or electronic document;;
The RPWEB network shall serve as initial platform of the government information
infrastructure (GII) to facilitate the electronic online transmission and conveyance (b) The making, publication, dissemination or distribution of such material or any
of government services to evolve and improve by better technologies or kinds and statement made in such material, including possible infringement of any right
electronic online wide area networks utilizing, but not limited to, fiber optic, satellite, subsisting in or in relation to such material. Provided, That:
wireless and other broadband telecommunication mediums or modes.
i. The service provider does not have actual knowledge, or is not aware of the facts
To facilitate the rapid development of the GII, the Department of Transportation and or circumstances from which it is apparent, that the making, publication,
Communications, National Telecommunications Commission and the National dissemination or distribution of such material is unlawful or infringes any rights
Computer Center are hereby directed to aggressively promote and implement a subsisting in or in relation to such material;;
policy environment and regulatory framework that shall lead to the substantial
reduction of costs of including, but not limited to, lease lines, land, satellite and dial- ii The service provider does not knowingly receive a financial benefit directly
up telephone access, cheap broadband and wireless accessibility by government attributable to the unlawful or infringing activity;; and
departments, agencies, bureaus, offices, government owned and controlled iii. The service provider does not directly commit any infringement or other unlawful
corporations, local government units, other public instrumentalities and the general act and does not induce or cause another person or party to commit any
public, to include the establishment of a government website portal and a domestic infringement or other unlawful act and/or does not benefit financially from the
internal exchange system to facilitate strategic access to government and amongst infringing activity or unlawful act or another person or party;; Provider, further, That
agencies thereof and the general public and for the speedier flow of locally nothing in this Section shall affect -
generated internal traffic within the Philippines.
(a) Any obligation founded on contract;;
The physical infrastructure of cable and wireless system for cable TV and broadcast
excluding programming content and the management thereof shall be considered (b) The obligation of a service provider as such under a licensing or other regulatory
as within the activity of telecommunications for the purpose of electronic commerce regime established under written law;; or
and to maximize the convergence of ICT in the installation of the GII.
(c) Any obligation imposed under any written law;;
Section 29. Authority of the Department of Trade and Industry and Participating
Entities. - The Department of Trade and Industry (DTI) shall direct supervise the (d) The civil liability of any party to the extent that such liability forms the basis for
promotion and development of electronic commerce in the country with relevant injunctive relief issued by a court under any law requiring that the service provider
government agencies, without prejudice to the provisions of Republic Act 7653 take or refrain from actions necessary to remove, block or deny access to any
(Charter of Bangko Sentral ng Pilipinas) and Republic Act No. 337, (General material, or to preserve evidence of a violation of law.
Banking Act) as amended.
Section 31. Lawful Access. - Access to an electronic file, or an electronic signature
Among others, the DTI is empowered to promulgate rules and regulations, as well of an electronic data message or electronic document shall only be authorized and
as provide quality standards or issue certifications, as the case may be, and perform enforced in favor of the individual or entity having a legal right to the possession or
such other functions as may be necessary for the implementation of this Act in the the use of plaintext, electronic signature or file or solely for the authorized purposes.
area of electronic commerce to include, but shall not limited to, the installation of an The electronic key for identity or integrity shall not be made available to any person
online public information and quality and price monitoring system for goods and or party without the consent of the individual or entity in lawful possession of that
services aimed in protecting the interests of the consuming public availing of the electronic key;;
advantages of this Act.
36
Section 32. Obligation of Confidentiality. - Except for the purposes authorized Failure to Issue rules and regulations shall not in any manner affect the executory
under this Act, any person who obtained access to any electronic key, electronic nature of the provisions of this Act.
data message or electronic document, book, register, correspondence, information,
or other material pursuant to any powers conferred under this Act, shall not convey Section 35. Oversight Committee. - There shall be Congressional Oversight
to or share the same with any other person. Committee composed of the Committees and Trade and Industry/Commerce,
Science and Technology, Finance and Appropriations of both the Senate and House
Section 33. Penalties. - The following Acts, shall be penalized by fine and/or of Representatives, which shall meet at least every quarter of the first two years
imprisonment, as follows: and every semester for the third year after the approval of this Act to oversee its
implementation. The DTI, DBM, Bangko Sentral ng Pilipinas, and other government
(a) Hacking or crackling with refers to unauthorized access into or interference in a agencies as may be determined by the Congressional Committee shall provide a
computer system/server or information and communication system;; or any access quarterly performance report of their actions taking in the implementation of this Act
in order to corrupt, alter, steal, or destroy using a computer or other similar for the first three (3) years.
information and communication devices, without the knowledge and consent of the
owner of the computer or information and communications system, including the Section 36. Appropriations. - The amount necessary to carry out the provisions of
introduction of computer viruses and the like, resulting in the corruption, destruction, Sections 27 and 28 of this Act shall be charged against any available funds and/or
alteration, theft or loss of electronic data messages or electronic documents shall savings under the General Appropriations Act of 2000 in the first year of effectivity
be punished by a minimum fine of One Hundred Thousand pesos (P 100,000.00) of this Act. Thereafter, the funds needed for the continued implementation shall be
and a maximum commensurate to the damage incurred and a mandatory included in the annual General Appropriations Act.
imprisonment of six (6) months to three (3) years;;
Section 37. Statutory Interpretation. - Unless otherwise expressly provided for, the
(b) Piracy or the unauthorized copying, reproduction, dissemination, or distribution, interpretation of this Act shall give due regard to its international origin and the need
importation, use, removal, alteration, substitution, modification, storage, uploading, to promote uniformity in its application and the observance of good faith in
downloading, communication, making available to the public, or broadcasting of international trade relations. The generally accepted principles of international law
protected material, electronic signature or copyrighted works including legally and convention on electronic commerce shall likewise be considered.
protected sound recordings or phonograms or information material on protected
works, through the use of telecommunication networks, such as, but not limited to, Section 38. Variation by Agreement. - As between parties involved in generating,
the internet, in a manner that infringes intellectual property rights shall be punished sending, receiving, storing or otherwise processing electronic data message or
by a minimum fine of one hundred thousand pesos (P 100,000.00) and a maximum electronic document, any provision of this Act may be varied by agreement between
commensurate to the damage incurred and a mandatory imprisonment of six (6) and among them.
months to three (3) years;;
Section 39. Reciprocity. - All benefits, privileges, advantages or statutory rules
(c) Violations of the Consumer Act of Republic Act No. 7394 and other relevant to established under this Act, including those involving practice of profession, shall be
pertinent laws through transaction covered by or using electronic data messages or enjoyed only by parties whose country origin grants the same benefits and
electronic documents, shall be penalized with the same penalties as provided in privileges or advantages to Filipino citizens.
those laws;;
Section 40. Separability Clause. - The provisions of this Act are hereby declared
(d) Other violations of the provisions of this Act, shall be penalized with a maximum separable and in the event of any such provision is declared unconstitutional, the
penalty of one million pesos (P 1,000,000.00) or six (6) years imprisonment. other provisions, which are not affected, shall remain in force and effect.
Section 34. Implementing Rules and Regulations. - The DTI, Department of Budget Section 41. Repealing Clause. - All other laws, decrees, rules and regulations or
and Management and the Bangko Sentral ng Pilipinas are hereby empowered to parts thereof which are inconsistent with the provisions of this Act are hereby
enforced the provisions of this Act and issue implementing rules and regulations repealed, amended or modified accordingly.
necessary, in coordination with the Department of Transportation and
Communications, National Telecommunications Commission, National Computer Section 42. Effectivity. - This Act shall take effect immediately after its publication
Center, National Information Technology Council, Commission on Audit, other in the Official Gazette or in at least two (2) national newspapers of general
concerned agencies and the private sector, to implement this Act within sixty (60) circulation.
days after its approval.

Citibank NA v. Chua 220 SCRA 75
37
Section 46 (which was relied upon by the CA) starts with the phrase "Every corporation has ever been made by the board of directors to make use of the power therein conferred.
formed under this Code", which can only refer to corporations incorporated in the It appears, however, that no annual meeting of the shareholders called since that date
Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, has been attended by a sufficient number of shareholders to constitute a quorum, with the
applies only to domestic corporations and not to foreign corporations. On the other hand, result that the provision referred to has no been eliminated from the by-laws, and it still
Section 125 of the same Code requires that a foreign corporation applying for a license to stands among the by-laws of the association, notwithstanding its patent conflict with the
transact business in the Philippines must submit, among other documents, to the SEC, a law.
copy of its articles of incorporation and by-laws, certified in accordance with law. Unless
these documents are submitted, the application cannot be acted upon by the SEC. Gokongwei v. SEC 89 SCRA 336 (1979)
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
Since the SEC will grant a license only when the foreign corporation has complied with all corporation or business or for any purpose other than the main purpose for which it was
the requirements of law, it follows that when it decides to issue such license, it is satisfied organized" provided that its Board of Directors has been so authorized by the affirmative
that the applicant's by-laws, among the other documents, meet the legal requirements. vote of stockholders holding shares entitling them to exercise at least two-thirds of the
This, in effect, is an approval of the foreign corporations’ by-laws. It may not have been voting power. If the investment is made in pursuance of the corporate purpose, it does not
made in express terms;; still it is clearly an approval. Therefore, petitioner bank's by-laws, need the approval of the stockholders. It is only when the purchase of shares is done
though originating from a foreign jurisdiction, are valid and effective in the Philippines. solely for investment and not to accomplish the purpose of its incorporation that the vote
of approval of the stockholders holding shares entitling them to exercise at least two-thirds
Boyer-Roxas v. CA 211 SCRA 470 of the voting power is necessary.
Regarding properties owned by the corporation, under the doctrine of corporate entity
“properties registered in the name of the corporation are owned by it as an entity separate As stated by Respondent Corporation, the purchase of beer manufacturing facilities by
and distinct from its members.” While shares of stock constitute personal property, they SMC was an investment in the same business stated as its main purpose in its Articles of
do not represent property of the corporation. A share of stock only typifies an aliquot part Incorporation, which is to manufacture and market beer. It appears that the original
of the corporation’s property, or the right to share in its proceeds to that extent when investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
distributed according to law and equity, but its holder is not the owner of any part of the purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
capital of the corporation, nor is he entitled to the possession of any definite portion of its manufacture and marketing of San Miguel beer thereat. Restructuring of the investment
property or assets. The stockholder is not a co-owner or tenant in common of the corporate was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
property. reorganization.

The corporation has a personality distinct and separate from its members and transacts b) Non-stock corp. – Sec. 92
business only through its officers or agents. Whatever authority these officers or agents CHAPTER II TRUSTEES AND OFFICES
may have is derived from the board or other governing body, unless conferred by the
charter of the corporation itself. An officer's power as an agent of the corporation must be Section 92. Election and term of trustees. – Unless otherwise provided in the articles
sought from the statute, charter, the by-laws or in a delegation of authority to such officer, of incorporation or the by-laws, the board of trustees of non-stock corporations, which
from the acts of the board of directors, formally expressed or implied from a habit or may be more than fifteen (15) in number as may be fixed in their articles of
custom of doing business. incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of their number shall expire every year;; and
In this case the elder Roxas who then controlled the management of the corporation, being subsequent elections of trustees comprising one-third (1/3) of the board of trustees
the majority stockholder, consented to the petitioner’s use and stay within the properties. shall be held annually and trustees so elected shall have a term of three (3) years.
The Board did not object and were allowed to stay until it adopted a resolution to the effect Trustees thereafter elected to fill vacancies occurring before the expiration of a
of authorizing to eject them. Since their stay was merely by tolerance, in deference to the particular term shall hold office only for the unexpired period.
wishes of the majority stockholder who controlled the corporation, when Roxas died his
actions cannot bind the company forever. There is no provision in the by-laws or any other No person shall be elected as trustee unless he is a member of the corporation.
resolution authorizing their continued stay.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a
Govt. of P. I. v. El Hogar Filipino 50 Phil. 399 (1927) non-stock corporation may be directly elected by the members. (n)
The by-law is of course a patent nullity, since it is in direct conflict with the latter part of
section 187 of the Corporation Law, which expressly declares that the board of directors
shall not have the power to force the surrender and withdrawal of unmatured stock except c) Close corp. - Secs. 97 (par.1, no.2), 97 (par.2), Sec.104
in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is
agreed that this provision of the by-laws has never been enforced, and in fact no attempt
38
Section 97. Articles of incorporation. – The articles of incorporation of a close A provisional director shall be an impartial person who is neither a stockholder nor
corporation may provide: a creditor of the corporation or of any subsidiary or affiliate of the corporation, and
whose further qualifications, if any, may be determined by the Commission. A
1. For a classification of shares or rights and the qualifications for owning or holding provisional director is not a receiver of the corporation and does not have the title
the same and restrictions on their transfers as may be stated therein, subject to the and powers of a custodian or receiver. A provisional director shall have all the rights
provisions of the following section;; and powers of a duly elected director of the corporation, including the right to notice
of and to vote at meetings of directors, until such time as he shall be removed by
2. For a classification of directors into one or more classes, each of whom may be order of the Commission or by all the stockholders. His compensation shall be
voted for and elected solely by a particular class of stock;; and determined by agreement between him and the corporation subject to approval of
the Commission, which may fix his compensation in the absence of agreement or
3. For a greater quorum or voting requirements in meetings of stockholders or
in the event of disagreement between the provisional director and the corporation.
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business
of the corporation shall be managed by the stockholders of the corporation rather d) Special corporations – Educational --- Sec. 108
than by a board of directors. So long as this provision continues in effect: TITLE XIII SPECIAL CORPORATIONS CHAPTER I –
1. No meeting of stockholders need be called to elect directors;; EDUCATIONAL CORPORATIONS
2. Unless the context clearly requires otherwise, the stockholders of the corporation Section 108. Board of trustees. – Trustees of educational institutions organized as
shall be deemed to be directors for the purpose of applying the provisions of this non-stock corporations shall not be less than five (5) nor more than fifteen (15):
Code;; and Provided, however, That the number of trustees shall be in multiples of five (5).
3. The stockholders of the corporation shall be subject to all liabilities of directors. Unless otherwise provided in the articles of incorporation on the by-laws, the board
of trustees of incorporated schools, colleges, or other institutions of learning shall, as
The articles of incorporation may likewise provide that all officers or employees or soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
that specified officers or employees shall be elected or appointed by the their number shall expire every year. Trustees thereafter elected to fill vacancies,
stockholders, instead of by the board of directors. occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of
Section 104. Deadlocks. – Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation, if the term shall hold office for five (5) years. A majority of the trustees shall constitute a
directors or stockholders are so divided respecting the management of the quorum for the transaction of business. The powers and authority of trustees shall be
corporation’s business and affairs that the votes required for any corporate action defined in the by-laws.
cannot be obtained, with the consequence that the business and affairs of the For institutions organized as stock corporations, the number and term of directors
corporation can no longer be conducted to the advantage of the stockholders shall be governed by the provisions on stock corporations. (169a)
generally, the Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise of such

power, the Commission shall have authority to make such order as it deems
Religious – Sec. 110-113, Sec. 116 (6)
appropriate, including an order: (1) cancelling or altering any provision contained in
the articles of incorporation, by-laws, or any stockholder’s agreement;; (2) CHAPTER II 
cancelling, altering or enjoining any resolution or act of the corporation or its board
of directors, stockholders, or officers;; (3) directing or prohibiting any act of the RELIGIOUS CORPORATIONS
corporation or its board of directors, stockholders, officers, or other persons party
Section 110. Corporation sole. – For the purpose of administering and managing,
to the action;; (4) requiring the purchase at their fair value of shares of any
as trustee, the affairs, property and temporalities of any religious denomination, sect
stockholder, either by the corporation regardless of the availability of unrestricted
or church, a corporation sole may be formed by the chief archbishop, bishop, priest,
retained earnings in its books, or by the other stockholders;; (5) appointing a
minister, rabbi or other presiding elder of such religious denomination, sect or
provisional director;; (6) dissolving the corporation;; or (7) granting such other relief
church. (154a)
as the circumstances may warrant.
39
Section 111. Articles of incorporation. – In order to become a corporation sole, the purposes. Such corporation may sell or mortgage real property held by it by
chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious obtaining an order for that purpose from the Court of First Instance of the province
denomination, sect or church must file with the Securities and Exchange where the property is situated upon proof made to the satisfaction of the court that
Commission articles of incorporation setting forth the following: notice of the application for leave to sell or mortgage has been given by publication
or otherwise in such manner and for such time as said court may have directed,
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder and that it is to the interest of the corporation that leave to sell or mortgage should
of his religious denomination, sect or church and that he desires to become a be granted. The application for leave to sell or mortgage must be made by petition,
corporation sole;; duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding
elder acting as corporation sole, and may be opposed by any member of the
2. That the rules, regulations and discipline of his religious denomination, sect or religious denomination, sect or church represented by the corporation sole:
church are not inconsistent with his becoming a corporation sole and do not forbid Provided, That in cases where the rules, regulations and discipline of the religious
it;; denomination, sect or church, religious society or order concerned represented by
such corporation sole regulate the method of acquiring, holding, selling and
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder,
mortgaging real estate and personal property, such rules, regulations and discipline
he is charged with the administration of the temporalities and the management of
shall control, and the intervention of the courts shall not be necessary. (159a)
the affairs, estate and properties of his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial jurisdiction;; Section 116. Religious societies. – Any religious society or religious order, or any
diocese, synod, or district organization of any religious denomination, sect or
4. The manner in which any vacancy occurring in the office of chief archbishop,
church, unless forbidden by the constitution, rules, regulations, or discipline of the
bishop, priest, minister, rabbi of presiding elder is required to be filled, according to
religious denomination, sect or church of which it is a part, or by competent
the rules, regulations or discipline of the religious denomination, sect or church to
authority, may, upon written consent and/or by an affirmative vote at a meeting
which he belongs;; and
called for the purpose of at least two-thirds (2/3) of its membership, incorporate for
5. The place where the principal office of the corporation sole is to be established the administration of its temporalities or for the management of its affairs, properties
and located, which place must be within the Philippines. and estate by filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or clerk or
The articles of incorporation may include any other provision not contrary to law for other member of such religious society or religious order, or diocese, synod, or
the regulation of the affairs of the corporation. (n) district organization of the religious denomination, sect or church, setting forth the
following:
Section 112. Submission of the articles of incorporation. – The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the chief 6. The names, nationalities, and residences of the trustees elected by the
archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, religious society or religious order, or the diocese, synod, or district
and accompanied by a copy of the commission, certificate of election or letter of organization to serve for the first year or such other period as may be
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding prescribed by the laws of the religious society or religious order, or of the
elder, duly certified to be correct by any notary public. diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15). (160a)
From and after the filing with the Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or affirmation, and accompanied by the
documents mentioned in the preceding paragraph, such chief archbishop, bishop, e) Meetings – Sec. 25, 49, 53, 54
priest, minister, rabbi or presiding elder shall become a corporation sole and all
Section 25. Corporate officers, quorum. – Immediately after their election, the
temporalities, estate and properties of the religious denomination, sect or church
directors of a corporation must formally organize by the election of a president, who
theretofore administered or managed by him as such chief archbishop, bishop,
shall be a director, a treasurer who may or may not be a director, a secretary who
priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation
shall be a resident and citizen of the Philippines, and such other officers as may be
sole, for the use, purpose, behalf and sole benefit of his religious denomination,
provided for in the by-laws. Any two (2) or more positions may be held concurrently
sect or church, including hospitals, schools, colleges, orphan asylums, parsonages
by the same person, except that no one shall act as president and secretary or as
and cemeteries thereof. (n)
president and treasurer at the same time.
Section 113. Acquisition and alienation of property. – Any corporation sole may
The directors or trustees and officers to be elected shall perform the duties enjoined
purchase and hold real estate and personal property for its church, charitable,
on them by law and the by-laws of the corporation. Unless the articles of
benevolent or educational purposes, and may receive bequests or gifts for such
40
incorporation or the by-laws provide for a greater majority, a majority of the number 3. The directors are accustomed to take informal action with the express or
of directors or trustees as fixed in the articles of incorporation shall constitute a implied acquiescence of all the stockholders;; or
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 4. All the directors have express or implied knowledge of the action in question
shall be valid as a corporate act, except for the election of officers which shall and none of them makes prompt objection thereto in writing.
require the vote of a majority of all the members of the board.
If a director’s meeting is held without proper call or notice, an action taken
Directors or trustees cannot attend or vote by proxy at board meetings. (33a) 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
Section 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or the corporation after having knowledge thereof.
members may be regular or special. (n)

Section 53. Regular and special meetings of directors or trustees. – Regular
meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise. f) Elections of DIR/TEES - Sec. 24, 26, 27
Section 24. Election of directors or trustees. – At all elections of directors or
Special meetings of the board of directors or trustees may be held at any time upon
trustees, there must be present, either in person or by representative authorized to
the call of the president or as provided in the by-laws.
act by written proxy, the owners of a majority of the outstanding capital stock, or if
Meetings of directors or trustees of corporations may be held anywhere in or outside there be no capital stock, a majority of the members entitled to vote. The election
of the Philippines, unless the by-laws provide otherwise. Notice of regular or special must be by ballot if requested by any voting stockholder or member. In stock
meetings stating the date, time and place of the meeting must be sent to every corporations, every stockholder entitled to vote shall have the right to vote in person
director or trustee at least one (1) day prior to the scheduled meeting, unless or by proxy the number of shares of stock standing, at the time fixed in the by-laws,
otherwise provided by the by-laws. A director or trustee may waive this requirement, in his own name on the stock books of the corporation, or where the by-laws are
either expressly or impliedly. (n) silent, at the time of the election;; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he may cumulate
Section 54. Who shall preside at meetings. – The president shall preside at all said shares and give one candidate as many votes as the number of directors to be
meetings of the directors or trustee as well as of the stockholders or members, elected multiplied by the number of his shares shall equal, or he may distribute them
unless the by-laws provide otherwise. (n) on the same principle among as many candidates as he shall see fit: Provided, That
the total number of votes cast by him shall not exceed the number of shares owned
by him as shown in the books of the corporation multiplied by the whole number of
Close corp. – Sec. 97(3), 101 directors to be elected: Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in the by-laws,
Section 97. Articles of incorporation. – The articles of incorporation of a close
members of corporations which have no capital stock may cast as many votes as
corporation may provide:
there are trustees to be elected but may not cast more than one vote for one
3. For a greater quorum or voting requirements in meetings of stockholders or candidate. Candidates receiving the highest number of votes shall be declared
directors than those provided in this Code. elected. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if, for any
Section 101. When board meeting is unnecessary or improperly held. - Unless the reason, no election is held, or if there are not present or represented by proxy, at
by-laws provide otherwise, any action by the directors of a close corporation without the meeting, the owners of a majority of the outstanding capital stock, or if there be
a meeting shall nevertheless be deemed valid if: no capital stock, a majority of the members entitled to vote. (31a)
1. Before or after such action is taken, written consent thereto is signed by all Section 26. Report of election of directors, trustees and officers. – Within thirty (30)
the directors;; or days after the election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the Securities and
2. All the stockholders have actual or implied knowledge of the action and Exchange Commission, the names, nationalities and residences of the directors,
make no prompt objection thereto in writing;; or trustees, and officers elected. Should a director, trustee or officer die, resign or in
any manner cease to hold office, his heirs in case of his death, the secretary, or any
41
other officer of the corporation, or the director, trustee or officer himself, shall the remaining directors or trustees, if still constituting a quorum;; otherwise, said
immediately report such fact to the Securities and Exchange Commission. (n) vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill a vacancy shall be elected
Section 27. Disqualification of directors, trustees or officers. – No person convicted only or the unexpired term of his predecessor in office.
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 Any directorship or trusteeship to be filled by reason of an increase in the number
date of his election or appointment, shall qualify as a director, trustee or officer of of directors or trustees shall be filled only by an election at a regular or at a special
any corporation. (n) meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of
the meeting. (n)
Stock and non-stock corp – manner of voting
Section 111. Articles of incorporation. – In order to become a corporation sole, the
• Which is the default is it proxy or cumulative? chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious
• Proxy voting is allowed – unlike in meeting of the board of directors or trustees, denomination, sect or church must file with the Securities and Exchange
where there is no proxy (BOARD MEETING) Commission articles of incorporation setting forth the following:
o Who are allowed to vote for the directors? SEC 6 of the Corporation
4. The manner in which any vacancy occurring in the office of chief
Code – those with voting shares
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
o Memorize Sec 6 that allows voting of non voting shares
filled, according to the rules, regulations or discipline of the religious
• Straight Voting vs. Cumulative Voting denomination, sect or church to which he belongs;; and

Removal – Sec. 28 Section 114. Filling of vacancies. – The successors in office of any chief
Section 28. Removal of directors or trustees. – Any director or trustee of a corporation archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole
may be removed from office by a vote of the stockholders holding or representing at shall become the corporation sole on their accession to office and shall be permitted
least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non- to transact business as such on the filing with the Securities and Exchange
stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Commission of a copy of their commission, certificate of election, or letters of
Provided, That such removal shall take place either at a regular meeting of the appointment, duly certified by any notary public.
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi
propose such removal at the meeting. A special meeting of the stockholders or or presiding elder of any religious denomination, sect or church incorporated as a
members of a corporation for the purpose of removal of directors or trustees, or any corporation sole, the person or persons authorized and empowered by the rules,
of them, must be called by the secretary on order of the president or on the written regulations or discipline of the religious denomination, sect or church represented
demand of the stockholders representing or holding at least a majority of the by the corporation sole to administer the temporalities and manage the affairs,
outstanding capital stock, or, if it be a non-stock corporation, on the written demand estate and properties of the corporation sole during the vacancy shall exercise all
of a majority of the members entitled to vote. Should the secretary fail or refuse to call the powers and authority of the corporation sole during such vacancy. (158a)
the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing the demand.
Notice of the time and place of such meeting, as well as of the intention to propose Rev. Ao-as v. CA June 20, 2006
such removal, must be given by publication or by written notice prescribed in this • Whether or not the Manner of election for the Church, can the CA direct the
Code. Removal may be with or without cause: Provided, That removal without cause manner of election
may not be used to deprive minority stockholders or members of the right of LCP By-Laws provide for a special procedure for the election of its directors. This was the
representation to which they may be entitled under Section 24 of this Code. (n) procedure followed by both the [Batong group] and the [Ao-As group].

Vacancy – Sec. 29;; 111(4) and 114 on corp. sole "Section 2. Composition of the Board of Directors of LCP.
a. The Board of Directors shall be composed of the President of LCP and the
Section 29. Vacancies in the office of director or trustee. – Any vacancy occurring President and lay representative of each District.
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
42
b. Newly elected members of the LCP Board of Directors shall assume their in the VVCC Board in a holdover capacity cannot be considered as extending his term.
positions immediately after LCP conventions or the October LCP Board of This holdover period, however, is not to be considered as part of his term, which, as
Directors’ meeting in the year in which they are elected." declared, had already expired.

However, Section 24 of the Corporation Code provides that "[a]t all elections of directors With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms
or trustees, there must be present, either in person or by representative to act by written of Section 29of the Corporation Code, must be filled by the stockholders of VVCC in a
proxy, x x x if there be no capital stock, a majority of the members entitled to vote." regular or special meeting called for the purpose. As correctly pointed out by the RTC,
when remaining members of the VVCC Board elected Ramirez to replace Makalintal,
It is clear from Section 24 that in the election of the trustees of a non-stock corporation, it there was no more unexpired term to speak of, as Makalintal’s one-year term had already
is necessary that at least "a majority of the members entitled to vote" must be present at expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving
the meeting held for the purpose. It follows that trustees cannot be elected by zones or lies with the VVCC’s stockholders, not the remaining members of its board of directors.
regions, each zone or region electing independently and separately a member of the
board of trustees of the corporation, such method being violative of Section 24. (SEC 2) Officers – Sec. 25, 92 (par. 3), 97 (last par.), 26, 27, 31, 32
Opinions, Jan. 30, 1969, April 1, 1981). The election of the directors by district or regions
as provided in the LCP By-Laws where a majority of the members are not present is Sec. 25
inconsistent with the Corporation [Code] and must be struck down as invalid. Section 25. Corporate officers, quorum. – Immediately after their election, the
Consequently, the directors elected by district cannot be considered as bona fide directors of a corporation must formally organize by the election of a president, who
directors. Even the election of LCP officers in the SEC-SICD sponsored national shall be a director, a treasurer who may or may not be a director, a secretary who

convention of the LCP must be considered as invalid. shall be a resident and citizen of the Philippines, and such other officers as may be

provided for in the by-laws. Any two (2) or more positions may be held concurrently
In any case, the stipulation in the By-Laws is not contrary to the Corporation Code. Section by the same person, except that no one shall act as president and secretary or as
89 of the Corporation Code pertaining to non-stock corporations provides that "(t)he right president and treasurer at the same time.
of the members of any class or classes (of a non-stock corporation) to vote may be limited,
broadened or denied to the extent specified in the articles of incorporation or the by-laws." The directors or trustees and officers to be elected shall perform the duties enjoined
This is an exception to Section 6 of the same code where it is provided that "no share may on them by law and the by-laws of the corporation. Unless the articles of incorporation
be deprived of voting rights except those classified and issued as ‘preferred’ or or the by-laws provide for a greater majority, a majority of the number of directors or
‘redeemable’ shares, unless otherwise provided in this Code." The stipulation in the By- trustees as fixed in the articles of incorporation shall constitute a quorum for the
Laws providing for the election of the Board of Directors by districts is a form of limitation transaction of corporate business, and every decision of at least a majority of the
on the voting rights of the members of a non-stock corporation as recognized under the directors or trustees present at a meeting at which there is a quorum shall be valid as
aforesaid Section 89. Section 24, which requires the presence of a majority of the a corporate act, except for the election of officers which shall require the vote of a
members entitled to vote in the election of the board of directors, applies only when the majority of all the members of the board.
directors are elected by the members at large, such as is always the case in stock
corporations by virtue of Section 6.

Sec. 92 (par. 3)
Valle Verde CC v. Africa Sept. 4, 2009
Section 92. Election and term of trustees. – Unless otherwise provided in the articles
Section 23of the Corporation Code declares that "the board of directors shall hold office of incorporation or the by-laws, the board of trustees of non-stock corporations, which
for one (1) year until their successors are elected and qualified," we construe the provision may be more than fifteen (15) in number as may be fixed in their articles of
to mean that the term of the members of the board of directors shall be only for one year;; incorporation or by-laws, shall, as soon as organized, so classify themselves that the
their term expires one year after election to the office. The holdover period – that time term of office of one-third (1/3) of their number shall expire every year;; and
from the lapse of one year from a member’s election to the Board and until his successor’s subsequent elections of trustees comprising one-third (1/3) of the board of trustees
election and qualification – is not part of the director’s original term of office, nor is it a new shall be held annually and trustees so elected shall have a term of three (3) years.
term;; the holdover period, however, constitutes part of his tenure. Corollary, when an Trustees thereafter elected to fill vacancies occurring before the expiration of a
incumbent member of the board of directors continues to serve in a holdover capacity, it particular term shall hold office only for the unexpired period.
implies that the office has a fixed term, which has expired, and the incumbent is holding
the succeeding term. No person shall be elected as trustee unless he is a member of the corporation.

After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintal’s term of office is deemed to have already expired. That he continued to serve
43
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a six (6) years, or a violation of this Code committed within five (5) years prior to the
non-stock corporation may be directly elected by the members. (n) date of his election or appointment, shall qualify as a director, trustee or officer of any
corporation. (n)

Sec. 97 (last par.)
Section 97. Articles of incorporation. – The articles of incorporation of a close Sec. 31, 32
Section 31. Liability of directors, trustees or officers. - Directors or trustees who
1. For a classification of shares or rights and the qualifications for owning or willfully and knowingly vote for or assent to patently unlawful acts of the corporation
holding the same and restrictions on their transfers as may be stated therein, or who are guilty of gross negligence or bad faith in directing the affairs of the
subject to the provisions of the following section;; corporation or acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all damages resulting
2. For a classification of directors into one or more classes, each of whom therefrom suffered by the corporation, its stockholders or members and other
may be voted for and elected solely by a particular class of stock;; and persons.
3. For a greater quorum or voting requirements in meetings of stockholders When a director, trustee or officer attempts to acquire or acquire, in violation of his
or directors than those provided in this Code. 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
The articles of incorporation of a close corporation may provide that the business in his own behalf, he shall be liable as a trustee for the corporation and must account
of the corporation shall be managed by the stockholders of the corporation rather for the profits which otherwise would have accrued to the corporation. (n)
than by a board of directors. So long as this provision continues in effect:
Section 32. Dealings of directors, trustees or officers with the corporation. – A
1. No meeting of stockholders need be called to elect directors;; 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
2. Unless the context clearly requires otherwise, the stockholders of the
present:
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code;; and 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;;
3. The stockholders of the corporation shall be subject to all liabilities of
directors. 2. That the vote of such director or trustee was not necessary for the approval of the
contract;;
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or 3. That the contract is fair and reasonable under the circumstances;; and
appointed by the stockholders, instead of by the board of directors.
4. That in case of an officer, the contract has been previously authorized by the board
of directors.
Sec. 26, 27
Where any of the first two conditions set forth in the preceding paragraph is absent,
Section 26. Report of election of directors, trustees and officers. – Within thirty (30) in the case of a contract with a director or trustee, such contract may be ratified by
days after the election of the directors, trustees and officers of the corporation, the the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
secretary, or any other officer of the corporation, shall submit to the Securities and capital stock or of at least two-thirds (2/3) of the members in a meeting called for the
Exchange Commission, the names, nationalities and residences of the directors, purpose: Provided, That full disclosure of the adverse interest of the directors or
trustees, and officers elected. Should a director, trustee or officer die, resign or in any trustees involved is made at such meeting: Provided, however, That the contract is
manner cease to hold office, his heirs in case of his death, the secretary, or any other fair and reasonable under the circumstances. (n)
officer of the corporation, or the director, trustee or officer himself, shall immediately
report such fact to the Securities and Exchange Commission. (n) LECTURE
• Marc ii vs Joson – cite Matling case – test to determine if a person is considered
Section 27. Disqualification of directors, trustees or officers. – No person convicted a corporate officer
by final judgment of an offense punishable by imprisonment for a period exceeding • Issue whether an officer acts within corporate powers but beyond the authority
44
granted by the board à The doctrine of apparent authority was not applicable in this case because the
o Principal of Agecny – can the officer bind the corporation president of the company was given a specific authority by virtue of a board
§ Ultra vires acts of officer but within corporate powers resolution to sell a particular land. Any actions of the president outside such vested
• Intra vires act of by laws, AOI or board of director – authority shall not bind the corporation with third party. The apparent power of an
matter of agency, did the officer bind the corporation? agent is to be determined by the acts of the principal and not by the acts of the
à if impliedly(Acts of corporation) or expressly agent.
ratified by the board, not timely object to the act,
board holds out to the public that he is authorized Bd. Of Liquidators v. Heirs of Kalaw 20 SCRA 987
(doctrine of ostensible or apparent authority) They were done with implied authority from the BOD. These previous contracts, it should
• Close Corporation – no need to ratify there is be stressed, were signed by Kalaw without prior authority from the board. Said contracts
presumption that the board of directors know the acts were known all along to the board members. Nothing was said by them. The aforesaid
§ Ultra vires acts of corporation - void contracts stand to prove one thing. Obviously NACOCO board met the difficulties
attendant to forward sales by leaving the adoption of means to end, to the sound discretion
Yu Chuck v. Kong Li Po 46 Phil 608 of NACOCO's general manager Maximo M. Kalaw.
The general rule is that the power to bind a corporation by contract lies with its board of
directors or trustees, but this power may either expressly or impliedly be delegated to Settled jurisprudence has it that where similar acts have been approved by the directors
other officers or agents of the corporation, and it is well settled that except where the as a matter of general practice, custom, and policy, the general manager may bind the
authority of employing servants and agent is expressly vested in the board of directors or company without formal authorization of the board of directors. In varying language,
trustees, an officer or agent who has general control and management of the corporation's existence of such authority is established, by proof of the course of business, the usages
business, or a specific part thereof, may bind the corporation by the employment of such and practices of the company and by the knowledge which the board of directors has, or
agent and employees as are usual and necessary in the conduct of such business. But must be presumed to have, of acts and doings of its subordinates in and about the affairs
the contracts of employment must be reasonable. of the corporation.

In the case at bar, although the court affirmed the power to bind the corporation may be Authorities, great in number, are one in the idea that "ratification by a corporation of an
made by an officer or agent, the contract of employment in the printing business is not unauthorized act or contract by its officers or others relates back to the time of the act or
reasonable for it was too long and onerous to the business. contract ratified, and is equivalent to original authority;;" and that "[t]he corporation and the
other party to the transaction are in precisely the same position as if the act or contract
Woodchild Holdings v. RoxasElectric 436 SCRA 235 had been authorized at the time." The language of one case is expressive: "The adoption
Generally, the acts of the corporate officers within the scope of their authority are binding or ratification of a contract by a corporation is nothing more nor less than the making of
on the corporation. However, under Article 1910 of the New Civil Code, acts done by such an original contract. The theory of corporate ratification is predicated on the right of a
officers beyond the scope of their authority cannot bind the corporation unless it has corporation to contract, and any ratification or adoption is equivalent to a grant of prior
ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts authority.
entered into by corporate officers beyond the scope of authority are unenforceable against
the corporation unless ratified by the corporation. Inter-Asia Investment v. CA June 10, 2003
The general rule is that, in the absence of authority from the board of directors, no person,
Evidently, Roxas was not specifically authorized under the said resolution to grant a right not even its officers, can validly bind a corporation. (see sec. 23)
of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to
the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot
No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion
of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither An officer of a corporation who is authorized to purchase the stock of another corporation
may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A- has the implied power to perform all other obligations arising therefrom, such as payment
3-B-2 to the petitioner “on such terms and conditions which he deems most reasonable of the shares of stock. By allowing its president to sign the Agreement on its behalf,
and advantageous.” The general rule is that the power of attorney must be pursued within petitioner clothed him with apparent capacity to perform all acts which are expressly,
legal strictures, and the agent can neither go beyond it;; nor beside it. The act done must impliedly and inherently stated therein.
be legally identical with that authorized to be done. In sum, then, the consent of the
respondent to the assailed provisions in the deed of absolute sale was not obtained;; Zamboanga Transpo. V. Bachrach Motors 52 Phil 244
hence, the assailed provisions are not binding on it. When the president of a corporation, who is one of the principal stockholders and at the
same time its general manager, auditor, attorney or legal adviser, is empowered by its by-
45
laws to enter into chattel mortgage contracts, subject to the approval of the board of The Court ruled that under such provision, it is clear upon whom the service of summons
directors, and enters into such contracts with the tacit approval of two other members of should be made. The designation of persons or officers who are authorized to accept
the board of directors, one of whom is also a principal shareholder, both of whom, together summons for a domestic corporation or partnership is now limited and more clearly
with the president, form a majority, and said corporation takes advantage of the benefits specified. The rule now states "general manager" instead of only "manager";; "corporate
afforded by said contract, such acts are equivalent to an implied ratification of said contract secretary" instead of "secretary";; and "treasurer" instead of "cashier." The phrase "agent,
by the board of directors and binds the corporation even if not formally approved by said or any of its directors" is conspicuously deleted in the new rule. In this case, since the
board of directors as required by the by-laws of the aforesaid corporation. summons was served upon a branch manager, who is not authorized to accept the same,
there was improper service of summons.
Marc ll v. Joson Dec. 12, 2011
Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in CAGAYAN VALLEY DRUG CORP. v. CIR Feb. 13, 2008
order to be considered as a corporate office. Thus, the creation of an office pursuant to or In several cases the court has recognized the authority of some corporate officers to sign
under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office. the verification and certification against forum shopping. In these cases, the court allowed
the: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3)
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an
the corporate officers enumerated in the by-laws are the exclusive Officers of the Employment Specialist in a labor case, to sign said documents, without need of a board
corporation and the Board has no power to create other Offices without amending first the resolution.
corporate [b]y-laws. However, the Board may create appointive positions other than
the positions of corporate Officers, but the persons occupying such positions are Also in this case, an authorization was belatedly submitted. Although belated, the court
not considered as corporate officers within the meaning of Section 25 of the still accepts it as a valid and which it had cured the procedural infirmities of the case.
Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties are 3) Board Committees versus Executive Committee - Sec. 35
to be determined by the Board of Directors/Trustees.
Section 35. Executive committee. – The by-laws of a corporation may create an
Matling Industrial and Commercial Corporation v. Coros: General Manager was not executive committee, composed of not less than three members of the board, to be
specifically mentioned in the roster of corporate officers in its corporate by-laws. The appointed by the board. Said committee may act, by majority vote of all its members,
enabling clause in petitioner corporation’s by-laws empowering its Board of Directors to on such specific matters within the competence of the board, as may be delegated
create additional officers, i.e., General Manager, and the alleged subsequent passage of to it in the by-laws or on a majority vote of the board, except with respect to:
a board resolution to that effect cannot make such position a corporate office. Matling (1) approval of any action for which shareholders’ approval is also required;;
clearly enunciated that the board of directors has no power to create other corporate (2) the filing of vacancies in the board;;
offices without first amending the corporate by-laws so as to include therein the newly (3) the amendment or repeal of by-laws or the adoption of new by-laws;;
created corporate office. Though the board of directors may create appointive positions (4) the amendment or repeal of any resolution of the board which by its
other than the positions of corporate officers, the persons occupying such positions cannot express terms is not so amendable or repealable;; and
40
be viewed as corporate officers under Section 25 of the Corporation Code. In view (5) a distribution of cash dividends to the shareholders.
thereof, this Court holds that unless and until petitioner corporation’s by-laws is amended

for the inclusion of General Manager in the list of its corporate officers, such position
NOTE:
cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code. • Different from finance committee, special projects committee
• In effect, it is also the board of directors à since 3 of them are required to be
Matling safeguards the constitutionally enshrined right of every employee to security of part of the EC
tenure. To allow the creation of a corporate officer position by a simple inclusion in the • Regular Meeting of the Stockholders is ANNUALLY, while BOD is monthly
corporate by-laws of an enabling clause empowering the board of directors to do so can • The Corporation not require creation of executive committee by the by laws may
result in the circumvention of that constitutionally well-protected right. require
• PURPOSE?: Board of Directors are not employees of the corporation
E.B. Villarosa v. Benito 312 SRA 65 (1999) o They are the – COO, CEO, CFO, general manager à they will be
Section 13, Rule 14 of the Rules of Court which provided that: Service upon private discussing matters to the corporation
domestic corporation or partnership, If the defendant is a corporation organized under the o Members who are employed à they are the one conversant with the
laws of the Philippines or a partnership duly registered, service may be made on the going of the businesss à at least 3 of BOD be members of Executive
president, manager, secretary, cashier, agent, or any of its directors. Member (MAY, not mandatory
o Usually done by big companies
46
o TAKE NOTE: of cases that cannot be left to the Executive Committee executive committee under Sec 35 à in this case despite being called Executive
Committee if its function is not those contemplated by Sec 25 then the Board of
Directors may create the said committee
Hayes v. Canada Atlantic & Plant S.S. Co., Ltd. (1910) US Circuit CA, First Circuit o The acts of Committee created by the BOD à needs approval of the BOD of
181 F. 289 ratified by the BOD
No, because the Executive Committee usurped the powers vested in the board and the o Board of Directors may create executive committee, outside of SECTION 35,
stockholders. If their actions were valid, it would put the corporation in a situation wherein business judgment rule
only two men, acting in their own pecuniary interests, would have absorbed the powers of
the entire corporation. 4) Stockholders –
"Full powers" should be interpreted only in the ordinary conduct of a) Sec. 23 and other provisions requiring SHs’ action
business and not total abdication of board and stockholders' powers to the
Executive Committee. "FULL POWERS" does not mean unlimited or absolute Section 23. The board of directors or trustees. – Unless otherwise provided in this
power. Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
NOTE: and held by the board of directors or trustees to be elected from among the holders
o EXECUTIVE VOTING – voting is by the majority of stocks, or where there is no stock, from among the members of the corporation,
o REVOKE DELEGATED POWER à 2/3 of stockholders voting share who shall hold office for one (1) year until their successors are elected and qualified.
o HOW TO APPOINT? (28a)
o Amend by-laws to create an executive committee
o Board of Directors vote Every director must own at least one (1) share of the capital stock of the corporation
o Majority of the Stockholders vote of which he is a director, which share shall stand in his name on the books of the
o HAYES CASE: corporation. Any director who ceases to be the owner of at least one (1) share of
o Function of the EO should be clearly stated à not blanket description the capital stock of the corporation of which he is a director shall thereby cease to
o Abuse of powerà blanket delegation à which should not have granted be a director. Trustees of non-stock corporations must be members thereof. A
power to EO to amend the by laws. majority of the directors or trustees of all corporations organized under this Code

Filipinas Port Services, Inc. v. Go 518 SCRA 453 (2007)
b) Meetings – Sec. 49, 50, 51, 52, 54, 55, 56, 57, 93

The bylaws of the corporation are silent as to the creation by its board of directors of an TITLE VI 
15
executive committee. Under Section 35 of the Corporation Code, the creation of an
executive committee must be provided for in the bylaws of the corporation. MEETINGS

Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the Section 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or
creation of the executive committee by the board of directors is illegal or unlawful. One members may be regular or special. (n)
reason is the absence of a showing as to the true nature and functions of said executive Section 50. Regular and special meetings of stockholders or members. - Regular
committee considering that the "executive committee," referred to in Section 35 of the meetings of stockholders or members shall be held annually on a date fixed in the
Corporation Code which is as powerful as the board of directors and in effect acting for by-laws, or if not so fixed, on any date in April of every year as determined by the
the board itself, should be distinguished from other committees which are within the
board of directors or trustees: Provided, That written notice of regular meetings shall
competency of the board to create at anytime and whose actions require ratification and be sent to all stockholders or members of record at least two (2) weeks prior to the
16
confirmation by the board. Another reason is that, ratiocinated by both the two (2) courts meeting, unless a different period is required by the by-laws.
below, the Board of Directors has the power to create positions not provided for in Filport’s
bylaws since the board is the corporation’s governing body, clearly upholding the power Special meetings of stockholders or members shall be held at any time deemed
of its board to exercise its prerogatives in managing the business affairs of the corporation. 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
NOTE: provided in the by-laws.
o The executive committee was not under those Sec 35, they should already be
created by the By-Laws
o Can name any committee, but must look at the function, it may not be the
47
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or co-owners, authorizing one or some of them or any other person to vote such share
member. or shares: Provided, That when the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said shares or appoint a proxy
Whenever, for any cause, there is no person authorized to call a meeting, the therefor. (n)
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 Section 57. Voting right for treasury shares. – Treasury shares shall have no voting
stockholder or member directing him to call a meeting of the corporation by giving right as long as such shares remain in the Treasury. (n)
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. (24, 26) Section 93. Place of meetings. – The by-laws may provide that the members of a
non-stock corporation may hold their regular or special meetings at any place even
Section 51. Place and time of meetings of stockholders of members. –
outside the place where the principal office of the corporation is located: Provided,
Stockholder’s or member’s meetings, whether regular or special, shall be held in
That proper notice is sent to all members indicating the date, time and place of the
the city or municipality where the principal office of the corporation is located, and
meeting: and Provided, further, That the place of meeting shall be within the
if practicable in the principal office of the corporation: Provided, That Metro Manila
Philippines. (n)
shall, for purposes of this section, be considered a city or municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein. NOTE: Powers Vested in the Stockholders à need votes of stockholders to be valid
o Sec 16 amendment of articles
All proceedings had and any business transacted at any meeting of the o Sec 38, 40, 42, 43, 44, 46
stockholders or members, if within the powers or authority of the corporation, shall o Mergers and Consolidations
be valid even if the meeting be improperly held or called, provided all the o 120 – dissolution, shortening of corporate terms
stockholders or members of the corporation are present or duly represented at the o QUORUM – generally should be majority, can be adjourned if here is still no
meeting. (24 and 25) quorum. If repeated failure, they can petition the SEC for a management
committee
Section 52. Quorum in meetings. – Unless otherwise provided for in this Code or o Amendments of the AOI à make sure that the quorum is 2/3, check the by-laws
in the by-laws, a quorum shall consist of the stockholders representing a majority as to requirement to have a valid voting
of the outstanding capital stock or a majority of the members in the case of non- o WHO CAN VOTE?
stock corporations. (n) o Registered holder, or the transferor or the unregistered stocks
o PROXY à can vote, but based on the authority granted to it
o BOARD OF DIRECTOR/TRUSTEE can:
§ Trustee can vote in membership meeting? (non-stock) à YES,
Section 54. Who shall preside at meetings. – The president shall preside at all he can vote as a member, since a board of trustees meeting
meetings of the directors or trustee as well as of the stockholders or members, is different from members meeting. He can vote since he is a
unless the by-laws provide otherwise. (n) member (Section 23) and as to Board of Director
o PCGG à who votes?
Section 55. Right to vote of pledgors, mortgagors, and administrators. – In case of o Republic vs COCOFED
pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall
have the right to attend and vote at meetings of stockholders, unless the pledgee REPUBLIC vs PCGG
or mortgagee is expressly given by the pledgor or mortgagor such right in writing
which is recorded on the appropriate corporate books. (n) The general rule is that the sequestered shares are voted by the registered holders
because voting is an act of dominion, and PCGG is only a conservator;; the exception is
Executors, administrators, receivers, and other legal representatives duly appointed
when the two tiered test has been complied with:
by the court may attend and vote in behalf of the stockholders or members without
need of any written proxy. (27a)
(1) prima facie evidence that said shares are ill-gotten wealth;; (2) imminent danger of
Section 56. Voting in case of joint ownership of stock. – In case of shares of stock dissipation - PCGG can instead vote
owned jointly by two or more persons, in order to vote the same, the consent of all
the co-owners shall be necessary, unless there is a written proxy, signed by all the The general rule, apparently, does not find application in this case not because of the
compliance to the two-tiered test, but because of the "public character" of these shares.
48
Public character means that: of the estate iseffected, the stocks of the decedent are held by the administrator
or executor. On the other hand,membership in and all rights arising from a
(1) government shares are taken over by private persons and registered them in their own nonstock corporation are personal and non-transferable,unless the articles of
names;; and (2) these shares, which were acquired with public funds, landed in private incorporation or the bylaws of the corporation provide otherwise. In other words,
hands. thedetermination of whether or not "dead members" are entitled to exercise their voting
rights (through theirexecutor or administrator), depends on those articles of incorporation
or bylaws. Under the By-Laws of GCHS, membership in the corporation shall, among
The rationale: Legal fiction must yield to truth;; prima facie beneficial owner should be given
others, be terminated by thedeath of the member. Applying Section 91, dead members
privilege of enjoying the rights flowing from the prima facie fact of ownership
who are dropped from the membership rosterin the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted indetermining
the requisite vote in corporate matters or the requisite quorum for the annual
Tan v. Sycip G.R. 153468 (Aug.17, 2006) members’meeting. With 11 remaining members, the quorum in the present case should
Remaining members of the board of trustees of GCHS may convene and fill up the be 6. Therefore, there being a quorum, the annual members’ meeting was valid
vacancies in the board
NOTE:
Except as provided, the vote necessary to approve a particular corporate act as provided
STOCK CORPORATION NON STOCK CORPORATION
in this Code shall be deemed to refer only to stocks with voting rights:
rights of a qualified shareholder or only those who are actual, living
1. Amendment of the articles of incorporation;;
member is the right to vote -- either members with voting rights shall be
2. Adoption and amendment of by-laws;;
personally or by proxy -- for the directors counted in determining the existence
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
or trustees who are to manage the of a quorum during
substantially all of the corporation property;;
corporateaffairs. members’meetings. Dead members
4. Incurring, creating or increasing bonded indebtedness;;
shall not be counted
5. Increase or decrease of capital stock;;
The right to vote is inherent in and the voting rights attach to
6. Merger or consolidation of the corporation with another corporation
incidental to the ownership of corporate membership
or other corporations;;
stocks.
7. Investment of corporate funds in another corporation or business in
accordance with this Code;; and only those who are actual members
8. Dissolution of the corporation. with voting rights should be counted.
In stock corporations, the executor or membership in and all rights
administrator duly appointed by the arising from a nonstock
In a non-stock corporation, should dead members still be counted in determination of Court is vestedwith the legal title to the corporation are personal and non-
quorum forpurposed of conducting the Annual Members’ Meeting? à For stock stock and entitled to vote it. Until a transferable,unless the articles of
corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on settlement and division of the estate incorporation or the bylaws of the
the number of outstanding voting stocks. For nonstock corporations, only those who are iseffected, the stocks of the corporation provide otherwise. In
actual, living members with voting rights shall be counted in determining the existence of decedent are held by the other words, thedetermination of
a quorum during members’meetings. Dead members shall not be counted. One of the administrator or executor. whether or not "dead members" are
most important rights of a qualified shareholder or member is the right to entitled to exercise their voting rights
vote -- either personally or by proxy -- for the directors or trustees who are to manage the (through theirexecutor or
corporateaffairs. The right to vote is inherent in and incidental to the ownership of administrator), depends on those
corporate stocks. In nonstockcorporations, the voting rights attach to membership. The articles of incorporation or bylaws.
principle for determining the quorum for stock corporations is applied by analogy to Under the By-Laws of GCHS,
nonstock corporations, only those who are actual members with voting rights should be membership in the corporation shall,
counted. Under Section 52, the majority of the members representing the actual number among others, be terminated by
of voting rights, not the number or numerical constant that may originally be specified in thedeath of the member
thearticles of incorporation, constitutes the quorum.Having thus determined that the  
quorum in a members’ meeting is to be reckoned as the actual numberof members of the
corporation, the next question to resolve is what happens in the event of the death ofone c) Deadlocks in close corps – Sec. 104;; provisional director
of them. In stock corporations, the executor or administrator duly appointed by the Court Section 104. Deadlocks. – Notwithstanding any contrary provision in the articles of
is vestedwith the legal title to the stock and entitled to vote it. Until a settlement and division incorporation or by-laws or agreement of stockholders of a close corporation, if the
49
directors or stockholders are so divided respecting the management of the • Sec 89 à refer to general voting matters only. 1 member 1 vote
corporation’s business and affairs that the votes required for any corporate action • Differentiate from Section 24 à Section 24 to election of trustees wherein the
cannot be obtained, with the consequence that the business and affairs of the members vote their trustees, the general rule that members can cast as many
corporation can no longer be conducted to the advantage of the stockholders vote as there is trustees.
generally, the Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise of such STA. CLARA HOMEOWNERS v. GASTON Jan 23, 2002
power, the Commission shall have authority to make such order as it deems Private respondents cannot be compelled to become members of the SCHA by the simple
appropriate, including an order: (1) cancelling or altering any provision contained in expedient of including them in its Articles of Incorporation and By-laws without their
the articles of incorporation, by-laws, or any stockholder’s agreement;; (2) cancelling, express or implied consent. True, it may be to the mutual advantage of lot owners in a
altering or enjoining any resolution or act of the corporation or its board of directors, subdivision to band themselves together to promote their common welfare. But that is
stockholders, or officers;; (3) directing or prohibiting any act of the corporation or its possible only if the owners voluntarily agree, directly or indirectly, to become members of
board of directors, stockholders, officers, or other persons party to the action;; (4) the association.
requiring the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its When private respondents purchased their property in 1974 and obtained Transfer
books, or by the other stockholders;; (5) appointing a provisional director;; (6) Certificates of Title Nos. T-126542 and T-127462 for Lots 11 and 12 of Block 37 along
dissolving the corporation;; or (7) granting such other relief as the circumstances may San Jose Avenue in Sta. Clara Subdivision, there was no annotation showing their
warrant. automatic membership in the SCHA. Thus, no privity of contract arising from the title
certificate exists between petitioners and private respondents. Further, the records are
A provisional director shall be an impartial person who is neither a stockholder nor bereft of any evidence that would indicate that private respondents intended to become
a creditor of the corporation or of any subsidiary or affiliate of the corporation, and members of the SCHA. Prior to the implementation of the aforesaid Resolution, they and
whose further qualifications, if any, may be determined by the Commission. A the other homeowners who were not members of the association were issued non-
provisional director is not a receiver of the corporation and does not have the title member gate pass stickers for their vehicles. This fact has not been disputed by
and powers of a custodian or receiver. A provisional director shall have all the rights petitioners. Thus, the SCHA recognized that there were subdivision landowners who were
and powers of a duly elected director of the corporation, including the right to notice not members thereof, notwithstanding the provisions of its Articles of Incorporation and
of and to vote at meetings of directors, until such time as he shall be removed by By-laws.
order of the Commission or by all the stockholders. His compensation shall be
determined by agreement between him and the corporation subject to approval of PADCOM v. ORTIGAS CENTER May 9, 2002
the Commission, which may fix his compensation in the absence of agreement or in As lot owner, PADCOM is a regular member of the Association. No application for
the event of disagreement between the provisional director and the corporation. membership is necessary. If at all, acceptance by the Board of Directors is a ministerial
function considering that PADCOM is deemed to be a regular member upon the
acquisition of the lot pursuant to the automatic membership clause annotated in the
5) Members – Sec. 89 Certificate of Title of the property and the Deed of Transfer. Neither are we convinced by
CHAPTER I MEMBERS PADCOM's contention that the automatic membership clause is a violation of its freedom
of association. PADCOM was never forced to join the association. It could have avoided
Section 89. Right to vote. – The right of the members of any class or classes to such membership by not buying the land from TDC. Nobody forced it to buy the land when
vote may be limited, broadened or denied to the extent specified in the articles of it bought the building with the annotation of the condition or lien on the Certificate of Title
incorporation or the by-laws. Unless so limited, broadened or denied, each member, thereof and accepted the Deed. PADCOM voluntarily agreed to be bound by and respect
regardless of class, shall be entitled to one vote. the condition, and thus to join the Association.
Unless otherwise provided in the articles of incorporation or the by-laws, a member VIOLATION OF THE FREEDOM OF THE RIGHT TO ASSOCIATE
may vote by proxy in accordance with the provisions of this Code. (n) STA CLARA PADCOM
Voting by mail or other similar means by members of non-stock corporations may No Privity to contract à freedom to not There is privity of contract as to the
be authorized by the by-laws of non-stock corporations with the approval of, and associate automatic membership in the association.
under such conditions which may be prescribed by, the Securities and Exchange
Commission.
SEC Memo Circ. No. 4, series of 2004.
NOTE: VOTING BY MAIL
• Proxy voting is allowed
50
• stockholders attending stockholder' meetings shall vote their shares as ii. Adoption and amendment of by-laws;;  
provided by existing laws iii. Sale, lease, exchange, mortgage, pledge or other disposition of all or
• stockholders shall have the right to vote at all stockholders' meetings in substantially all of the corporate property;;  
person or by proxy. The stockholder may deliver, in person or by mail, his iv. Incurring, creating or increasing bonded indebtedness;;  
proxy vote directly to the corporation v. Increase or decrease of capital stock;;  
• in Case provided In Section 16 of the Corporation Code of the the vi. Merger or consolidation of the corporation with another corporation or other
philippines where written assent is allowed, the same number of votes corporations;;  
shall be observed and voting can likewise be done by proxy
vii. Investment of corporate funds in another corporation or business in accordance
• The stockholder may designate any person of his choice to act as his
with this Code;; and  
proxy. Absent such designation, the Chairman of the meeting shall be
viii. Dissolution of the corporation.
deemed authorized and hereby directed to cast the vote as indicated by
2) For purposes of the foregoing, the phrase “outstanding capital stock” as
the voting stockholder or his proxy
defined under Section 137 of the Corporation Code shall be deemed to
• The proxy must be dated. If a duly accomplished and executed proxy is
include preferred shares.
undated, the postmark or date of dispatch indicated in the electronic mail
or, if not mailed, its actual date of presentation, shall be considered as the
date of proxy
• Where the corporation receives more than one (1) proxy from the same DEFAULT:
stockholder and they are all undated, the postmark or electronic dates • What is
shall be considered. If the proxies are mailed on the same date, the one Distinguish from Sec. 24 (election of trustees)
bearing the latest time of day indicated in the postmark or latest time of
dispatch appearing in the electronic mail shall prevail. If the proxies are
not mailed, then the time of their actual presentation is considered. That OUTLINE 6
which is presented last will be recognized.
• If the stockholder intends to designate several proxies, the number of
shares of stock to be represented by each proxy shall be specifically Xlll. DUTIES OF DIRECTORS &CONTROLLING STOCKHOLDERS
indicated in the proxy form. If some of the proxy forms do not indicate the 3-fold duty of directors --- Hustle, Diligence, Loyalty, Obedience
number of shares, the total shareholdings of the stockholder shall be tallied Sec. 21 of NCC
and the balance thereof, if any, shall be alloted to the holder of the proxy CHAPTER 2:HUMAN RELATIONS (n)
form without the number of shares. If all are blank, the stocks shall be
distributed equally among the proxies. The number of persons to be Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
designated as proxies may be limited by the By-laws contrary to morals, good customs or public policy shall compensate the latter for the
damage.
ONE SHARE- ONE VOTE POLICY
1) Pursuant to Section 24 of the Corporation Code, one share is entitled to 1
vote. Voting shall always be in the basis of the number of shares and not Diligence
on the number of stockholders present in the stockholders' meeting. - The directors and officers are required to exercise due care in the performance of
2) Common shares shall have complete voting rights and such shares cannot their functions.
be deprived of such rights except as provided by law - Negligence on their part proximately causing damage to the corporation will make
3) Each common share shall be equal in all respects to every other common them liable.
share. Corporations are hereby prohibited from issuing multiple voting and
non-voting common shares nor can they limit the maximum number of Loyalty
votes per stockholder irrespective of the number of shares he holds. - The directors and officers owes loyalty and allegiance to the corporation – a loyalty
that is undivided and allegiance that is influenced by no consideration other than the
OUTSTANDING CAPITAL STOCK welfare of the corporation.
1) The articles of incorporation and the certificate of stocks cannot deprive
preferred shares of the right to cote in the following cases (Section 6, Obedience
Corporation Code) - obedience requires compliance with the laws and the rules .
i. Amendment of the articles of incorporation;;
51
- in relation to this duty, directors, trustees, and officers have the duty to act intra vires is not liable for loss or damage other than what was proximately caused by his own acts
and within authority. or omissions in breach of his duty. Only the option was tainted with improvidence. When
the option expired, any loss that followed was the result of the director’s independent
Montelibano v. Bacolod-Murcia May 18, 1962 business judgment for which they should not be held.
The Court ruled that the August 20, 1936 resolution, passed in good faith by the board of
directors, was valid and binding and formed an integral part of the amended milling Walker v. Man, et al 253 N.Y.S. 458 (1931)
contracts, the milling company having agreed to give concessions to the planters, Exemplary case. Directors were made liable for doing wrongful acts & committing waste,
precisely to induce them to agree to an extension of their contracts. but w/ acquiescing & confirming the wrong doing of others, & w/ doing nothing to retrieve
Petitioner filed two motions for reconsideration;; however, the doctrine of res the waste.
judicata had set in. Wherefore, the appeal was denied.
HELD: Directors are charged not with misfeasance, but with non-feasance, not only with
NOTES: doing wrongful acts and committing waste, but with acquiescing and confirming the wrong
• BUSINESS JUDGMENT RULE à the court recognizes that the boards are voted doing of others, and with doing nothing to retrieve the waste. Directors have the duty to
by the stockholders. Board would think in terms for the stockholders. attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify
• Directors and officers à they are no infalliable, business judgment is valid for as it. If the defendant knew that an unauthorized loan was made and did not take steps to
long as there is absence of BAD FAITH, GROSS NEGLIGENCE, not performing salvage the loan, he is chargeable with negligence and is accountable for his conduct
patently wrong act/unlawful à Court will recognize it as business judgment and
cannot substitute the courts decision with the said judgment Bates v. Dresser 251 US 524 (1920)
• SECTION 31à court cannot interfere unless tyere is bad faith, gross negligence
or patently unlawful act The President being closer to the operations of the bank on a day to day basis is more
• Section 31 (2) with Section 34 CO - RELATE liable for breach of diligence when compared to directors who must act on the basis of
reports & representations to them during board meetings.
Litwin v. Allen, et al 25 N.Y.S. 2D 667 (1940)
Directors stand in a fiduciary relationship to their company. They are bound by rules of
As far as the president is concerned he is liable, but not regarding the directors. The
conscientious fairness, morality, and honesty, which are imposed by the law as guidelines
directors acted reasonably by relying on the information given to them. They had no
for those who are under fiduciary obligations. A director owes a loyalty to his corporation
reason to believe that there were any irregularities in the bank records. Dresser’s position
that is undivided and an allegiance uninfluenced by no consideration other than the
was different. He was in the bank daily. He had access to the books at all times. He
welfare of the corporation. He must conduct the corporation’s business with the same
knew of shortages and apparent unexplained declines in deposits, yet he failed to
degree of care and fidelity, as an ordinary prudent man would exercise when managing
make any attempt to discover the reasons behind these peculiar events. The
his own affairs of similar size and importance. A director of a bank is held to stricter
continued losses were his fault b/c the warnings that he had should have led him to
accountability. He must use that degree of care ordinarily exercised by prudent bankers,
investigate. Had he investigated, the losses may have been eliminated b/c he may have
and, if he does so, he will be absolved from liability even though his opinion may turn out
discovered the reason behind them. Dresser, as president, was much closer to the
to be mistaken and his judgment faulty. The facts in existence at the time of their
operation of the bank than the directors. He was there every day, and he supervised
occurrence must be considered when determining liability. In this case, the first question
the actual operation of the bank. This the directors didn’t do;; therefore, Dresser’s
was whether the bond purchase was ultra vires. “It would seem that if it is against public
position exposed him to the warning signs, while the directors were not exposed
policy for a bank, anxious to dispose of some of its securities, to agree to buy them back
and, therefore, he was personally liable while the directors were not.
at the same price, it is even more so where a bank purchases securities and gives the

seller the option to buy them back at the same price, thereby incurring the entire risk of
loss with no possibility of gain other than the interest derived from the securities during No. The directors, who were serving gratuitously, had no
the period the bank holds them.” Therefore, regarding the price of securities, the bank knowledge of the cashier’s negligence of the possibility of such
inevitably assumed any risk of heavy loss, and any sharp rise was assured to benefit the fraud. They had the assurance of the president, as from the bank
seller. Trust (Defendant) could not avoid liability by having an agreement with its
subsidiary, Guaranty (Defendant), for Guaranty (Defendant) to take any loss, should it examiner’s reports, and they were not negligent in accepting the
occur. In this case, “the entire arrangement was so improvident, so risky, so unusual and cashier’s statements of liabilities. They were encouraged in their
unnecessary as to be contrary to fundamental conceptions of prudent banking belief that all was well by the president whose responsibility,
practice.” Therefore, the directors must be held personally liable. The second question,
in this case, was whether they were liable for the entire 81 percent loss or whether their interest as a large stockholder and depositor, and knowledge from
liability was limited to the percentage lost during the six-month option period. A director long daily presence in the bank were greater than theirs.
52
They were not bound by virtue of the office gratuitously the stockholders representing at least a majority of the
assumed by them to call in the pass books and compare them with outstanding capital stock
the ledger, and until the event showed the possibility, they hardly 3) Even if the by-laws does not provide for compensation, the
could have seen that their failure to look at the ledger opened a way directors are entitled to reasonable per diems
to fraud. 4) The total compensation of directors shall not exceed 10% of
This ruling is only applicable to the particular case in view of the net income before income tax of the corporation during
the circumstances surrounding the case. The degree of care the preceding year.
required of a director of a national bank depends upon the subject
to which it is to be applied. Per diem – is limted to pay for a day’s services.

PNB v. CA 83 SCRA 238 ( May 18, 1978) 2 ways DIRECTOR MAY HAVE COMPENSATION:
A corporation is civilly liable in the same manner as natural persons for torts, because 1. fixed by the by-law granting compensation to director
“generally speaking, the rules governing the liability of a principal or master for a tort 2. not fixed in the bylaw but granted by the 2/3 outstanding stockholders
committed by an agent or servant are the same whether the principal or master be a • RATIONALE: directors as stockholders should be gratuitous if they became a
natural person or a corporation, and whether the servant or agent be a natural or artificial director .They should act for the stockholders advantage.
person. All of the authorities agree that a principal or master is liable for every tort which • DIEM: by the directors à board resolution
it expressly directs or authorizes, and this is just as true of a corporation as of a natural • Section 30 also applies to TRUSTEES
person, a corporation is liable, therefore, whenever a tortious act is committed by an officer • NOT applicable to OFFICERS à must be reasonable compensation, and not
or agent under express direction or authority from the stockholders or members acting as done in fraud
a body, or, generally, from the directors as the governing body.”
Western Institute of Technology v. Salas 278 SCRA 216
LIABILITY OF OFFICER – TRAMAT CASE There is no argument that directors or trustees, as the case may
• when officer becomes solidarily liable with the corporation - gross negligence,
be, are not entitled to salary or other compensation when they
issuance of watered stocks. Consent to be solidarily liable – signing of
perform nothing more than the usual and ordinary duties of their
promissory notes in his personal capacity, vicarious liability, trust receipt law –
officer can be solidarily liable. office. This rule is founded upon a presumption that

1) Compensation of directors – Sec. 30
directors/trustees render service gratuitously, and that the return
upon their shares adequately furnishes the motives for service,
Section 30. Compensation of directors. – In the absence of any provision in the
without compensation.
by-laws fixing their compensation, the directors shall not receive any

compensation, as such directors, except for reasonable per diems: Provided,
however, That any such compensation other than per diems may be granted to
Under the foregoing section, there are only two (2) ways by which
directors by the vote of the stockholders representing at least a majority of the
members of the board can be granted compensation apart from
outstanding capital stock at a regular or special stockholders’ meeting. In no case
reasonable per diems: (1) when there is a provision in the by-laws
shall the total yearly compensation of directors, as such directors, exceed ten
(10%) percent of the net income before income tax of the corporation during the
preceding year. (n) (LAST SENTENCE: includes per diem)
fixing their compensation;; and (2) when the stockholders

representing a majority of the outstanding capital stock at a regular
Rules on Compensation: or special stockholders’ meeting agree to give it to them. In the case
1) The by-laws may provide for a fixed compensation of the at bench, Resolution No. 48, s. 1986 granted monthly
members of the board of directors compensation to private respondents not in their capacity as
2) If the by-laws does not provide for a compensation, members of the board, but rather as officers of the corporation,
compensation may be granted to the directors by the vote of more particularly as Chairman, Vice-Chairman, Treasurer and
53
Secretary of Western Institute of Technology. Clearly, therefore, the - Courts cannot undertake to control the discretion of the board of
prohibition with respect to granting compensation to corporate directors about administrative matters as to which they have
directors/trustees as such under Section 30 is not violated in this legitimate powers of action.
particular case.
Rationale:

2) Duty of diligence/Business Judgment Rule – Secs.23, 31 1. If the management were liable for mere good faith errors in
TITLE III BOARD OF DIRECTORS/TRUSTEES AND OFFICERS judgment, few capable individuals would be willing to incur
Section 23. The board of directors or trustees. – Unless otherwise provided in this the financial and emotional risks of serving in such roles.
Code, the corporate powers of all corporations formed under this Code shall be 2. Courts are generally ill equipped to evaluate business
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
judgments.
of stocks, or where there is no stock, from among the members of the corporation, 3. Management has the expertise to discharge the
who shall hold office for one (1) year until their successors are elected and responsibility of making such determinations.
qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the Board of Liquidators v. Kalaw 20 SCRA 987
corporation. Any director who ceases to be the owner of at least one (1) share of
They were done with implied authority from the BOD. These
the capital stock of the corporation of which he is a director shall thereby cease to
previous contracts, it should be stressed, were signed by Kalaw
be a director. Trustees of non-stock corporations must be members thereof. A
without prior authority from the board. Said contracts were known
majority of the directors or trustees of all corporations organized under this Code

all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing. Obviously NACOCO
Section 31. Liability of directors, trustees or officers. - Directors or trustees who
board met the difficulties attendant to forward sales by leaving the
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs
adoption of means to end, to the sound discretion of NACOCO's
of the corporation or acquire any personal or pecuniary interest in conflict with their
general manager Maximo M. Kalaw.
duty as such directors or trustees shall be liable jointly and severally for all

damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
Settled jurisprudence has it that where similar acts have been
NOTE:
approved by the directors as a matter of general practice, custom,
• Relate section 31 with 34 à Section 34 on Business Opportunity à it must
belong to the corporation and policy, the general manager may bind the company without
formal authorization of the board of directors. In varying language,
• If not a business opportunity, that the director will grab à will not be liable for
dmages under Section 34 since it does not belong to the corporation

existence of such authority is established, by proof of the course of
Business Judgment Rule business, the usages and practices of the company and by the
- Under this rule, the will of the majority controls in corporate knowledge which the board of directors has, or must be presumed
affairs, and contracts intra vires entered into by the board of to have, of acts and doings of its subordinates in and about the
directors are binding on the corporation and courts will not affairs of the corporation.

interfere unless such contracts are so unconscionable and Ratification by a corporation of an unauthorized act or contract by its officers relates back
oppressive as to amount to a wanton destruction of rights of the to the time of the act or contract ratified and is equivalent to original authority. The theory
minority. of corporate ratification is predicated upon the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority. Ratification “cleanses the
contract from all its defects from the moment it was constituted. Thus, even in the face of
54
an express by-law requirement of prior approval, the law on corporations is not to be held Section 32. Dealings of directors, trustees or officers with the corporation. – A
too rigid and inflexible as to fail to recognize equitable considerations. 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
NOTE: present:
• for an officer à prove guilty of gross negligence or bad faith à must be clearly 1. That the presence of such director or trustee in the board meeting in
established by evidence and bad faith. which the contract was approved was not necessary to constitute a quorum
• Officers / directors à trustees of the properties of the corporation for the for such meeting;;
stockholders 2. That the vote of such director or trustee was not necessary for the
• Insolvencies à directors becomes trustees of the creditors approval of the contract;;
3. That the contract is fair and reasonable under the circumstances;; and
Benguet Electric Coop. v. NLRC 209 SCRA 55 4. That in case of an officer, the contract has been previously authorized
The Board members and officers of a corporation who purport to by the board of directors.

act for and in behalf of the corporation, keep within the lawful scope Where any of the first two conditions set forth in the preceding paragraph is absent,
of their authority in so acting, and act in good faith, do not become in the case of a contract with a director or trustee, such contract may be ratified by
liable, civilly or otherwise, for the consequences of their acts. Those 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
acts are properly attributed to the corporation alone and no called for the purpose: Provided, That full disclosure of the adverse interest of the
personal liability is incurred. In this case, the board members directors or trustees involved is made at such meeting: Provided, however, That
obviously wanted to get rid of Cosalan and acted with indecent the contract is fair and reasonable under the circumstances. (n)
haste in removing him from his GM position. This shows strong Self-dealing DTO
indications that the members of the board had illegally suspended - Are those who personally contract with the corporation in which
and dismissed him precisely because he was trying to rectify the they are directors, trustees, or officers.
financial irregularities. - It is discouraged because the DTOs have fiduciary relationship
with the corporation, and there can be no real bargaining where
The Board members are also liable for damages under Sec. 31 of the same is acting on both sides of the trade.
the Corporation Code, which by virtue of Sec. 4 thereof, makes it Status of Contract: Voidable
applicable in a supplementary manner to all corporations, including Valid if:
those with special or individual charters so long as these are not 1. The presence of such D/T in the board meeting approving
inconsistent therewith. the contract was not necessary for constituting a quorum for
such meeting;;
The Board members are also guilty of gross negligence and bad 2. The vote of such D/T in the board meeting approving the
faith in directing the affairs of the corporation in enacting the said contract was not necessary for the approval of the contract;;
resolutions, and in doing so, acted beyond the scope of their 3. The contract is fair and reasonable under the circumstance;;
authority. and
4. In the case of an O, there was precious authorization by the
3) Self-dealing directors- Sec. 32
• Co-relate Section 32(2) with Section 34 board of D/T.
• If the person obtains a business opportunity for himself but he is an office à
Section 31 Prime White Cement v. IAC 220 SCRA 103
All corporate powers are exercised by the Board. It may also delegate specific powers to
• NOT RATIFIED à vitiated
its President or other officers. In the absence of express delegation, a contract entered
• Other conditions are not complied but 2/3 is complied à?
into by the President in behalf of the corporation, may still bind the latter if the board should
• If all conditions are complied à valid and cannot be rescinded ratify expressly or impliedly. In the absence of express or implied ratification, the President
55
may as a general rule bind the corporation through a contract in the ordinary course of valid, his interest is substantial in both so he is allowed to vote
business, provided the same is reasonable under the circumstances. These rules are o Nominal interest of both, both corporation voted to validate the contract,
applicable where the President or other officer acting for the corporation is dealing with a including his vote à still valid
third person.
Gokongwei v. SEC et al. 89 SCRA 336
The situation is different where a director or officer is dealing with his own Under US corporate law, corporations have the power to make by-laws declaring a person
corporation. Te was not an ordinary stockholder;; he was a member of the Board employed in the service of a rival company to be ineligible for the corporation's Board
and Auditor of the corporation. He is what is often called a “self-dealing” director. of Directors. ... An amendment which renders ineligible, or if elected, subjects to removal,
As a director, he holds a position of trust and owes a duty of loyalty to his a director if he be also a director in a corporation whose business is in competition with or
corporation. In case his interests conflict with those of the corporation, he cannot is antagonistic to the other corporation is valid." This is based upon the principle that where
sacrifice the latter to his own advantage and benefit. The trust relationship springs the director is so employed in the service of a rival company, he cannot serve both, but
from the control and guidance of the corporate affairs and property interests of the must betray one or the other. Such an amendment "advances the benefit of the
stockholders. A director’s contract with his corporation is not in all instances void corporation and is good." In the Philippines, section 21 of the Corporation Law expressly
or voidable. If the contract is fair and reasonable under the circumstances, it may provides that a corporation may make by-laws for the qualifications of directors. Thus, it
be ratified by the stockholders provided a full disclosure of his adverse interest is has been held that an officer of a corporation cannot engage in a business in direct
made. competition with that of the corporation where he is a director by utilizing information he
has received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
4) Interlocking directors – Sec. 33 business of the corporation of which he is an officer or director.”
Section 33. Contracts between corporations with interlocking directors. – Except in
cases of fraud, and provided the contract is fair and reasonable under the It is also well established that corporate officers "are not permitted to use their position
circumstances, a contract between two or more corporations having interlocking of trust and confidence to further their private interests." In a case where directors of a
directors shall not be invalidated on that ground alone: Provided, That if the interest corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
of the interlocking director in one corporation is substantial and his interest in the products, and after establishing a rival business, the directors entered into a new contract
other corporation or corporations is merely nominal, he shall be subject to the themselves with the foreign firm for exclusive sale of its products, the court held that equity
provisions of the preceding section insofar as the latter corporation or corporations would regard the new contract as an offshoot of the old contract and, therefore, for the
are concerned. benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct
to the exclusion of his principal.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors. (n) 5) Doctrine of Corporate Opportunity – Sec. 34
Section 34. Disloyalty of a director. – Where a director, by virtue of his office,
Interlocking dictatorship: acquires for himself a business opportunity which should belong to the corporation,
- There is an interlocking director in a corporation when one (or thereby obtaining profits to the prejudice of such corporation, he must account to
some or all) of the directors in one corporation is (or are) a 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
director/s in another corporation. outstanding capital stock. This provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the venture. (n)
NOTE:
• CONDITIONS: NOTE:
1. Not fraudulent
• The duty of loyalty mandates that directors should not give
2. Fair and reasonable under the circumstances
3. The interest of the interlocking director à substantial interest in one preference to their own personal amelioration by taking the
corporation and a nominal interest in the other corporation. opportunity belonging to the corporation.
• APPLY SECTION 32 à directors who has nominal interest àhe is at a • The corporate opportunity doctrine is the legal principle providing that
disadvantage à corporation code protects those with nominal. Considered as a directors, officers, and controlling shareholders of a corporation must not
self dealing corporation à apply only his interest in one is substantial and the take for themselves any business opportunity that could benefit the
other is nominal corporation.[1] The corporate opportunity doctrine is one application of the
• WHAT IF, director voted for the approval of the contract and that his interest is fiduciary duty of loyalty
30% in one and 20% in another à is it valid? Both corporation approved à it is
56
• The corporate opportunity doctrine does not apply to all fiduciaries of a context of a sale of the stock of a privately held corporation “only when a
corporation;; rather, it is limited to directors, officers, and controlling director is possessed of special knowledge of future plans or secret
shareholders.[3] The doctrine applies regardless of whether the resources and deliberately misleads a stockholder who is ignorant of them.”
corporation is harmed by the transaction;; indeed, it applies even if the To satisfy the special facts requirement, a plaintiff must point to knowledge
of a substantial transaction, such as an offer to acquire the whole company.
corporation benefits from the transaction.[4] The corporate opportunity
doctrine only applies if the opportunity was not disclosed to the
corporation. If the opportunity was disclosed to the board of directors and Strong v.Repide 41 Phil. 947
the board declined to take the opportunity for the corporation, the fiduciary The director and controlling stockholder who purchased the shares
may take the opportunity for him- or herself.[5] When the corporate of another stockholder through an agent was held to be guilty of
opportunity doctrine applies, the corporation is entitled to all profits earned concealing the impending purchase of the friar lands they own by
by the fiduciary from the transaction
• Elements: A business opportunity is a corporate opportunity if the the government, a significant fact which would affect the price of
corporation is financially able to undertake the opportunity, the opportunity the shares.
is within the corporation's line of business, and the corporation has an
interest or expectancy in the opportunity.[7] The Delaware Court of Although ordinarily, the relationship between directors and
Chancery has stated, "An opportunity is within a corporation's line of
business . . . if it is an activity as to which the corporation has fundamental stockholders of a corporation is not of a fiduciary character as to
knowledge, practical experience and ability to pursue."[8] In In re eBay, oblige the director to disclose to a stockholder the general
Inc. Shareholders Litigation, investing in various securities was held to be knowledge which he may possess regarding the value of the shares
in a line of business of eBay despite the fact that eBay's primary purpose
of the company before he purchases any form a shareholder, there
is to provide an online auction platform.[9] Investing was in a line of
business of eBay because eBay "consistently invested a portion of its
are cases when such duty and obligation upon the director is
cash on hand in marketable securities."[10] A corporation has an interest
present. Being the chief negotiator for the sale of the lands, the
or expectancy in a business opportunity if the opportunity would further director was the only person who knew of the advantages and the
an established business policy of the corporation.[11] impending increase in the value of the shares such that he is
NOTE: precluded from acquiring stocks from other shareholders without
• Directors are not full time or employee of the corporation except if they are COO, first informing them of the pertinent facts affecting the value of the
CEO or CFO à acts of said directors to take business opportunity à ratified by
the stockholders will make said director not liable anymore for profits or loss shares being bought. It is fraudulent for a stockholder to buy from a
incurred by him. shareholder without disclosing his identity.
• Reason why ratified ? if director owns 2/3 to ratify, it is not attractive to the
business or not in line with the corporations business
• Business Opportunity belongs to the corporation à director takes such OBITER DICTUM:
opportunity he shall be liable under Sec34 (is it in line with the corporations The directors are declared to be mandatories of the society and that they are prohibited
business?) from acquiring by purchase, even at public or judicial auction, the property the
• Business Opportunity NOT BELONGS to the corporation à director will not be administration or sale of which, may have been entrusted to them, and that this is the
liable if he takes said opportunity extent of the prohibition.

6) Duty to stockholders - Special Facts Doctrine
NOTES: NOTE: Special Facts Doctrine: a doctrine holding that a corporate
• Special facts doctrine is a term used in corporate law to describe the officer with superior knowledge gained by virtue of being an insider
fiduciary duty of a corporate officer to shareholders to disclose information owes a limited fiduciary duty to a shareholder in transactions
during a transaction involving a stock transfer. This duty arises because of
the superior knowledge the officer holds by virtue of his or her position.
involving transfer of stock.

• The special facts doctrine requires a director to disclose information in the
57
7) Duty to creditors – 2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
Steinberg v. Velasco 52 Phil. 953 provisions of this Code;; and
Creditors of a corporation have the right to assume that so long as 3. The stockholders of the corporation shall be subject to all liabilities of
there are outstanding debts and liabilities, the BOD will not use the directors.
The articles of incorporation may likewise provide that all officers or
assets of the corporation to buy its own stock, and will not declare employees or that specified officers or employees shall be elected or
dividends to stockholders when the corporation is insolvent. appointed by the stockholders, instead of by the board of directors.

Section 100. Agreements by stockholders. -
In this case, it was found that the corporation did not have an actual
bona fide surplus from which dividends could be paid. Moreover, 4. A written agreement among some or all of the stockholders in a close
the Court noted that the Board of Directors purchased the stock corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
from the corporation and declared the dividends on the stock at the with the discretion or powers of the board of directors: Provided, That such
same Board meeting, and that the directors were permitted to agreement shall impose on the stockholders who are parties thereto the
resign so that they could sell their stock to the corporation. Given liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the
all of this, it was apparent that the directors did not act in good faith management or operation of the business and affairs of a close corporation,
or were grossly ignorant of their duties. Either way, they are liable the stockholders shall be held to strict fiduciary duties to each other and
for their actions which affected the financial condition of the among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability
corporation and prejudiced creditors. insurance.

8) Watered Stocks - Sec. 65
XlV. DEVICES AFFECTING CONTROL – DISCUSS HOW EACH ITEM AFFECTS
Section 65. Liability of directors for watered stocks. – Any director or officer of a CONTROL
corporation consenting to the issuance of stocks for a consideration less than its par 1) Proxy device – Sec. 58;; SEC Memo Circ. 4 (2004)
or issued value or for a consideration in any form other than cash, valued in excess
Section 58. Proxies. – Stockholders and members may vote in person or by proxy
of its fair value, or who, having knowledge thereof, does not forthwith express his
in all meetings of stockholders or members. Proxies shall in writing, signed by the
objection in writing and file the same with the corporate secretary, shall be solidarily,
stockholder or member and filed before the scheduled meeting with the corporate
liable with the stockholder concerned to the corporation and its creditors for the
secretary. Unless otherwise provided in the proxy, it shall be valid only for the
difference between the fair value received at the time of issuance of the stock and
meeting for which it is intended. No proxy shall be valid and effective for a period
the par or issued value of the same. (n)
longer than five (5) years at any one time. (n)

This is limitation: how does it affect the control of the corporation? à To ensure that the
9) Duty of shareholders in close corps. – Secs. 97(2);; 100 (4),(5)
absent stockholder can still avail of his right to vote
VOTING BY MAIL
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein, • stockholders attending stockholder' meetings shall vote their shares as
subject to the provisions of the following section;; provided by existing laws
2. For a classification of directors into one or more classes, each of whom • stockholders shall have the right to vote at all stockholders' meetings in
may be voted for and elected solely by a particular class of stock;; and person or by proxy. The stockholder may deliver, in person or by mail, his
3. For a greater quorum or voting requirements in meetings of stockholders or proxy vote directly to the corporation
directors than those provided in this Code. • in Case provided In Section 16 of the Corporation Code of the the
The articles of incorporation of a close corporation may provide that the business of philippines where written assent is allowed, the same number of votes
the corporation shall be managed by the stockholders of the corporation rather than shall be observed and voting can likewise be done by proxy
by a board of directors. So long as this provision continues in effect: • The stockholder may designate any person of his choice to act as his
1. No meeting of stockholders need be called to elect directors;; proxy. Absent such designation, the Chairman of the meeting shall be
58
deemed authorized and hereby directed to cast the vote as indicated by viii. Dissolution of the corporation.
the voting stockholder or his proxy 2. For purposes of the foregoing, the phrase “outstanding capital stock” as
• The proxy must be dated. If a duly accomplished and executed proxy is defined under Section 137 of the Corporation Code shall be deemed to
undated, the postmark or date of dispatch indicated in the electronic mail include preferred shares.
or, if not mailed, its actual date of presentation, shall be considered as the
date of proxy Types – general/limited;;
• Where the corporation receives more than one (1) proxy from the same
GENERAL
stockholder and they are all undated, the postmark or electronic dates 3) A general or unrestricted proxy gives a general discretionary power of
shall be considered. If the proxies are mailed on the same date, the one attorney to vote for directors and on all ordinary matters that may properly
bearing the latest time of day indicated in the postmark or latest time of
come before a regular meeting, even specific mention of them is not made
dispatch appearing in the electronic mail shall prevail. If the proxies are
in the notice of the meeting. A general proxy has no authority, however,
not mailed, then the time of their actual presentation is considered. That
to vote for fundamental changes in the corporate charter or for dissolution
which is presented last will be recognized.
or a transfer of all of the property to another corporation, or other unusual
• If the stockholder intends to designate several proxies, the number of transactions.
shares of stock to be represented by each proxy shall be specifically
indicated in the proxy form. If some of the proxy forms do not indicate the LIMITED
number of shares, the total shareholdings of the stockholder shall be 1) limited proxy may restrict the authority to vote on specified matters only
tallied and the balance thereof, if any, shall be alloted to the holder of the and may direct the manner in which the vote shall be cast.
proxy form without the number of shares. If all are blank, the stocks shall
be distributed equally among the proxies. The number of persons to be
designated as proxies may be limited by the By-laws Duration – limited and specific/continuing
DURATION
ONE SHARE- ONE VOTE POLICY • The Code states: "Unless otherwise provided in the proxy, it shall be
4) Pursuant to Section 24 of the Corporation Code, one share is entitled to valid only for the meeting for which it is intended. No proxy shall be valid
1 vote. Voting shall always be in the basis of the number of shares and and effectivefor a period longer than five (5) years at anyone time."53
not on the number of stockholders present in the stockholders' meeting. Under this provision, it is clear that the proxy may fix the period during
5) Common shares shall have complete voting rights and such shares which it may be used, but it cannot exceed five years, renewable for not
cannot be deprived of such rights except as provided by law more than five years for each renewal. Where the proxy does not fix any
6) Each common share shall be equal in all respects to every other common period, then it expires after the meeting for which it was given. It cannot
share. Corporations are hereby prohibited from issuing multiple voting be used again for a subsequent meeting unless it is renewed.
and non-voting common shares nor can they limit the maximum number
of votes per stockholder irrespective of the number of shares he holds. REVOCATION
• A proxy, like agency in general, is revocable unless coupled with an
OUTSTANDING CAPITAL STOCK interest, even though it may expressly be declared to be irrevocable.
1. The articles of incorporation and the certificate of stocks cannot deprive Revocation of a proxy need not be made by formal notice in writing to
preferred shares of the right to cote in the following cases (Section 6, the corporation unless so required by statute. Revocation may be
Corporation Code) expressed to the proxy holder, by a subsequent proxy to another or by
i. Amendment of the articles of incorporation;; sale of the shares. Thus it may be revoked orally or by conduct.
ii. Adoption and amendment of by-laws;;   Appearing and asserting the right to vote at a meeting revokes a proxy
iii. Sale, lease, exchange, mortgage, pledge or other disposition of previously given. Like agency in general, proxy is also terminated by the
all or substantially all of the corporate property;;   death of the principal, or of the agent, or by the loss of capacity by either
iv. Incurring, creating or increasing bonded indebtedness;;   party, unless this is changed by statute.
v. Increase or decrease of capital stock;;  
• At the end of five years, whether or not it is coupled with an interest and
vi. Merger or consolidation of the corporation with another
even where the period fixed exceeds five years, the proxy automatically
corporation or other corporations;;  
loses its effectivity.
vii. Investment of corporate funds in another corporation or
business in accordance with this Code;; and  
59
Restrictions, renewal, etc. courts over so-called election contests or controversies under Section
RESTRICTIONS: 5 (c) does not extend to every potential subject that may be voted on by
1) The question as to whether the by-laws may deny the stockholder the right shareholders, but only to the election of directors or trustees, in which
to vote by proxy has not yet been ruled upon by our Supreme Court. stockholders are authorized to participate under Section 24 of the
However, our Securities and Exchange Commission has expressed the Corporation Code.
opinion that the appointment of a proxy is purely personal and an incident
of ownership and, therefore, a by-law provision prohibiting the use of proxy This qualification allows for a useful distinction that gives due effect to the
is contrary to law and, hence, null and void statutory right of the SEC to regulate proxy solicitation, and the statutory
jurisdiction of regular courts over election contests or controversies. The
2) The by-laws may, however, impose conditions as to the form and manner power of the SEC to investigate violations of its rules on proxy solicitation is
of voting by proxy. But these conditions must be reasonable. A by-law unquestioned when proxies are obtained to vote on matters unrelated to the
which imposes unreasonably restrictive conditions is void for it is cases enumerated under Section 5 of Presidential Decree No. 902-A.
practically a denial of the right to vote by proxy. However, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly
3) Proxies may be given only by those who are entitled to vote in the
stockholders' meeting. raised the violation of the SEC rules on proxy solicitation, should be
properly seen as an election controversy within the original and
FORM exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the
• "proxies shall be in writing, signed by the stockholder and filed before the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.
scheduled meeting with the corporate secretary."51 The by-laws may not
provide that the proxy may be oral. However,. the by-laws may require as The conferment of original and exclusive jurisdiction on the regular courts over
an additional requirement the acknowledgment before a notary public of the such controversies in the election of corporate directors must be seen as
proxy.52 The by-laws may also prescribe a reasonable period before the intended to confine to one body the adjudication of all related claims and
meeting when the written proxy should be filed with the secretary;; e.g., not controversy arising from the election of such directors. For that reason, the
later than two days before the meeting. aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term
“election contest” as encompassing all plausible incidents arising from the
election of corporate directors, including: (1) any controversy or dispute
SEC vs CA October 22, 2014 involving title or claim to any elective office in a stock or nonstock corporation,
32
In that case, we observed that Section 6 (g) of Presidential Decree No. (P.D.) 902-A (2) the validation of proxies, (3) the manner and validity of elections and (4)
dated 11 March 1976 conferred on SEC the power “[t]o pass upon the validity of the the qualifications of candidates, including the proclamation of winners. If all
issuance and use of proxies and voting trust agreements for absent stockholders or matters anteceding the holding of such election which affect its manner and
members.” Section 6, however, opens thus: “In order to effectively exercise such conduct, such as the proxy solicitation process, are deemed within the original
33
jurisdiction x x x.” This opening clearly refers to the preceding Section 5. The Court and exclusive jurisdiction of the SEC, then the prospect of overlapping and
pointed out therein that the power to pass upon the validity of proxies was merely competing jurisdictions between that body and the regular courts becomes
incidental or ancillary to the powers conferred on the SEC under Section 5 of the same frighteningly real. From the language of Section 5 (c) of Presidential Decree
decree. With the passage of the SRC, the powers granted to SEC under Section 5 were No. 902-A, it is indubitable that controversies as to the qualification of voting
withdrawn, together with the incidental and ancillary powers enumerated in Section 6. shares, or the validity of votes cast in favor of a candidate for election to the
board of directors are properly cognizable and adjudicable by the regular
34
While the regular courts now had the power to hear and decide cases involving courts exercising original and exclusive jurisdiction over election cases. x x
controversies in the election of directors, it was not clear whether the SRC also transferred x.
to these courts the incidental and ancillary powers of the SEC as enumerated in Section
6 of P.D. 902-A. Thus, in GSIS v. CA, it was necessary for the Court to determine whether The ruling harmonizes the seeming conflict between the Amended SRC Rules
the action to invalidate the proxies was intimately tied to an election controversy. Hence, promulgated by the SEC and the Interim Rules of Procedure Governing Intra-Corporate
the Court pronounced:chanRoblesvirtualLawlibrary Disputes promulgated by the Court.

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides:
the jurisdiction of the regular trial courts with respect to election-related
controversies is specifically confined to “controversies in the election or SRC RULE 20.
appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations.” Evidently, the jurisdiction of the regular Disclosures to Stockholders Prior to Meeting
60
(formerly, SRC Rule 20 – The Proxy Rule)
x x x x
x x x x
SECTION 2. Definition. – An election contest refers to any controversy or dispute
11. Other Procedural Requirements involving title or claim to any elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections, and the qualifications of
x x x x candidates, including the proclamation of winners, to the office of director, trustee or other
officer directly elected by the stockholders in a close corporation or by members of a non-
b. Proxy stock corporation where the articles of incorporation or by-laws so provide. (Emphases
supplied)
x x x x
xxi. In the validation of proxies, a special committee of inspectors The Court explained that the power of the SEC to regulate proxies remains in place in
35
shall be designated or appointed by the Board of Directors which shall instances when stockholders vote on matters other than the election of directors. The
be empowered to pass on the validity of proxies. Any dispute that test is whether the controversy relates to such election. All matters affecting the manner
may arise pertaining thereto, shall be resolved by the Securities and conduct of the election of directors are properly cognizable by the regular courts.
and Exchange Commission upon formal complaint filed by the Otherwise, these matters may be brought before the SEC for resolution based on the
aggrieved party, or by the SEC officer supervising the proxy regulatory powers it exercises over corporations, partnerships and associations.
validation process. (Emphasis supplied)
Astra endeavors to remove the instant case from the ambit of GSIS v. CA by arguing that
On the other hand, these are the provisions of Section 1, Rule 1;; and Section 2, Rule 6 of 1) the validation of proxies in this case relates to the determination of the existence of a
the Interim Rules of Procedure Governing Intra-Corporate Disputes: quorum;; and 2) no actual voting for the members of the board of directors was conducted,
as the directors were merely elected by motion.
RULE 1
General Provisions Indeed, the validation of proxies in this case relates to the determination of the existence
of a quorum. Nonetheless, it is a quorum for the election of the directors, and, as such,
SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to be which requires the presence – in person or by proxy – of the owners of the majority of the
36
observed in civil cases involving the following: outstanding capital stock of Omico. Also, the fact that there was no actual voting did not
make the election any less so, especially since Astra had never denied that an election of
a) Devices or schemes employed by, or any act of, the board of directors, business directors took place.
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members We find no merit either in the proposal of Astra regarding the “two (2) viable, non-exclusive
37
of any corporation, partnership, or association;;cralawlawlibrary and successive legal remedies to question the validity of proxies.” It suggests that the
power to pass upon the validity of proxies to determine the existence of a quorum prior to
b) Controversies arising out of intra-corporate, partnership, or association relations, the conduct of the stockholders’ meeting should lie with the SEC;; but, after the
between and among stockholders, members, or associates;; and between, any or all of stockholders’ meeting, questions regarding the use of invalid proxies in the election of
them and the corporation, partnership, or association of which they are stockholders, directors should be cognizable by the regular courts, since there was already an election
members, or associates, respectively;;cralawlawlibrary to speak of.

c) Controversies in the election or appointment of directors, trustees, officers, or First, this interpretation is akin to the argument struck down by the Court in GSIS v. CA. If
managers of corporations, partnerships, or associations;; the Court adopts the suggestion, “we would be perpetually confronted with the spectacle
of election controversies being heard and adjudicated by both the SEC and the regular
d) Derivative suits;; and courts, made possible through a mere allegation that the anteceding x x x process was
errant, but the competing cases [were] filed with one objective in mind – to affect the
38
e) Inspection of corporate books. outcome of the election of the board of directors.”

x x x x Second, the validation of proxies serves a number of purposes, including determining the
existence of a quorum and ascertaining the authenticity of proxies to be used for the
RULE 6 election of directors at the stockholders’ meeting. Section 2, Rule 6, of the Interim Rules
Election Contests of Procedure Governing Intra-Corporate Disputes provides that an election contest covers
61
any controversy or dispute involving the validation of proxies, in general. Thus, it can only
refer to all the beneficial purposes that validation of proxies can bring about when made Everett v. Asia Banking (49 Phil 512) (IN ORDER TO PERPETRATE FRAUD)
in connection with a forthcoming election of directors. Thus, there is no point in making Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress
distinctions between who has jurisdiction before and who has jurisdiction after the election wrongs done to the corporation, but that the action must be brought by the Board of
of directors, as all controversies related thereto – whether before, during or after – shall Directors, the appellees argue — and the court below held — that the corporation Teal
be passed upon by regular courts as provided by law. and Company is a necessary party plaintiff and that the plaintiff stockholders, not having
made any demand on the Board to bring the action, are not the proper parties plaintiff.
2) Voting trusts – Sec. 59;; But, like most rules, the rule in question has its exceptions. It is alleged in the complaint
Section 59. Voting trusts. – One or more stockholders of a stock corporation and, consequently, admitted through the demurrer that the corporation Teal and Company
may create a voting trust for the purpose of conferring upon a trustee or trustees is under the complete control of the principal defendants in the case, and, in these
the right to vote and other rights pertaining to the shares for a period not exceeding circumstances, it is obvious that a demand upon the Board of Directors to institute an
five (5) years at any time: Provided, That in the case of a voting trust specifically action and prosecute the same effectively would have been useless, and the law does not
required as a condition in a loan agreement, said voting trust may be for a period require litigants to perform useless acts.
exceeding five (5) years but shall automatically expire upon full payment of the
loan. A voting trust agreement must be in writing and notarized, and shall specify The conclusion of the court below that the plaintiffs, not being stockholders in the
the terms and conditions thereof. A certified copy of such agreement shall be filed Philippine Motors Corporation, had no legal right to proceed against that corporation in
with the corporation and with the Securities and Exchange Commission;; otherwise, the manner suggested in the complaint evidently rest upon a misconception of the
said agreement is ineffective and unenforceable. The certificate or certificates of character of the action. In this proceeding it was necessary for the plaintiffs to set forth in
stock covered by the voting trust agreement shall be cancelled and new ones shall full the history of the various transactions which eventually led to the alleged loss of their
be issued in the name of the trustee or trustees stating that they are issued property and, in making a full disclosure, references to the Philippine Motors Corporation
pursuant to said agreement. In the books of the corporation, it shall be noted that appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against
the transfer in the name of the trustee or trustees is made pursuant to said voting the corporation itself at this stage of the proceedings.
trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust NOTE: However, it may be inferred that the stockholders may bring
certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
suit against the trustees if the voting trust agreement is being used
The voting trust agreement filed with the corporation shall be subject to
by the said Trustees to perpetuate fraud against the corporation, as
examination by any stockholder of the corporation in the same manner as any other is present in this case. The stockholders would still have legal
corporate book or record: Provided, That both the transferor and the trustee or standing to institute the suit in behalf of the corporation for acts
trustees may exercise the right of inspection of all corporate books and records in
accordance with the provisions of this Code. (approved by the SEC) done by the trustees to defraud the corporation, when the said
Any other stockholder may transfer his shares to the same trustee or trustees trustees already have control of the Board of the said corporation.
upon the terms and conditions stated in the voting trust agreement, and thereupon A derivative suit is still proper.
shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing
the law against monopolies and illegal combinations in restraint of trade or used NIDC v. Aquino (163 SCRA 153) (VOTING TRUST AGREEMENT AS A SECURITY)
for purposes of fraud. A Voting Trust Agreement only transfers voting or other rights pertaining to the shares
Unless expressly renewed, all rights granted in a voting trust agreement shall subject of the agreement, or control over the stock. Stockholders of a corporation that lost
automatically expire at the end of the agreed period, and the voting trust certificates all its assets through foreclosures cannot go after those properties.
as well as the certificates of stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of stock shall be reissued in the However, the acquisition by PNB-NIDC of the properties in question was not made or
name of the transferors. effected under the capacity of a trustee but as a foreclosing creditor for the purpose of
recovering on a just and valid obligation of Batjak.
The voting trustee or trustees may vote by proxy unless the agreement provides

otherwise. (36a)
LEE vs CA
AFFECT? Voting trust. Trust created by an agreement between a group of
• Voting trustee affects of the control of the corporation by
• Mechanics and right
the stockholders of a corporation and the trustee or by a group of
62
identical agreements between individual stockholders and a 2. An agreement between two or more stockholders, if in writing and signed by
common trustee, whereby it is provided that for a term of years, or the parties thereto, may provide that in exercising any voting rights, the shares held
by them shall be voted as therein provided, or as they may agree, or as determined
for a period contingent upon a certain event, or until the agreement in accordance with a procedure agreed upon by them.
is terminated, control over the stock owned by such stockholders, 3. No provision in any written agreement signed by the stockholders, relating
either for certain purposes or for all purposes, is to be lodged in the to any phase of the corporate affairs, shall be invalidated as between the parties
trustee, either with or without a reservation to the owners, or on the ground that its effect is to make them partners among themselves.
persons designated by them, of the power to direct how such 4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the conduct
control shall be used (Ballentine's Law Dictionary) of the business and affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: Provided, That such agreement shall
The most immediate effect of a voting trust agreement on the status of a stockholder impose on the stockholders who are parties thereto the liabilities for managerial
who is a party to its execution — from legal title holder or owner of the shares subject of acts imposed by this Code on directors.
the voting trust agreement, he becomes the equitable or beneficial owner.
5. To the extent that the stockholders are actively engaged in the management
or operation of the business and affairs of a close corporation, the stockholders
By its very nature, a voting trust agreement results in the separation of the voting rights
shall be held to strict fiduciary duties to each other and among themselves. Said
of a stockholder from his other rights such as the right to receive dividends, the right to
stockholders shall be personally liable for corporate torts unless the corporation
inspect the books of the corporation, the right to sell certain interests in the assets of the
has obtained reasonably adequate liability insurance.
corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. • Based on the agreement of the stockholders – VALID à to direct the direction
of the company
However, in order to distinguish a voting trust agreement from proxies and other voting • Written agreements by stockhodlers
pools and agreements, it must pass three criteria or tests, namely:

(1) that the voting rights of the stock are separated from the other attributes of 4) Cumulative voting – Sec. 24
ownership;;  PREPARE TO ILLUSTRATE
Section 24. Election of directors or trustees. – At all elections of directors or trustees,
(2) that the voting rights granted are intended to be irrevocable for a definite period of there must be present, either in person or by representative authorized to act by
time;; and written proxy, the owners of a majority of the outstanding capital stock, or if there be
no capital stock, a majority of the members entitled to vote. The election must be by
(3) that the principal purpose of the grant of voting rights is to acquire voting control of ballot if requested by any voting stockholder or member. In stock corporations, every
the corporation. stockholder entitled to vote shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the by-laws, in his own name
Take note also that in order to be eligible as a director, what is material is the legal title on the stock books of the corporation, or where the by-laws are silent, at the time of
to, not beneficial ownership of, the stock as appearing on the books of the corporation the election;; and said stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said shares and give
one candidate as many votes as the number of directors to be elected multiplied by
3) Pooling & voting agreements – Sec. 100 the number of his shares shall equal, or he may distribute them on the same principle
Section 100. Agreements by stockholders. - among as many candidates as he shall see fit: Provided, That the total number of
1. Agreements by and among stockholders executed before the formation and votes cast by him shall not exceed the number of shares owned by him as shown in
organization of a close corporation, signed by all stockholders, shall survive the the books of the corporation multiplied by the whole number of directors to be elected:
incorporation of such corporation and shall continue to be valid and binding Provided, however, That no delinquent stock shall be voted. Unless otherwise
between and among such stockholders, if such be their intent, to the extent that provided in the articles of incorporation or in the by-laws, members of corporations
such agreements are not inconsistent with the articles of incorporation, irrespective which have no capital stock may cast as many votes as there are trustees to be
of where the provisions of such agreements are contained, except those required elected but may not cast more than one vote for one candidate. Candidates receiving
by this Title to be embodied in said articles of incorporation. the highest number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day to day or from
63
time to time but not sine die or indefinitely if, for any reason, no election is held, or if must have to tie, not what you need to win. Of course not every shareholder
there are not present or represented by proxy, at the meeting, the owners of a votes perfectly every time, so the flawed formula may work in many practical
majority of the outstanding capital stock, or if there be no capital stock, a majority of instances despite it being conceptually flawed and mathematically wrong.
the members entitled to vote. (31a) • Help minority in votings
• Director or member who is voted by stockholders cannot be removed without
NOTE: just cause
• . For example, if the election is for four directors and you hold 500 shares
(with one vote per share), under the regular method you could vote a 5) Classification of shares – Sec. 6
maximum of 500 shares for each one candidate (giving you 2,000 votes
total—500 votes per each of the four candidates). With cumulative voting, Section 6. Classification of shares. – The shares of stock of stock corporations may
you are afforded the 2,000 votes from the start and could choose to vote all be divided into classes or series of shares, or both, any of which classes or series of
2,000 votes for one candidate, 1,000 each to two candidates, or otherwise shares may have such rights, privileges or restrictions as may be stated in the articles
divide your votes whichever way you wanted. of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a class or series
• Proportional Voting
of shares which have complete voting rights. Any or all of the shares or series of
• In a cumulative voting system, the number of votes available to a
shares may have a par value or have no par value as may be provided for in the
shareholder in any given election is equal to the number of shares
articles of incorporation: Provided, however, That banks, trust companies, insurance
outstanding held by the shareholder times the number of positions up for
companies, public utilities, and building and loan associations shall not be permitted
vote. All positions are voted on at the same time, and the person with the
to issue no-par value shares of stock.
highest amount of votes wins the election. The key difference between
Preferred shares of stock issued by any corporation may be given preference in the
cumulative voting and plurality voting is that these votes may be voted in
distribution of the assets of the corporation in case of liquidation and in the distribution
any possible combination and may all be cast for the same director. For
of dividends, or such other preferences as may be stated in the articles of
example, if shareholders were asked for five directors, each share would be
incorporation which are not violative of the provisions of this Code: Provided, That
entitled to five votes, which could all be cast for the same candidate. It is
preferred shares of stock may be issued only with a stated par value. The board of
important to remember that cumulative voting will only be used to elect the
directors, where authorized in the articles of incorporation, may fix the terms and
board of directors, and is not applicable for other votes held by shareholders
conditions of preferred shares of stock or any series thereof: Provided, That such
or the board of directors.
terms and conditions shall be effective upon the filing of a certificate thereof with the
• The formula to determine the number of shares necessary to elect a majority
Securities and Exchange Commission.
of directors is:
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto: Provided;; That shares without par value may not be
issued for a consideration less than the value of five (P5.00) pesos per share:
• where Provided, further, That the entire consideration received by the corporation for its no-
X = number of shares needed to elect a given number of directors par value shares shall be treated as capital and shall not be available for distribution
S = total number of shares at the meeting as dividends.
N = number of directors needed A corporation may, furthermore, classify its shares for the purpose of insuring
D = total number of directors to be elected compliance with constitutional or legal requirements.
• The formula to determine how many directors can be elected by a faction Except as otherwise provided in the articles of incorporation and stated in the
controlling a certain number of shares is: certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;;
• with N becoming the number of directors which can be elected and X the 2. Adoption and amendment of by-laws;;
number of shares controlled. Note that several sources include a variation 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
of this formula using "X" rather than "(X-1)". Such a formulation does not substantially all of the corporate property;;
assure you of having enough votes to elect a director if the "-1” is missing. 4. Incurring, creating or increasing bonded indebtedness;;
Without the "-1" you will only be able to determine how many shares you 5. Increase or decrease of capital stock;;
64
6. Merger or consolidation of the corporation with another corporation or other as in the certificate of stock;; otherwise, the same shall not be binding on any
corporations;; purchaser thereof in good faith. Said restrictions shall not be more onerous than
7. Investment of corporate funds in another corporation or business in granting the existing stockholders or the corporation the option to purchase the
accordance with this Code;; and shares of the transferring stockholder with such reasonable terms, conditions or
8. Dissolution of the corporation. period stated therein. If upon the expiration of said period, the existing stockholders
Except as provided in the immediately preceding paragraph, the vote necessary to or the corporation fails to exercise the option to purchase, the transferring stockholder
approve a particular corporate act as provided in this Code shall be deemed to refer may sell his shares to any third person.
only to stocks with voting rights. (5a)
8) Prescribing qualifications for directors – Sec. 47 (5)
6) Control Test vs. Grandfather Rule Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this
• control test or the liberal rule. The other is the Grandfather Rule, which is Code, other special laws, and the articles of incorporation, a private corporation may
known to be the stricter and more stringent test. provide in its by-laws for:
• The control test provides that shares belonging to corporations or 5. The qualifications, duties and compensation of directors or trustees, officers
partnerships at least 60% of the capital of which is owned by Filipino and employees;;
citizens shall be considered of Philippine nationality. This test is
straightforward and does not scrutinize further the ownership of the 9) Management contracts – Sec. 44
Filipino shareholdings. Section 44. Power to enter into management contract. – No corporation shall
• On the other hand, the Grandfather Rule determines the actual Filipino conclude a management contract with another corporation unless such contract
ownership and control in a corporation by tracing both the direct and shall have been approved by the board of directors and by stockholders owning at
indirect shareholdings in the corporation. “the Grandfather test was least the majority of the outstanding capital stock, or by at least a majority of the
originally intended to look into the citizenship of the individuals who members in the case of a non-stock corporation, of both the managing and the
ultimately own and control the shares of stock of a corporation for managed corporation, at a meeting duly called for the purpose: Provided, That (1)
purposes of determining compliance with the constitutional requirement where a stockholder or stockholders representing the same interest of both the
of Filipino ownership”.The shareholdings should ideally be traced (i.e. managing and the managed corporations own or control more than one-third (1/3)
grandfathered) to the point where natural persons hold the shares. of the total outstanding capital stock entitled to vote of the managing corporation;;
However, this may be impractical and a limit must be set when tracing or (2) where a majority of the members of the board of directors of the managing
through the corporate layers to attribute nationality. Citing a memorandum corporation also constitute a majority of the members of the board of directors of
from the Securities and Exchange Commission (SEC), the Supreme the managed corporation, then the management contract must be approved by the
Court noted the suggestion of the SEC to apply the Grandfather Rule on stockholders of the managed corporation owning at least two-thirds (2/3) of the
two levels of corporate relations for publicly-held corporations or where total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the
shares are traded in the stock exchange, and to three levels for closely members in the case of a non-stock corporation. No management contract shall be
held ones or those which are not traded in any stock exchange. Clearly, entered into for a period longer than five years for any one term.
the limits should not go beyond the level of what is reasonable.
• The Court explained that the use of the Grandfather Rule is a The provisions of the next preceding paragraph shall apply to any contract whereby
supplement to the Control Test in implementing the wisdom of the a corporation undertakes to manage or operate all or substantially all of the
“Filipinization” provisions of the Constitution. business of another corporation, whether such contracts are called service
• The Court further discussed that the Grandfather Rule applies only contracts, operating agreements or otherwise: Provided, however, That such
when the 60-40 Filipino-foreign ownership is in doubt or where there service contracts or operating agreements which relate to the exploration,
is reason to believe that there is non-compliance with the provisions development, exploitation or utilization of natural resources may be entered into for
of the Constitution on the nationality restriction. “Doubt” refers to such periods as may be provided by the pertinent laws or regulations. (n)
various indicia that the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino shareholders but in foreign ***take note of the requirements
stakeholders.

10) “Super” votes;; unusual voting/quorum reqs. – Sec. 97
7) Restriction on transfer of shares – Sec. 98
Section 98. Validity of restrictions on transfer of shares. – Restrictions on the right to corporation may provide:
transfer shares must appear in the articles of incorporation and in the by-laws as well
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1. For a classification of shares or rights and the qualifications for owning minutes of all meetings of stockholders or members, or of the board of directors or
or holding the same and restrictions on their transfers as may be stated trustees, in which shall be set forth in detail the time and place of holding the meeting,
therein, subject to the provisions of the following section;; how authorized, the notice given, whether the meeting was regular or special, if
2. For a classification of directors into one or more classes, each of whom special its object, those present and absent, and every act done or ordered done at
may be voted for and elected solely by a particular class of stock;; and the meeting. Upon the demand of any director, trustee, stockholder or member, the
3. For a greater quorum or voting requirements in meetings of stockholders time when any director, trustee, stockholder or member entered or left the meeting
or directors than those provided in this Code. must be noted in the minutes;; and on a similar demand, the yeas and nays must be
The articles of incorporation of a close corporation may provide that the business taken on any motion or proposition, and a record thereof carefully made. The protest
of the corporation shall be managed by the stockholders of the corporation rather of any director, trustee, stockholder or member on any action or proposed action
than by a board of directors. So long as this provision continues in effect: must be recorded in full on his demand.
1. No meeting of stockholders need be called to elect directors;;
2. Unless the context clearly requires otherwise, the stockholders of the The records of all business transactions of the corporation and the minutes of any
corporation shall be deemed to be directors for the purpose of applying the meetings shall be open to inspection by any director, trustee, stockholder or member
provisions of this Code;; and of the corporation at reasonable hours on business days and he may demand, in
3. The stockholders of the corporation shall be subject to all liabilities of writing, for a copy of excerpts from said records or minutes, at his expense.
directors.
The articles of incorporation may likewise provide that all officers or employees or Any officer or agent of the corporation who shall refuse to allow any director, trustees,
that specified officers or employees shall be elected or appointed by the stockholder or member of the corporation to examine and copy excerpts from its
stockholders, instead of by the board of directors. 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
• Unusual voting or quorum requirement – which is different from what is under guilty of an offense which shall be punishable under Section 144 of this Code:
the code… this is stipulated in the AOI (exampled: unanimous) Provided, That if such refusal is made pursuant to a resolution or order of the board
• CONTROL: it would be harder to change the status quo – veto power when of directors or trustees, the liability under this section for such action shall be imposed
the super vote is not met, it would take a greated number fshares or members upon the directors or trustees who voted for such refusal: and Provided, further, That
to pass a corporate act. it shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior examination of the
11) Shares that cannot vote --- Sec. 89 vs. sec. 6 records or minutes of such corporation or of any other corporation, or was not acting
Section 89. Right to vote. – The right of the members of any class or classes to vote in good faith or for a legitimate purpose in making his demand.
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied, each member, Stock corporations must also keep a book to be known as the "stock and transfer
regardless of class, shall be entitled to one vote. 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
Unless otherwise provided in the articles of incorporation or the by-laws, a member subscription has been made, and the date of payment of any installment;; a statement
may vote by proxy in accordance with the provisions of this Code. (n) 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
Voting by mail or other similar means by members of non-stock corporations may be transfer book shall be kept in the principal office of the corporation or in the office of
authorized by the by-laws of non-stock corporations with the approval of, and under its stock transfer agent and shall be open for inspection by any director or stockholder
such conditions which may be prescribed by, the Securities and Exchange of the corporation at reasonable hours on business days.
Commission.
No stock transfer agent or one engaged principally in the business of registering
Depriving their right to vote – they cannot vote
• 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
XV. RIGHT OF INSPECTION ----Secs 74 – 75;; 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
TITLE VIII CORPORATE BOOKS AND RECORDS
performing or making transfer of its own stocks, in which case all the rules and
Section 74. Books to be kept;; stock transfer agent. – Every corporation shall keep regulations imposed on stock transfer agents, except the payment of a license fee
and carefully preserve at its principal office a record of all business transactions and herein provided, shall be applicable. (51a and 32a;; P.B. No. 268.)
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Section 75. Right to financial statements. – Within ten (10) days from receipt of a is sufficient, order the issuance of summons which shall be served, together with a
written request of any stockholder or member, the corporation shall furnish to him its copy of the complaint, on the defendant within two (2) days from its issuance.
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 Sec. 4. Answer. - The defendant shall file his answer to the complaint, serving a copy
reasonable detail its assets and liabilities and the result of its operations. thereof on the plaintiff, within ten (10) days from the service of summons and the
complaint. In addition to the requirements in Section 6, Rule 2 of these Rules, the
At the regular meeting of stockholders or members, the board of directors or trustees answer must state the following:chanroblesvirtuallawlibrary
shall present to such stockholders or members a financial report of the operations of (1) The grounds for the refusal of defendant to grant the demands of the
the corporation for the preceding year, which shall include financial statements, duly plaintiff, stating the law and jurisprudence in support thereof;;
signed and certified by an independent certified public accountant. (2) The conditions or limitations on the exercise of the right to inspect which
should be imposed by the court;; and cralaw
However, if the paid-up capital of the corporation is less than P50,000.00, the (3) The cost of inspection, including manpower and photocopying expenses,
financial statements may be certified under oath by the treasurer or any responsible if the right to inspect is granted.cralaw
officer of the corporation. (n)
Sec. 5. Affidavits, documentary and other evidence. - The parties shall attach to the
NOTE: complaint and answer the affidavits of witnesses, documentary and other evidence
• Corporation can refuse because of the volume of the documents in support thereof, if any.
• Copy at your own expense or can take a picture
• MINUTES à need approval of the directors Sec. 6. Effect of failure to answer. - If the defendants fails to file an answer within the
• WHO HAS JURISDICTION OVER DERIVATIVE SUIT à RTC period above provided, the court, within ten (10) days from the lapse of the said
period, motu proprio or upon motion, shall render judgment as warranted by the
allegations of the complaint, as well as the affidavits, documentary and other
Rule 7, Rules of Proc. On Intra-corp. Controversies evidence on record. In no case shall the court award a relief beyond or different from
Rule 7 that prayed for.cralaw
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 7. Decision. - The court shall render a decision based on the pleadings, affidavits
Section 1. Cases covered. - The provisions of this Rule shall apply to disputes and documentary and other evidence attached thereto within fifteen (15) days from
exclusively involving the rights of stockholders or members to inspect the books and receipt of the last pleading. A decision ordering defendants to allow the inspection of
records and/or to be furnished with the financial statements of a corporation, under books and records and/or to furnish copies thereof shall also order the plaintiff to
Sections 74 and 75 of Batas Pambansa Blg. 68, otherwise known as the Corporation deposit the estimated cost of the manpower necessary to produce the books and
Code of the Philippines. records and the cost of copying, and state, in clear and categorical terms, the
limitations and conditions to the exercise of the right allowed or enforced.
Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these
Rules, the complaint must state the following: Purpose;; requirements;; coverage;; remedies if denied;;
(1) The case is for the enforcement of plaintiff's right of inspection of corporate Defenses available to D/T/O held liable
orders or records and/or to be furnished with financial statements under
Sections 74 and 75 of the Corporation Code of the Philippines;; ***REQUIREMENTS FOR DERIVATIVE SUITSà book of Aquino
(2) A demand for inspection and copying of books and records and/or to be APPRAISAL RIGHTS à Instances
furnished with financial statements made by the plaintiff upon defendant;;  (3)
The refusal of defendant to grant the demands of the plaintiff and the reasons Philpotts v. Phil. Mfg. Co. 40 Phil. 479
given for such refusals, if any;; and Right of inspection of records can be exercised by proper agent or
(4) The reasons why the refusal of defendant to grant the demands of
the plaintiff is unjustified and illegal, stating the law and jurisprudence in
attorney of the stockholder as well as by stockholder in person. The
support thereof.cralaw right of inspection / examination into corporate affairs given to a
stockholder in section 51 of the Corporation Law which states:
Sec. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from
the filing of the complaint, the court, upon a consideration of the allegations thereof,
“The records of all business transactions of the corporation and the
may dismiss the complaint outright if it is not sufficient in form and substance, or, if it minutes of any meeting shall be open to the inspection of any
67
director, member, or stockholder of the corporation at reasonable (1) the records must be kept at the principal office of the corporation;; (2) the inspection
hour” can be exercised either by himself or by any duly authorized must be made on business days;;
representative or attorney in fact, and either with or without the (3) the stockholder may demand a copy of the excerpts of the records or minutes;; and
attendance of the stockholder.
(4) the refusal to allow such inspection shall subject the erring officer or agent of the
corporation to civil and criminal liabilities.
This is in conformity with the general rule that what a man may do
in person he may do through another. However, while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a condition for such
Pardo v. Hercules Lumber 47 Phil. 965 examination that the one requesting it:
The general right given by the statute may not be lawfully abridged to the extent attempted
in this resolution. It may be admitted that the officials in charge of a corporation may deny (a) must not have been guilty of using improperly any information secured through a
inspection when sought at unusual hours or under other improper conditions;; but neither prior examination, and that
the executive officers nor the board of directors have the power to deprive a stockholder
of the right altogether. A by-law unduly restricting the right of inspection is undoubtedly
(b) the person asking for such examinations must be "acting in good faith and for a
invalid. Authorities to this effect are too numerous and direct to require extended
legitimate purpose in making his demand."
comment. Under a statute similar to our own it has been held that the statutory right of
inspection is not affected by the adoption by the board of directors of a resolution providing
for the closing of transfer books thirty days before an election.
Veraguth v. Isabela Sugar Co. 57 Phil. 266
The resolution of the board limiting the rights of stockholders to inspect its records to a NO. Directors have the unqualified right to inspect the books and records of a
period of 10 days prior to the annual SH meeting is an unreasonable restriction in corporation at all reasonable times. Pretexts may not be put forward by the officers
accordance with the Corporation Code which provides that the right to inspect can be to keep a director or stockholder from inspecting the books and minutes of the
exercised at reasonable hours. The right of inspection was interpreted to mean that the corporation, and the right to inspect cannot be denied on the grounds that the
right may be exercised at reasonable hours on business days throughout the year, and director or stockholders are on unfriendly terms with the officers. A director or
not merely during an arbitrary period of a few days chosen by the directors. stockholder has no absolute right to secure certified copies of the minutes until
these minutes have been written up and approved by the directors.
Gonzales v. PNB 122 SCRA 490

The Code has prescribed limitations to the right of inspection, NOTE: TAKE NOTE OF THE CONFIDENTIALITY CLAUSE
requiring as a condition for examination that the person requesting
must not have been guilty of using improperly any information Gokongwei v. SEC L- 45911, April 11, 1979
Where the right to inspect is granted by statute to the stockholder, it is given to him as
secured through a prior examination, and that the person asking for such and must be exercised by him with respect to his interest as a stockholder and for
such must be acting in good faith and for a legitimate purpose. It is some purpose germane thereto or in the interest of the corporation. The inspection has to
the stockholder seeking to exercise the right of inspection to set 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.
forth the reasons and purposes for which he desires such
inspection. SC held that the purpose of Gonzales, which was to arm The stockholder’s right to inspect is based on his ownership of the assets and property of
himself with evidence which he can use against the bank for acts the corporation. It is therefore an incident of ownership of the corporate property, whether
this ownership or interest be termed an equitable ownership, beneficial ownership, or
done by the latter when he was still a total stranger (i.e. not a SH), quasi-ownership, and is predicated upon the necessity of self-protection. On application
were not deemed proper motives and his request was denied. for mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholder’s good faith and his purpose and motives in seeking inspection. But the
DOCTRINE: impropriety of purpose such as will defeat enforcement must be set up by the corporation
As may be noted, among the changes introduced in the new Code with respect to the defensively if the Court is to take cognizance of it as a qualification. In other words, the
right of inspection granted to a stockholder are the following: law take from the stockholder the burden of showing the propriety of purpose and place
upon the corporation the burden of showing impropriety of purpose or motive.
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INDIVIDUAL à may be instituted by a stockholder against another stockholder for
The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would wrongs committed against him personally, and to determine their
be more in accord with equity, good faith, and fair dealing to construe the statutory right individual rights – this is an individual suit between stockholders
of Gokongwei as stockholder to inspect the books of the parent as extending to the books à may be instituted by a stockholder against another stockholder for
of the subsidiary in its control. wrongs committed against him personally, and to determine their
individual rights – this is an individual suit between stockholders.
NOTE: à an individual suit may also be instituted against a corporation, the
• Principal and the subsidiary is different corporation BUT exception is discussed same having a separate juridical personality, which by its own may
in Gokongwei vs SEC be sued.
• INSPECTION CLASS à Where the wrong is done to a group of stockholders, as where
o Good faith of stockholders is presumed therefore must allow the preferred stockholders’ rights are violated, a class or representative
inspection suit will be proper for the protection of all stockholders belonging to
o EXCEPT: if corporation can prove bad faith of the shareholder in suits, the same group.
and that the purpose in not germane to his right as a shareholder. DERIVATIVE à an effective remedy of the minority against the abuses of
• management. Thus, an individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he holds stock
XVl. DERIVATIVE SUIT - Rule 8, Rules of Proc. On Intra-corporate Controversies in order to protect or vindicate corporate rights, whenever officials of
Rule 8 the corporation refuse to sue or are the ones to be sued or hold the
DERIVATIVE SUITS control of the corporation.
àIn such actions, the suing stockholder is regarded as the nominal
Section 1. Derivative action. — A stockholder or member may bring an action in party, with the corporation as the party in interest.
the name of a corporation or association, as the case may be, provided, à if the gravamen of the complaint is injury to the corporation, or to
that:chanroblesvirtuallawlibrary the whole body of its stock and property without any severance or
(1) He was a stockholder or member at the time the acts or transactions distribution among individual holders, or it seeks to recover assets for
subject of the action occurred and the time the action was filed;; the corporation or to prevent the dissipation of its assets.’
(2) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of • Exhaust intra corporate remedies before going to court
incorporation, by-laws, laws or rules governing the corporation or partnership • Harassment Suits
to obtain the relief he desires;;   • Share should be in his own name
(3) No appraisal rights are available for the acts or acts complained of;; and • Number of share is immaterial
cralaw   o He is suing in behalf of the corporation
(4) The suits is not a nuisance or harassment suit.cralaw •
In case of nuisance of harassment suit, the court shall forthwith dismiss the case.
Evangelista v. Santos 86 Phil. 387
Sec. 2. Discontinuance. - A derivative action shall not be discontinued, The complaint shows that the action is for damages resulting from mismanagement of the
compromised or settled without approval of the court. During the pendency of the affairs and assets of the corporation by its principal officer, it being alleged that defendant's
action, any sale of shares of the complaining stockholders shall be approved by the maladministration has brought about the ruin of the corporation and the consequent loss
court. If the court determines that the interest of the stockholders or members will be of value of its stocks. The injury complained of is thus primarily to the corporation, so that
substantially affected by the discontinuance, compromise or settlement, the court the suit for the damages claimed should be by the corporation rather than by the
may direct that notice, by publication or otherwise, be given to the stockholders or stockholders. The stockholders may not directly claim those damages for themselves for
members whose interest it determines will be so affected. that would result in the appropriation by and the distribution among them of part of the
corporate assets before the dissolution of the corporation and the liquidation of its debts

and liabilities something which cannot be legally done.
NOTE:

• Derivative suit VS Individual Suit VS Class Suit
But while it is to the corporation that the action should pertain in cases of this nature,
o Suits by stockholders or members of a corporation based on wrongful
however, if the officers of the corporation, who are the ones called upon to protect their
or fraudulent acts of directors or other persons may be classified into
rights, refuse to sue, or where a demand upon them to file the necessary suit would be
individual suits, class suits, and derivative suits.
futile because they are the very ones to be sued or because they hold the controlling

69
interest in the corporation, then in that case any of the stockholders is allowed to bring complaint, to exhaust all remedies available under the articles of incorporation, by-
suit. But in that case, the corporation is the real party in interest. laws, laws or rules governing the corporation or partnership to obtain the relief he
desires. As additional requirements, the SC said there must be no appraisal rights
Republic Bank v. Cuaderno 19 SCRA 671 — which would allow a stockholder to sell his holdings back to the company –
It is settled that an individual stockholder is permitted to institute a derivative or available and the suit is not a nuisance or harassment suit.
representative suit on behalf of the corporation wherein he holds stock in order to protect
or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are Pascual v. Orozco 19 Phil 83
the ones to be sued or hold the control of the corporation. In such actions, the suing NOTE: continuing injury incurred by stockholder, despite the fact he was not a
stockholder is regarded as a nominal party, with the corporation as the real party in stockholder at the beginning of the injury
interest. Normally, it is the corporation through the board of directors which should bring
the suit. But as in this case, the members of the board of directors of the bank were the As to the first cause of action: In suits of this character the corporation itself and not the
nominees and creatures of respondent Roman and thus, any demand for an intra- plaintiff stockholder is the real party in interest. The rights of the individual stockholder are
corporate remedy would be futile, the stockholder is permitted to bring a derivative suit. merged into that of the corporation. It is a universally recognized doctrine that a
stockholder in a corporation has no title legal or equitable to the corporate property;; that
Should the corporation be made a party? The English practice is to make the both of these are in the corporation itself for the benefit of all the stockholders. So it is
corporation a party plaintiff while the US practice is to make it a party defendant. What is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank
important though is that the corporation should be made a party in order to make the (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of
court's ruling binding upon it and thus bar any future re-litigation of the issues. such a right must depend upon when, how, and for what purpose he acquired the shares
which he now owns.
SMC v. Khan L- 85339 (Aug. 11, 1989)
The bona fide ownership by a stockholder in his own right suffices to invest him with the As to the Second cause of action: It affirmatively appears from the complaint that the
standing to bring a derivative suit for the benefit of the corporation. The number of his plaintiff was not a stockholder during any of the time in question in this second cause of
shares is immaterial since he is not suing in his own behalf, or for the protection or action. Upon the question whether or not a stockholder can maintain a suit of this character
vindication of his own particular right, or the redress of a wrong committed against him upon a cause of action pertaining to the corporation when it appears that he was not a
individually but in behalf and for the benefit of the corporation. stockholder at the time of the occurrence of the acts complained of and upon which the
action is based, the authorities do not agree.
The requisites of a derivative suit are: (1) the party bringing the suit should be a
stockholder as of the time of the act or transactions complained of, the number of shares Cuav.OcampoTan GR 181455/182008 (12/04/2009)
not being material;; (2) exhaustion of intra-corporate remedies (has made a demand on
the board of directors for the appropriate relief but the latter has failed or refused to heed In effect, the (derivative) suit is an action for specific performance of an obligation, owed
his plea);; and (3) the cause of action actually devolves on the corporation and not to the by the corporation to the stockholders, to assist its rights of action when the corporation
particular stockholder bringing the suit. has been put in default by the wrongful refusal of the directors or management to adopt
suitable measures for its protection. The basis of a stockholder's suit is always one of
Yu v. YukayguanGR 177549 (June 18, 2009) equity. However, it cannot prosper without first complying with the legal requisites for its
The fact that Winchester, Inc. is a family corporation should not in any way exempt institution.
respondents from complying with the clear requirements and formalities of the rules for
filing a derivative suit. Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies
(IRPICC) lays down the following requirements which a stockholder must comply with in
A stockholder’s right to institute a derivative suit is not based on any express provision of filing a derivative suit:
the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the Sec. 1.Derivative action. — A stockholder or member may bring an action in the name of
corporation and its stockholders for violation of their fiduciary duties. a corporation or association, as the case may be, provided, that:

However, there are mandatory requirements before a derivative suit can be given
(1) He was a stockholder or member at the time the acts or transactions subject of the
due course by the Court. Citing Section 1, Rule 8 of the Interim Rules of Procedure
action occurred and at the time the action was filed;;
Governing Intra-Corporate Controversies, the SC said derivative actions may be
filed provided that the suing party was a stockholder or member at the time the acts
or transactions subject of the action occurred and at the time the action was filed;; (2) He exerted all reasonable efforts, and alleges the same with particularity in the
and 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,
70
laws or rules governing the corporation or partnership to obtain the relief he desires;; (3) No appraisal rights are available for the act or acts complained of;; and
(3) No appraisal rights are available for the act or acts complained of;; and (4) The suit is (4) The suit is not a nuisance or harassment suit.
not a nuisance or harassment suit.
. Although the shareholdings of petitioners are indeed only two out of the 409 alleged
outstanding shares or 0.24%, the Court has held that it is enough that a member or a
Ching and Wellington v. Subic Bay Golf Sept. 10, 2014 minority of stockholders file a derivative suit for and in behalf of a corporation.
25
A derivative suit must be differentiated from individual and representative or class suits,
thus: DISSOLUTION
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts
of directors or other persons may be classified intoindividual suits, class suits, and TITLE XIV
derivative suits. Where a stockholder or member is denied the right of inspection, his suit DISSOLUTION
would be individual because the wrong is done to him personally and not to the other
stockholders or the corporation. Where the wrong is done to a group of stockholders, as Sec. 117. Methods of dissolution. - A corporation formed or organized under the
where preferred stockholders’ rights are violated, a class or representative suitwill be provisions of this Code may be dissolved voluntarily or involuntarily. (n)
proper for the protection of all stockholders belonging to the same group. But where the
Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution
acts complained of constitute a wrong to the corporation itself, the cause of action belongs
of a corporation does not prejudice the rights of any creditor having a claim against
to the corporation and not to the individual stockholder or member. Although in most every
it, the dissolution may be effected by majority vote of the board of directors or
case of wrong to the corporation, each stockholder is necessarily affected because the
trustees, and by a resolution duly adopted by the affirmative vote of the stockholders
value of his interest therein would be impaired, this fact of itself is not sufficient to give him
owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-
an individual cause of action since the corporation is a person distinct and separate from
thirds (2/3) of the members of a meeting to be held upon call of the directors or
him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory
trustees after publication of the notice of time, place and object of the meeting for
of separate entity be violated, but there would be multiplicity of suits as well as a violation
three (3) consecutive weeks in a newspaper published in the place where the
of the priority rights of creditors. Furthermore,there is the difficulty of determining the
principal office of said corporation is located;; and if no newspaper is published in
amount of damages that should be paid to each individual stockholder.
such place, then in a newspaper of general circulation in the Philippines, after
: "A shareholder’s derivative suit seeks to recover for the benefit of the corporation and its sending such notice to each stockholder or member either by registered mail or by
whole body of shareholders when injury is caused to the corporation that may not personal delivery at least thirty (30) days prior to said meeting. A copy of the
otherwise be redressed because of failureof the corporation to act. Thus, ‘the action is resolution authorizing the dissolution shall be certified by a majority of the board of
derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the directors or trustees and countersigned by the secretary of the corporation. The
corporation, or to the whole body of its stock and property without any severance or Securities and Exchange Commission shall thereupon issue the certificate of
distribution among individual holders, or it seeks to recover assets for the corporation or dissolution. (62a)
to prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed by Sec. 119. Voluntary dissolution where creditors are affected. - Where the
the shareholder individually (or on behalf of a classof shareholders to which he or she dissolution of a corporation may prejudice the rights of any creditor, the petition for
belongs) for injury to his or her interestas a shareholder. x x x. [T]he two actions are dissolution shall be filed with the Securities and Exchange Commission. The petition
mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders shall be signed by a majority of its board of directors or trustees or other officers
(direct action) *651 or the corporation(derivative action)." x x x. having the management of its affairs, verified by its president or secretary or one of
its directors or trustees, and shall set forth all claims and demands against it, and
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate
that its dissolution was resolved upon by the affirmative vote of the stockholders
Controversies imposes the following requirements for derivative suits:
representing at least two-thirds (2/3) of the outstanding capital stock or by at least
(1) He was a stockholder or member at the time the acts or transactions subject of two-thirds (2/3) of the members at a meeting of its stockholders or members called
the action occurred and at the time the action was filed;; for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order
(2) He exerted all reasonable efforts, and alleges the same with particularity in the reciting the purpose of the petition, fix a date on or before which objections thereto
complaint, to exhaust all remedies available under the articles of incorporation, by- may be filed by any person, which date shall not be less than thirty (30) days nor
laws, laws or rules governing the corporation or partnership to obtain the relief he more than sixty (60) days after the entry of the order. Before such date, a copy of
desires;; the order shall be published at least once a week for three (3) consecutive weeks
in a newspaper of general circulation published in the municipality or city where the
71
principal office of the corporation is situated, or if there be no such newspaper, then
in a newspaper of general circulation in the Philippines, and a similar copy shall be Except by decrease of capital stock and as otherwise allowed by this Code, no
posted for three (3) consecutive weeks in three (3) public places in such municipality corporation shall distribute any of its assets or property except upon lawful
or city. dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
Upon five (5) day's notice, given after the date on which the right to file objections
as fixed in the order has expired, the Commission shall proceed to hear the petition
and try any issue made by the objections filed;; and if no such objection is sufficient, NOTE:
and the material allegations of the petition are true, it shall render judgment - Let the End the term
dissolving the corporation and directing such disposition of its assets as justice - Amend articles to shorten it
requires, and may appoint a receiver to collect such assets and pay the debts of the - Sec 22 à should always be notice and hearing for the dissolution of the company
corporation. (Rule 104, RCa) - Voluntary and involuntary dissolution:
o Voluntary – 180
Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution o Involuntary -
may be effected by amending the articles of incorporation to shorten the corporate - Liquidation comes after dissolution, purpose is to pay of the credit. Whatever is
term pursuant to the provisions of this Code. A copy of the amended articles of the net can now be distributed to the stockholder or members. Sec 94-95
incorporation shall be submitted to the Securities and Exchange Commission in - Liquidation à
accordance with this Code. Upon approval of the amended articles of incorporation o Juridical personality ceases in dissolutionà but there is winding up
of the expiration of the shortened term, as the case may be, the corporation shall period à corporation can still go after debtors, creditors can still sue
be deemed dissolved without any further proceedings, subject to the provisions of corporation. Corporation during this period cannot conduct business
this Code on liquidation. (n) only. This period is only for LIQUIDATION
o Trustees à appointed by the Board à they hold it in trust for the
Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
corporation and the stockholders. 3 year period of winding up à
Securities and Exchange Commission upon filing of a verified complaint and after
trustees may continue liquidation beyond the 3 year period.
proper notice and hearing on the grounds provided by existing laws, rules and
o Liquidation may continue after 3 years if a trustee is appointed by the
regulations. (n)
board within the 3 year
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its o ANOTHER WAY IS: Receivership à
own limitation or is annulled by forfeiture or otherwise, or whose corporate existence - TRUST FUND DOCTRINE:
for other purposes is terminated in any other manner, shall nevertheless be - LIQUIDATION and DISSOLUTION of Non Stock Corporation
continued as a body corporate for three (3) years after the time when it would have

been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property OUTLINE 7
and to distribute its assets, but not for the purpose of continuing the business for
which it was established.

At any time during said three (3) years, the corporation is authorized and BUSORG2 OUTLINE NO. 7
empowered to convey all of its property to trustees for the benefit of stockholders, ( Prof. M.I.P. Romero 2016)
members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its XVII. MERGERS & CONSOLIDATION
stockholders, members, creditors and others in interest, all interest which the Sec. 76 – 80
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest. TITLE IX MERGER AND CONSOLIDATION
Upon the winding up of the corporate affairs, any asset distributable to any creditor Section 76. Plan or merger of consolidation. – Two or more corporations may merge
or stockholder or member who is unknown or cannot be found shall be escheated into a single corporation which shall be one of the constituent corporations or may
to the city or municipality where such assets are located. 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:
72
1. The names of the corporations proposing to merge or consolidate, hereinafter Section 79. Effectivity of merger or consolidation. – The articles of merger or of
referred to as the constituent corporations;; consolidation, signed and certified as herein above required, shall be submitted to the
Securities and Exchange Commission in quadruplicate for its approval: Provided, That
2. The terms of the merger or consolidation and the mode of carrying the same in the case of merger or consolidation of banks or banking institutions, building and
into effect;; loan associations, trust companies, insurance companies, public utilities, educational
3. A statement of the changes, if any, in the articles of incorporation of the institutions and other special corporations governed by special laws, the favorable
surviving corporation in case of merger;; and, with respect to the consolidated recommendation of the appropriate government agency shall first be obtained. If the
corporation in case of consolidation, all the statements required to be set forth Commission is satisfied that the merger or consolidation of the corporations concerned
in the articles of incorporation for corporations organized under this Code;; and 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
4. Such other provisions with respect to the proposed merger or consolidation be effective.
as are deemed necessary or desirable. (n)
If, upon investigation, the Securities and Exchange Commission has reason to believe
Section 77. Stockholder’s or member’s approval. – Upon approval by majority vote of that the proposed merger or consolidation is contrary to or inconsistent with the
each of the board of directors or trustees of the constituent corporations of the plan of provisions of this Code or existing laws, it shall set a hearing to give the corporations
merger or consolidation, the same shall be submitted for approval by the stockholders concerned the opportunity to be heard. Written notice of the date, time and place of
or members of each of such corporations at separate corporate meetings duly called hearing shall be given to each constituent corporation at least two (2) weeks before
for the purpose. Notice of such meetings shall be given to all stockholders or members said hearing. The Commission shall thereafter proceed as provided in this Code. (n)
of the respective corporations, at least two (2) weeks prior to the date of the meeting,
either personally or by registered mail. Said notice shall state the purpose of the Section 80. Effects of merger or consolidation. – The merger or consolidation shall
meeting and shall include a copy or a summary of the plan of merger or consolidation. have the following effects:
The affirmative vote of stockholders representing at least two-thirds (2/3) of the 1. The constituent corporations shall become a single corporation which, in
outstanding capital stock of each corporation in the case of stock corporations or at case of merger, shall be the surviving corporation designated in the plan of
least two-thirds (2/3) of the members in the case of non-stock corporations shall be
merger;; and, in case of consolidation, shall be the consolidated corporation
necessary for the approval of such plan. Any dissenting stockholder in stock designated in the plan of consolidation;;
corporations may exercise his appraisal right in accordance with the Code: Provided,
That if after the approval by the stockholders of such plan, the board of directors 2. The separate existence of the constituent corporations shall cease, except
decides to abandon the plan, the appraisal right shall be extinguished. that of the surviving or the consolidated corporation;;
Any amendment to the plan of merger or consolidation may be made, provided such 3. The surviving or the consolidated corporation shall possess all the rights,
amendment is approved by majority vote of the respective boards of directors or privileges, immunities and powers and shall be subject to all the duties and
trustees of all the constituent corporations and ratified by the affirmative vote of liabilities of a corporation organized under this Code;;
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of
two-thirds (2/3) of the members of each of the constituent corporations. Such plan, 4. The surviving or the consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
together with any amendment, shall be considered as the agreement of merger or
consolidation. (n) constituent corporations;; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses
Section 78. Articles of merger or consolidation. – After the approval by the stockholders in action, and all and every other interest of, or belonging to, or due to each
or members as required by the preceding section, articles of merger or articles of constituent corporation, shall be deemed transferred to and vested in such
consolidation shall be executed by each of the constituent corporations, to be signed surviving or consolidated corporation without further act or deed;; and
by the president or vice-president and certified by the secretary or assistant secretary
of each corporation setting forth: 5. The surviving or consolidated corporation shall be responsible and liable for
all the liabilities and obligations of each of the constituent corporations in the
1. The plan of the merger or the plan of consolidation;; same manner as if such surviving or consolidated corporation had itself incurred
such liabilities or obligations;; and any pending claim, action or proceeding
2. As to stock corporations, the number of shares outstanding, or in the case of brought by or against any of such constituent corporations may be prosecuted
non-stock corporations, the number of members;; and by or against the surviving or consolidated corporation. The rights of creditors
3. As to each corporation, the number of shares or members voting for and or liens upon the property of any of such constituent corporations shall not be
against such plan, respectively. (n) impaired by such merger or consolidation. (n)
NOTES:
73
• CONSOLIDATION : A plus B = C… A and B are constituent, C is a new containing the information specified in the regulations issued by the Commission:
corporation Provided, That the Commission shall promulgate other criteria, such as increased
market share in the relevant market in excess of minimum thresholds, that may be
o A and B is deemed dissolved applied specifically to a sector, or across some or all sectors, in determining whether
parties to a merger or acquisition shall notify the Commission under this Chapter.
o C is the consolidated corporation
An agreement consummated in violation of this requirement to notify the Commission
o A and B will transfer its properties to C
shall be considered void and subject the parties to an administrative fine of one percent
o C will now issue stocks to A and B stockholders (1%) to five percent (5%) of the value of the transaction.

o A and B will now be stockholders of C Should the Commission deem it necessary, it may request further information that are
reasonably necessary and directly relevant to the prohibition under Section 20 hereof
• MERGER : A + B = A absorbs B à A is automatically dissolved from the parties to the agreement before the expiration of the thirty (30)-day period
referred. The issuance of such a request has the effect of extending the period within
• MERGER : A + B = B absorbs A è B is automatically dissolved which the agreement may not be consummated for an additional sixty (60) days,
beginning on the day after the request for information is received by the parties:
o All properties of A will be transferred to B Provided, That, in no case shall the total period for review by the Commission of the
subject agreement exceed ninety (90) days from initial notification by the parties.
o B issue shares of stocks to A

o A becomes the stockholder of B When the above periods have expired and no decision has been promulgated for
whatever reason, the merger or acquisition shall be deemed approved and the parties
à CONSOLIDATION à it shall absorb all the liabilities of the consolidated company à may proceed to implement or consummate it. All notices, documents and information
Creditors or lien rights should not be impaired provided to or emanating from the Commission under this section shall be subject to
confidentiality rule under Section 34 of this Act except when the release of information
• Corporation may agree what liabilities are absorbed as long as creditors right is contained therein is with the consent of the notifying entity or is mandatorily required to
not impaired à be disclosed by law or by a valid order of a court of competent jurisdiction, or of a
government or regulatory agency, including an exchange.
Y-1 Leisure Case
In the case of the merger or acquisition of banks, banking institutions, building and loan
• Surviving Company will be the one to absorb the absorbed company associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, a favorable or no-

objection ruling by the Commission shall not be construed as dispensing of the
R.A. 10667 (Phil. Competition Act of 2015) – Title IV
requirement for a favorable recommendation by the appropriate government agency
[Republic Act No. 10667] under Section 79 of the Corporation Code of the Philippines.
AN ACT PROVIDING FOR A NATIONAL COMPETITION POLICY PROHIBITING
ANTI-COMPETITIVE AGREEMENTS, ABUSE OF DOMINANT POSITION AND ANTI- A favorable recommendation by a governmental agency with a competition mandate
COMPETITIVE MERGERS AND ACQUISITIONS, ESTABLISHING THE PHILIPPINE shall give rise to a disputable presumption that the proposed merger or acquisition is
COMPETITION COMMISSION AND APPROPRIATING FUNDS THEREFOR not violative of this Act.

CHAPTER IV SEC. 18. Effect of Notification. — If within the relevant periods stipulated in the
MERGERS AND ACQUISITIONS preceding section, the Commission determines that such agreement is prohibited under
SEC. 16. Review of Mergers and Acquisitions. — The Commission shall have the power Section 20 and does not qualify for exemption under Section 21 of this Chapter, the
to review mergers and acquisitions based on factors deemed relevant by the Commission may:
Commission. (a) Prohibit the implementation of the agreement;;
(b) Prohibit the implementation of the agreement unless and until it is modified
SEC. 17. Compulsory Notification. – Parties to the merger or acquisition agreement by changes specified by the Commission.
referred to in the preceding section wherein the value of the transaction exceeds one (c) Prohibit the implementation of the agreement unless and until the pertinent
billion pesos (P1,000,000,000.00) are prohibited from consummating their agreement party or parties enter into legally enforceable agreements specified by the
until thirty (30) days after providing notification to the Commission in the form and Commission.
74
Global Business Holdings v. Surecomp Software (G.R.173463;; Oct.13, 2010)
SEC. 19. Notification Threshold. – The Commission shall, from time to time, adopt and It cannot be denied that there is indeed a contract entered into between Surecomp and
publish regulations stipulating: Global, the latter as a successor-in-interest of the merging, Global is estopped from
(a) The transaction value threshold and such other criteria subject to the denying Surecomp’s capacity to sue it for alleged breach of that contract with damages.
notification requirement of Section 17 of this Act;;
(b) The information that must be supplied for notified merger or acquisition;; In the merger of two existing corporations, one of the corporations survives and continues
(c) Exceptions or exemptions from the notification requirement;; and the business, while the other is dissolved, and all its rights, properties, and liabilities are
(d) Other rules relating to the notification procedures. acquired by the surviving corporation.

SEC. 20. Prohibited. Mergers and Acquisitions. – Merger or acquisition agreements that Reyes et al. v. Blouse et al. 91 Phil 305
substantially prevent, restrict or lessen competition in the relevant market or in the The questioned resolution charges the board of Laguna to consolidate properties and
market for goods or services as may be determined by the Commission shall be franchises thereof with that of Batangas Transport. Both corporations have passed similar
prohibited. resolutions to take steps to effect the consolidation. It is apparent that the purpose of the
resolution is not to dissolve but to merely transfer its assets to a new corporation in
SEC. 21. Exemptions from Prohibited. Mergers and Acquisitions. – Merger or exchange for its shares. This comes within the purview of the old corporation law, which
acquisition agreement prohibited under Section 20 of this Chapter may, nonetheless, provides that a corporation may sell, exchange, lease or otherwise dispose of all its
be exempt from prohibition by the Commission when the parties establish either of the property and assets when authorized by affirmative vote of 2/3 of stockholders. The words
following: "or other wise disposed of" is very broad and in a sense covers a merger or consolidation.
(a) The concentration has brought about or is likely to bring about gains in However, the transaction in this case cannot be considered as a merger or consolidation
efficiencies that are greater than the effects of any limitation on competition that because a merger implies the termination or cessation of the merged corporations and
result or likely to result from the merger or acquisition agreement;; or not merely a merger of assets and properties. The two companies will not lose their
(b) A party to the merger or acquisition agreement is faced with actual or corporate existence but will continue to exist even after the consolidation. What is intended
imminent financial failure, and the agreement represents the least anti- by the resolution is merely a consolidation of properties and assets, to be managed and
competitive arrangement among the known alternative uses for the failing operated by a new corporation, and not a merger of the corporations themselves.
entity’s assets:
Edward Nell Co. v. Pacific Farms, Inc. 15 SCRA 415
Provided, That an entity shall not be prohibited from continuing to own and Generally where one corporation sells or otherwise transfers all of its assets to another
hold the stock or other share capital or assets of another corporation which corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1)
it acquired prior to the approval of this Act or acquiring or maintaining its where the purchaser expressly or impliedly agrees to assume such debts;; (2) where the
market share in a relevant market through such means without violating the transaction amounts to a consolidation or merger of the corporations;; (3) where the
provisions of this Act: purchasing corporation is merely a continuation of the selling corporation;; and (4) where
the transaction is entered into fraudulently in order to escape liability for such debts.
Provided, further, That the acquisition of the stock or other share capital of
one or more corporations solely for investment and not used for voting or In the case at bar, there is neither proof nor allegation that appellee had made any of the
exercising control and not to otherwise bring about, or attempt to bring about above exceptions. Hence, Pacific Farms cannot assume the debts and liabilities of Insular
the prevention, restriction, or lessening of competition in the relevant market Farms.
shall not be prohibited.
Laguna Trans. Co. Inc. v. SSS 107 Phil 833
SEC. 22. Burden of Proof. – The burden of proof under Section 21 lies with the parties
seeking the exemption. A party seeking to rely on the exemption specified in Section Although, a corporation will be looked upon as a legal entity as a general rule,
21(a) must demonstrate that if the agreement were not implemented, significant and until sufficient reason to the contrary appears;; but, when the motion of legal
efficiency gains would not be realized. entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons.
SEC. 23. Finality of Ridings on Mergers and Acquisitions. – Merger or acquisition

agreements that have received a favorable ruling from the Commission, except when
such ruling was obtained on the basis of fraud or false material information, may not be However, where a corporation was formed by, and consisted of members of a
challenged under this Act. partnership whose business and property was conveyed and transferred to the
corporation for the purpose of continuing its business, in payment for which

75
corporate capital stock was issued, such corporation is presumed to have subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
assumed partnership debts, and is prima facie liable therefore. as may be determined by the Securities and Exchange Commission. (6)

Lozano v. De Los Santos 274 SCRA 452 Section 22. Effects on non-use of corporate charter and continuous inoperation of a
NO. There is no intracorporate nor partnership relation between petitioner and corporation. – If a corporation does not formally organize and commence the
private respondent. The controversy between them arose out of their plan to transaction of its business or the construction of its works within two (2) years from the
date of its incorporation, its corporate powers cease and the corporation shall be
consolidate their respective jeepney drivers' and operators' associations into a
deemed dissolved. However, if a corporation has commenced the transaction of its
single common association. This unified association was, however, still a business but subsequently becomes continuously inoperative for a period of at least
proposal. It had not been approved by the SEC, neither had its officers and five (5) years, the same shall be a ground for the suspension or revocation of its
members submitted their articles of consolidation in accordance with Sections 78 corporate franchise or certificate of incorporation. (19a)
and 79 of the Corporation Code.
This provision shall not apply if the failure to organize, commence the transaction of its
Consolidation becomes effective not upon mere agreement of the members but businesses or the construction of its works, or to continuously operate is due to causes
only upon issuance of the certificate of consolidation by the SEC. When the SEC, beyond the control of the corporation as may be determined by the Securities and
upon processing and examining the articles of consolidation, is satisfied that the Exchange Commission.

consolidation of the corporations is not inconsistent with the provisions of the
TITLE XIV DISSOLUTION
Corporation Code and existing laws, it issues a certificate of consolidation which
Section 117. Methods of dissolution. – A corporation formed or organized under the
makes the reorganization official. The new consolidated corporation comes into provisions of this Code may be dissolved voluntarily or involuntarily. (n)
existence and the constituent corporations dissolve and cease to exist.
Section 118. Voluntary dissolution where no creditors are affected. – If dissolution of
BPI v. BPI Employees Union Aug. 10, 2010 a corporation does not prejudice the rights of any creditor having a claim against it, the
As a general rule, the State protects the workers right to security of tenure. An dissolution may be effected by majority vote of the board of directors or trustees, and
employee’s services can only be terminated upon just and authorized causes. In by a resolution duly adopted by the affirmative vote of the stockholders owning at least
this case, the presence of a Union Shop Clause in the CBA between BPI and two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
BPI Union must be respected. Failure of an employee to join the union pursuant members of a meeting to be held upon call of the directors or trustees after publication
to the clause is an authorized cause for BPI not to continue employing the of the notice of time, place and object of the meeting for three (3) consecutive weeks
employee concerned – and BPI must respect that provision of the CBA. In the 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
hierarchy of labor rights, unionism is favored over security of tenure. A contrary
circulation in the Philippines, after sending such notice to each stockholder or member
interpretation of the Union Shop Clause would dilute its efficacy and put the either by registered mail or by personal delivery at least thirty (30) days prior to said
certified union that is supposedly being protected thereby at the mercy of meeting. A copy of the resolution authorizing the dissolution shall be certified by a
management. Nevertheless, the FEB employees are still entitled to the twin majority of the board of directors or trustees and countersigned by the secretary of the
notice rule – this is to afford them ample opportunity to whether or not join the corporation. The Securities and Exchange Commission shall thereupon issue the
union. certificate of dissolution. (62a)

BANCOM v. RPN April 21, 2014 Section 119. Voluntary dissolution where creditors are affected. – Where the
dissolution of a corporation may prejudice the rights of any creditor, the petition for
XVIII. DISSOLUTION: dissolution shall be filed with the Securities and Exchange Commission. The petition
shall be signed by a majority of its board of directors or trustees or other officers having
Modes and Effects of Dissolution Secs. 11, 22, 117 – 121, 105 the management of its affairs, verified by its president or secretary or one of its directors
Section 11. Corporate term. – A corporation shall exist for a period not exceeding fifty or trustees, and shall set forth all claims and demands against it, and that its dissolution
(50) years from the date of incorporation unless sooner dissolved or unless said period was resolved upon by the affirmative vote of the stockholders representing at least two-
is extended. The corporate term as originally stated in the articles of incorporation may thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members
be extended for periods not exceeding fifty (50) years in any single instance by an at a meeting of its stockholders or members called for that purpose.
amendment of the articles of incorporation, in accordance with this Code;; Provided, If the petition is sufficient in form and substance, the Commission shall, by an order
That no extension can be made earlier than five (5) years prior to the original or reciting the purpose of the petition, fix a date on or before which objections thereto may
76
be filed by any person, which date shall not be less than thirty (30) days nor more than enabling it to settle and close its affairs, to dispose of and convey its property and to
sixty (60) days after the entry of the order. Before such date, a copy of the order shall distribute its assets, but not for the purpose of continuing the business for which it was
be published at least once a week for three (3) consecutive weeks in a newspaper of established.
general circulation published in the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper, then in a newspaper of At any time during said three (3) years, the corporation is authorized and empowered
general circulation in the Philippines, and a similar copy shall be posted for three (3) to convey all of its property to trustees for the benefit of stockholders, members,
consecutive weeks in three (3) public places in such municipality or city. creditors, and other persons in interest. From and after any such conveyance by the
Upon five (5) day’s notice, given after the date on which the right to file objections as corporation of its property in trust for the benefit of its stockholders, members, creditors
fixed in the order has expired, the Commission shall proceed to hear the petition and and others in interest, all interest which the corporation had in the property terminates,
try any issue made by the objections filed;; and if no such objection is sufficient, and the the legal interest vests in the trustees, and the beneficial interest in the stockholders,
material allegations of the petition are true, it shall render judgment dissolving the members, creditors or other persons in interest.
corporation and directing such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the corporation. (Rule Upon the winding up of the corporate affairs, any asset distributable to any creditor or
104, RCa) stockholder or member who is unknown or cannot be found shall be escheated to the
city or municipality where such assets are located.
Section 120. Dissolution by shortening corporate term. – A voluntary dissolution may
be effected by amending the articles of incorporation to shorten the corporate term Except by decrease of capital stock and as otherwise allowed by this Code, no
pursuant to the provisions of this Code. A copy of the amended articles of incorporation corporation shall distribute any of its assets or property except upon lawful dissolution
shall be submitted to the Securities and Exchange Commission in accordance with this and after payment of all its debts and liabilities. (77a, 89a, 16a)
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 B. Modes of Liquidation –
any further proceedings, subject to the provisions of this Code on liquidation. (n) 1) by board of directors
2) by trustees
Section 121. Involuntary dissolution. – A corporation may be dissolved by the 3) by receiver
Securities and Exchange Commission upon filing of a verified complaint and after
proper notice and hearing on the grounds provided by existing laws, rules and Gen Rule: Prohibition against distribution of assets except upon dissolution and
regulations. (n) liquidation (Sec 122)
Exception: Sec. 8, 9, 38, 41, 43, 104, 105
Section 105. Withdrawal of stockholder or dissolution of corporation. – In addition and Section 8. Redeemable shares. – Redeemable shares may be issued by the
without prejudice to other rights and remedies available to a stockholder under this corporation when expressly so provided in the articles of incorporation. They may be
Title, any stockholder of a close corporation may, for any reason, compel the said purchased or taken up by the corporation upon the expiration of a fixed period,
corporation to purchase his shares at their fair value, which shall not be less than their regardless of the existence of unrestricted retained earnings in the books of the
par or issued value, when the corporation has sufficient assets in its books to cover its corporation, and upon such other terms and conditions as may be stated in the articles
debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close of incorporation, which terms and conditions must also be stated in the certificate of
corporation may, by written petition to the Securities and Exchange Commission, stock representing said shares. (n)
compel the dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or Section 9. Treasury shares. – Treasury shares are shares of stock which have been
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever issued and fully paid for, but subsequently reacquired by the issuing corporation by
corporate assets are being misapplied or wasted. 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. (n)

XlX. LIQUIDATION: Section 38. Power to increase or decrease capital stock;; incur, create or increase
bonded indebtedness. – No corporation shall increase or decrease its capital stock or
A. Sec. 122 incur, create or increase any bonded indebtedness unless approved by a majority vote
Section 122. Corporate liquidation. – Every corporation whose charter expires by its of the board of directors and, at a stockholder’s meeting duly called for the purpose,
own limitation or is annulled by forfeiture or otherwise, or whose corporate existence two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of
for other purposes is terminated in any other manner, shall nevertheless be continued the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
as a body corporate for three (3) years after the time when it would have been so Written notice of the proposed increase or diminution of the capital stock or of the
dissolved, for the purpose of prosecuting and defending suits by or against it and incurring, creating, or increasing of any bonded indebtedness and of the time and place
77
of the stockholder’s meeting at which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded indebtedness is to be considered, Bonds issued by a corporation shall be registered with the Securities and
must be addressed to each stockholder at his place of residence as shown on the books Exchange Commission, which shall have the authority to determine the
of the corporation and deposited to the addressee in the post office with postage sufficiency of the terms thereof. (17a)
prepaid, or served personally.
Section 41. Power to acquire own shares. – A stock corporation shall have the power
A certificate in duplicate must be signed by a majority of the directors of the corporation to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
and countersigned by the chairman and the secretary of the stockholders’ meeting, including but not limited to the following cases: Provided, That the corporation has
setting forth: unrestricted retained earnings in its books to cover the shares to be purchased or
(1) That the requirements of this section have been complied with;; acquired:
(2) The amount of the increase or diminution of the capital stock;; 1. To eliminate fractional shares arising out of stock dividends;;
(3) If an increase of the capital stock, the amount of capital stock or number of 2. To collect or compromise an indebtedness to the corporation, arising out of
shares of no-par stock thereof actually subscribed, the names, nationalities and unpaid subscription, in a delinquency sale, and to purchase delinquent shares
residences of the persons subscribing, the amount of capital stock or number sold during said sale;; and
of no-par stock subscribed by each, and the amount paid by each on his 3. To pay dissenting or withdrawing stockholders entitled to payment for their
subscription in cash or property, or the amount of capital stock or number of shares under the provisions of this Code. (a)
shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;; Section 43. Power to declare dividends. - The board of directors of a stock corporation
(4) Any bonded indebtedness to be incurred, created or increased;; may declare dividends out of the unrestricted retained earnings which shall be payable
(5) The actual indebtedness of the corporation on the day of the meeting;; in cash, in property, or in stock to all stockholders on the basis of outstanding stock held
(6) The amount of stock represented at the meeting;; and by them: Provided, That any cash dividends due on delinquent stock shall first be
(7) The vote authorizing the increase or diminution of the capital stock, or the applied to the unpaid balance on the subscription plus costs and expenses, while stock
incurring, creating or increasing of any bonded indebtedness. 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
Any increase or decrease in the capital stock or the incurring, creating or approval of stockholders representing not less than two-thirds (2/3) of the outstanding
increasing of any bonded indebtedness shall require prior approval of the capital stock at a regular or special meeting duly called for the purpose. (16a)
Securities and Exchange Commission.
Stock corporations are prohibited from retaining surplus profits in excess of one
One of the duplicate certificates shall be kept on file in the office of the hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
corporation and the other shall be filed with the Securities and Exchange definite corporate expansion projects or programs approved by the board of directors;;
Commission and attached to the original articles of incorporation. From and or (2) when the corporation is prohibited under any loan agreement with any financial
after approval by the Securities and Exchange Commission and the issuance institution or creditor, whether local or foreign, from declaring dividends without its/his
by the Commission of its certificate of filing, the capital stock shall stand consent, and such consent has not yet been secured;; or (3) when it can be clearly
increased or decreased and the incurring, creating or increasing of any bonded shown that such retention is necessary under special circumstances obtaining in the
indebtedness authorized, as the certificate of filing may declare: Provided, That corporation, such as when there is need for special reserve for probable contingencies.
the Securities and Exchange Commission shall not accept for filing any (n)
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time Section 104. Deadlocks. – Notwithstanding any contrary provision in the articles of
of the filing of the certificate, showing that at least twenty-five (25%) percent of incorporation or by-laws or agreement of stockholders of a close corporation, if the
such increased capital stock has been subscribed and that at least twenty-five directors or stockholders are so divided respecting the management of the corporation’s
(25%) percent of the amount subscribed has been paid either in actual cash to business and affairs that the votes required for any corporate action cannot be obtained,
the corporation or that there has been transferred to the corporation property with the consequence that the business and affairs of the corporation can no longer be
the valuation of which is equal to twenty-five (25%) percent of the subscription: conducted to the advantage of the stockholders generally, the Securities and Exchange
Provided, further, That no decrease of the capital stock shall be approved by Commission, upon written petition by any stockholder, shall have the power to arbitrate
the Commission if its effect shall prejudice the rights of corporate creditors. the dispute. In the exercise of such power, the Commission shall have authority to make
such order as it deems appropriate, including an order: (1) cancelling or altering any
Non-stock corporations may incur or create bonded indebtedness, or increase provision contained in the articles of incorporation, by-laws, or any stockholder’s
the same, with the approval by a majority vote of the board of trustees and of at agreement;; (2) cancelling, altering or enjoining any resolution or act of the corporation
least two-thirds (2/3) of the members in a meeting duly called for the purpose. or its board of directors, stockholders, or officers;; (3) directing or prohibiting any act of
78
the corporation or its board of directors, stockholders, officers, or other persons party the Philippines substantially similar to those of the dissolving corporation
to the action;; (4) requiring the purchase at their fair value of shares of any stockholder, according to a plan of distribution adopted pursuant to this Chapter;;
either by the corporation regardless of the availability of unrestricted retained earnings 4. Assets other than those mentioned in the preceding paragraphs, if any,
in its books, or by the other stockholders;; (5) appointing a provisional director;; (6) shall be distributed in accordance with the provisions of the articles of
dissolving the corporation;; or (7) granting such other relief as the circumstances may incorporation or the by-laws, to the extent that the articles of incorporation or
warrant. the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution;; and
A provisional director shall be an impartial person who is neither a stockholder nor a 5. In any other case, assets may be distributed to such persons, societies,
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose organizations or corporations, whether or not organized for profit, as may be
further qualifications, if any, may be determined by the Commission. A provisional specified in a plan of distribution adopted pursuant to this Chapter. (n)
director is not a receiver of the corporation and does not have the title and powers of a Section 95. Plan of distribution of assets. – A plan providing for the distribution of
custodian or receiver. A provisional director shall have all the rights and powers of a assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock
duly elected director of the corporation, including the right to notice of and to vote at corporation in the process of dissolution in the following manner:
meetings of directors, until such time as he shall be removed by order of the
Commission or by all the stockholders. His compensation shall be determined by The board of trustees shall, by majority vote, adopt a resolution recommending a plan
agreement between him and the corporation subject to approval of the Commission, of distribution and directing the submission thereof to a vote at a regular or special
which may fix his compensation in the absence of agreement or in the event of meeting of members having voting rights. Written notice setting forth the proposed plan
disagreement between the provisional director and the corporation. of distribution or a summary thereof and the date, time and place of such meeting shall
be given to each member entitled to vote, within the time and in the manner provided
Section 105. Withdrawal of stockholder or dissolution of corporation. – In addition and in this Code for the giving of notice of meetings to members. Such plan of distribution
without prejudice to other rights and remedies available to a stockholder under this Title, shall be adopted upon approval of at least two-thirds (2/3) of the members having voting
any stockholder of a close corporation may, for any reason, compel the said corporation rights present or represented by proxy at such meeting. (n)
to purchase his shares at their fair value, which shall not be less than their par or issued
value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any stockholder of a close China Banking v. Michelin 58 Phil. 261
corporation may, by written petition to the Securities and Exchange Commission, The appointment of a receiver by the court to wind up the affairs of the corporation upon
compel the dissolution of such corporation whenever any of acts of the directors, petition of voluntary dissolution does not empower the court to hear and pass on the claims
officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or of the creditors of the corporation at first hand. In such cases, the receiver does not act
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement
corporate assets are being misapplied or wasted. of the affairs of a corporation consists of adjusting the debts and claims, that is, of
collecting all that is due the corporation, the settlement and adjustment of claims against
it and the payment of its just debts, all claims must be presented for allowance to the
B. Non-stock Corporations - Sec. 94 to 95 receiver or trustees or other proper persons during the winding-up proceedings within the
CHAPTER III DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS 3 years provided by the Corporation Law as the term for the corporate existence of the
Section 94. Rules of distribution. – In case dissolution of a non-stock corporation in corporation, and if a claim is disputed so that the receiver cannot safely allow the same, it
accordance with the provisions of this Code, its assets shall be applied and distributed should be transferred to the proper court for trial and allowance, and the amount so
as follows: allowed then presented to the receiver or trustee for payment. The rulings of the receiver
1. All liabilities and obligations of the corporation shall be paid, satisfied and on the validity of claims submitted are subject to review by the court appointing such
discharged, or adequate provision shall be made therefore;; receiver though no appeal is taken to the latter ruling, and during the winding-up
2. Assets held by the corporation upon a condition requiring return, transfer or proceedings after dissolution, no creditor will be permitted by legal process or otherwise
conveyance, and which condition occurs by reason of the dissolution, shall be to acquire priority, or to enforce his claim against the property held for distribution as
returned, transferred or conveyed in accordance with such requirements;; against the rights of other creditors.
3. Assets received and held by the corporation subject to limitations permitting
their use only for charitable, religious, benevolent, educational or similar RP v. Marsman Dev. Corp 44 SCRA 418
purposes, but not held upon a condition requiring return, transfer or Although Marsman was extra-judicially dissolved, with the 3-year rule, nothing however
conveyance by reason of the dissolution, shall be transferred or conveyed to bars an action for recovery of corporate debts against the liquidators. In fact, the 1st
one or more corporations, societies or organizations engaged in activities in assessment was given before dissolution, while the 2nd and 3rd assessments were given
just 6 months after dissolution (within the 3-year rule). Such facts definitely established
79
that the Government was a creditor of the corporation for whom the liquidator was corporation to the new corporation intended to be created as long as the
supposed to hold assets of the corporation. stockholders have given their consent.

NOTE: Code provides for a 3-year period for continuation of the corporate existence for Non-filing of the by-laws will not result in automatic dissolution of the corporation.
purposes of liquidation, BUT there is nothing in the provision which bars an action for
recovery of debts of the corporation against the liquidator himself, after the lapse of the 3-
Under Section 6(i) of PD 902-A, the SEC is empowered to "suspend or revoked,
year period. after proper notice and hearing, the franchise or certificate of registration of a
corporation" on the ground inter alia of "failure to file by-laws within the required
Tan Tiong Bio v. CIR GR L-15778;; April 23, 1962 period." It is clear from this provision that there must first of all be a hearing to
The creditor of a dissolved corporation may follow its assets once they passed into the determine the existence of the ground, and secondly, assuming such finding, the
hands of the stockholders. The dissolution of a corporation does not extinguish the debts penalty is not necessarily revocation but may be only suspension of the charter.
due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the In fact, under the rules and regulations of the SEC, failure to file the by-laws on
nature of a trust fund, into the hands of its stockholders. An indebtedness of a corporation time may be penalized merely with the imposition of an administrative fine without
to the federal government for income and excess profit taxes is not extinguished by the affecting the corporate existence of the erring firm.
dissolution of the corporation.

(NOTE: Relate to SEC OGC Opinion No. 08-17 dated Aug. 20, 2008)
That the hands of the government cannot, collects taxes from a defunct corporation, it 20 August 2008
loses thereby none of its rights to assess taxes which had been due from the corporation, SEC-OGC Opinion No. 08-17
and to collect them from persons who by reason of transaction with the corporation hold Effect of re-registration of a revoked corporation
property against which the tax can be enforced and that the legal death of the corporation J. T. LEONARDO C. SANTOS
no more prevents such action than would the physical death of an individual prevent the & ASSOCIATES LAW FIRM Unit 2502 Atlanta Centre
government from assessing taxes against him and collecting them from his administrator Annapolis Street, Greenhills
who holds the property which the decedent had formerly possessed. San Juan, Metro Manila

Attention: Atty. Clifford Richard Genesela
Chung Ka Bio v. IAC 163 SCRA 534 Gentlemen:
Non-filing of the by-laws will not result in automatic dissolution of the corporation. This pertains to your letter dated 29 January 2008 requesting opinion on the effect of
Under Section 6(i) of PD 902-A, the SEC is empowered to “suspend or revoked, re-registration of an old corporation under a new set of incorporators.
after proper notice and hearing, the franchise or certificate of registration of a
corporation” on the ground inter alia of “failure to file by-laws within the required As a brief background, Capricorn Development Realty Corporation (hereinafter referred
period.” It is clear from this provision that there must first of all be a hearing to to as the Senior Corporation) was registered with the Commission under registration
number CS0000067914 sometime in 1976. The Senior Corporation was granted a fifty-
determine the existence of the ground, and secondly, assuming such finding, the
year existence. Sometime in the 1980s, the incorporators and the majority stockholder
penalty is not necessarily revocation but may be only suspension of the charter. of Capricorn executed a Trust Agreement in favor of the then president. The tenor of
In fact, under the rules and regulations of the SEC, failure to file the by-laws on the Trust Agreement is that the trustee is the absolute owner of Twenty Thousand
time may be penalized merely with the imposition of an administrative fine without shares with par value of One Hundred Pesos (Php100.00) per share but the shares
affecting the corporate existence of the erring firm. were registered in the name of the trustors and that they (trustors) hold the shares in
behalf and in trust for the trustee.
Methods of liquidation
Due to its failure, however, to comply with the reportorial requirements of this
While we agree that the board of directors is not normally permitted to undertake Commission, the Senior Corporation's certificate of registration was revoked by virtue
of S.E.C. Order dated 08 July 2003. The said order was published in a newspaper of
any activity outside of the usual liquidation of the business of the dissolved
general circulation on 11 July 2003. The revocation became effective on 11 August
corporation, there is nothing to prevent the stockholders from conveying their 2003.
respective shareholdings toward the creation of a new corporation to continue
the business of the old. Winding up is the sole activity of a dissolved corporation The Senior Corporation was alleged to have been re-registered on 23 April 2007 under
that does not intend to incorporate anew. If it does, however, it is not unlawful for a new registration number CS200706098. The Junior Corporation has its own set of
the old board of directors to negotiate and transfer the assets of the dissolved incorporators.
80
be assigned by the co-owners to the new corporation in exchange of new
You would like now to know the effect of re-registration corporation. shares of stocks to be issued by the re-incorporated D. N. Venegas."

One of the modes of termination of corporate existence is through the annulment by The Junior Corporation can only succeed ownership over the properties and the rights
forfeiture of its franchise as decreed by this Commission. of the dissolved corporation in the event a liquidation proceeding is carried out and
Upon termination of its existence, a corporation loses the power to deal and enter into distributed to the stockholders, who in turn, are willing to exchange the properties of
further legal relations with other persons;; it may have only such rights as may be the Senior Corporation with the shares of the Junior Corporation. In other words, unless
required by the process of liquidating and winding up its affairs. Dissolution is a the old corporation has liquidated its assets and transferred the same to the new
condition of law and fact which ends the capacity of the body corporate to act as such corporation, the two corporations will have their separate and distinct assets and
and necessitates a liquidation and extinguishment of all legal relations existing in liabilities. Based on that, the Senior Corporation must undergo liquidation and wind up
respect of the corporate enterprise. its affairs before its rights are transferred or assigned to the Junior Corporation.

Section 122 of the Corporation Code provides as follows: It shall be understood that the foregoing opinion is rendered based solely on the facts
"Sec. 122. Corporate liquidation. - Every corporation whose and circumstances disclosed and relevant solely to the particular issues raised therein
charter expires by its own limitation or is annulled by forfeiture or and shall not be used in the nature of a standing rule binding upon the Commission in
otherwise, or whose corporate existence for other purposes is other cases whether of similar or dissimilar circumstances. If, upon investigation, it will
terminated in any other manner, shall nevertheless be continued be disclosed that the facts relied upon are different, this opinion shall be rendered null
as a body corporate for three (3) years after the time when it and void.
would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabli~g it to settle and close NOTE: In the absence of corporate liquidation, the properties and any rights of
its affairs, to dispose of and convey its property and to distribute the Senior Corporation cannot be deemed to be transferred to the Junior
its assets, but not for the purpose of continuing the business for Corporation even if the two corporations have the same name albeit different set
which it was
of incorporators. Thus, for all intents and purposes, the two corporations are
established."

separate and distinct from each other.
Applying the foregoing legal provisions in the case of the subject corporations, this
Office is of the opinion that in the absence of corporate liquidation, the properties and The Junior Corporation can only succeed ownership over the properties and the
any rights of the Senior Corporation cannot be deemed to be transferred to the Junior rights of the dissolved corporation in the event a liquidation proceeding is carried
Corporation even if the two corporations have the same name albeit different set of out and distributed to the stockholders, who in turn, are willing to exchange the
incorporators. Thus, for all intents and purposes, the two corporations are separate and properties of the Senior Corporation with the shares of the Junior Corporation. In
distinct from each other. other words, unless the old corporation has liquidated its assets and transferred
the same to the new corporation, the two corporations will have their separate
This Office had also the occasion to render an opinion involving the issue as in the
and distinct assets and liabilities. Based on that, the Senior Corporation must
instant query.4 The relevant portion of the opinion is quoted as follows:
"In the absence of a corporate liquidation, the real property of a dissolved
undergo liquidation and wind up its affairs before its rights are transferred or
corporation cannot be automatically transferred to the re-incorporated D. assigned to the Junior Corporation.
N. Venegas & Co., Inc.
xxx
It must be emphasized that the re-incorporated D.N. Venegas & Co., Inc.
is a new entity distinct and separate from the dissolved corporation, even Gelano v. CA 103 SCRA 90 (1981)
though the two corporations have the same corporate names, Can a corporation, whose corporate life had ceased by the expiration of its terms of
incorporators and stockholders. existence, still continue prosecuting and defending suits after its dissolution and beyond
xxx the period of three (3) years provided for under Act No. 1459, otherwise known as the
Lastly, the reincorporated D. N. Venegas & Co., Inc. can succeed Corporation Law, to wind up its affairs, without having undertaken any step to transfer its
ownership over the real property owned by the dissolved corporation assets to a trustee or assignee.
only in the event that a liquidation proceeding can be carried out by the
Directors acting as Trustees of the dissolved corporation and real YES. It is to be noted that the time during which the corporation, through its own officers,
properties distributed to the stockholders as liquidation dividends shall may conduct the liquidation of its assets and sue and be sued as a corporation is limited
to three years from the time the period of dissolution commences;; but that there is no time
81
limited within which the trustees must complete a liquidation placed in their hands. It is If the 3-year extended life has expired without a trustee or receiver having been expressly
provided only (Corp. Law, Sec. 78) that the conveyance in the trustees must he made designated by the corporation itself within that period, the board of directors or trustees
within the three-year period. It may be found impossible to complete the work of liquidation itself may be permitted to so continue as "trustees" by legal implication to complete the
within the three-year period or to reduce disputed claims to judgment. The authorities are corporate liquidation. In the absence of a board of directors or trustees, those having any
to the effect that suits by or against a corporation abate where it ceased to be an entity pecuniary interest in the assets, including not only the shareholders but likewise the
capable of suing or being sued;; but trustees to whom the corporate assets have been creditors of the corporation, acting for and in its behalf, might make proper representations
conveyed pursuant to the authority of Section 78 may sue and be sued as such in all with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature,
matters connected with the liquidation. By the terms of the statute the effect of the for working out a final settlement of the corporate concerns.
conveyance is to make the trustees the legal owners of the property conveyed, subject to
the beneficial interest therein of creditors and stockholders." Reburiano v. CA 301 SCRA 342 (1999)
Sec. 122 of the Corporation Code provides that every corporation whose charter
The trustee may commence a suit which can proceed to final judgment even beyond the expires by its own limitation or is annulled by forfeiture or otherwise, or whose
three-year period. No reason can be conceived why a suit already commenced by the corporate existence for other purposes is terminated in any other manner, shall
corporation itself during its existence, not by a mere trustee who, by fiction, merely nevertheless be continued as a body corporate for 3years after the time when it
continues the legal personality of the dissolved corporation should not be accorded similar would have been so dissolved, for the purpose of prosecuting and defending
treatment allowed — to proceed to final judgment and execution thereof.
suits by or against it and enabling it to settle and close its affairs, to dispose of
an convey its property and to distribute its assets, but not for the purpose of
conjugal property is liable time during which the corporation, through its own continuing the business for which it was established .However, Reburiano further
officers, may conduct the liquidation of its assets and sue and be sued as a argues that when Pepsi undertook a voluntary dissolution, there was no showing
corporation is limited to 3 years from the time the period of dissolution that a receiver or trustee was ever appointed. He contends that Sec. 122 of the
commences;; but that there is no time limited within which the trustees must Corporation Code above cited does not authorize a corporation, after the 3 year
complete a liquidation placed in their hands. Only the conveyance to the trustees liquidation period, to continue actions instituted by it within said period of 3 years.
must be made within the 3-year period. Effect of the conveyance is to make the SC held that in the case of Gelano vs. CA, a corporation that has a pending action
trustees the legal owners of the property conveyed, subject to the beneficial and which cannot be terminated within the 3 year period after dissolution is
interest therein of creditors and stockholders authorized to convey all its property to trustees to enable it to prosecute and
defend suits by or against the corporation beyond the 3 year period. No reason
Trustee may commence a suit which can proceed to final judgment even beyond could be conceived why a suit already commenced by the corporation itself
the 3-year period. "Trustee" = general concept - include the counsel to whom during its existence, not by a mere trustee who, by fiction, merely continues the
was entrusted in the instant case. The purpose in the transfer of the assets of the legal personality of the dissolved corporation, should not be accorded similar
corporation to a trustee upon its dissolution is more for the protection of its treatment allowed to proceed to final judgment and execution thereof. Counsel
creditor and stockholders. Debtors may not take advantage of the failure of the of the dissolved corporation can be considered a trustee. Also, the board of
corporation to transfer its assets to a trustee directors may be permitted to complete the corporate liquidation by continuing
as trustees by legal implication. Moreover, the Corporation Code provides:
Section 77 of the Corporation Law, when the corporate existence is terminated Sec. 145 –Amendment or Repeal – No right or remedy in favor or against any
in any legal manner, the corporation shall nevertheless continue as a body corporation, its stockholders, members, directors, trustees, or officers, shall be
corporate for 3 years after the time when it would removed or impaired either by the shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent amendment or
Clemente v. CA 242 SCRA 717 (1995)
repeal of this Code or of any part thereof
The corporation continues to be a body corporate for three (3) years after its dissolution

for purposes of prosecuting and defending suits by and against it and for enabling it to
Paramount Insurance v. A.C. Ordonez 561 SCRA 327 (2008)
settle and close its affairs, culminating in the disposition and distribution of its remaining
Section 11, Rule 14 sets out an exclusive enumeration of the officers who can receive
assets. It may, during the three-year term, appoint a trustee or a receiver who may act
summons on behalf of a corporation. Service of summons to someone other than the
beyond that period. The termination of the life of a juridical entity does not by itself cause
corporation’s president, managing partner, general manager, corporate secretary,
the extinction or diminution of the right and liabilities of such entity nor those of its owners
treasurer, and in-house counsel, is not valid.
and creditors.

The designation of persons or officers who are authorized to receive summons for a
82
domestic corporation or partnership is limited and more clearly specified in the new rule. found that the board of directors of a dissolved corporation may continue to
8
The phrase ‘agent, or any of its directors’ has been conspicuously deleted. Moreover, the exercise its powers and act in behalf of the corporation for the limited purpose of
argument of substantial compliance is no longer compelling. We have ruled that the new winding up and liquidating its corporate affairs. For this reason, issues raised by
rule, as opposed to Section 13, Rule 14 of the 1964 Rules of Court, is restricted, limited the stockholder of the dissolved corporation against the board are still covered
and exclusive, following the rule in statutory construction that expressio unios est exclusio
alterius. Had the Rules of Court Revision Committee intended to liberalize the rule on
by the summary rules on intra-corporate disputes.
service of summons, it could have done so in clear and concise language. Absent a
manifest intent to liberalize the rule, strict compliance with Section 11, Rule 14 of the 1997 The case arose when Vitaliano Aguirre discovered substantive
Rules of Civil Procedure is required.
9 discrepancies in the General Information Sheet (GIS) of FQB+7 Inc. (FQB), a
dissolved corporation. These changes include the designation of Nathaniel
Although the cancellation of a corporation’s certificate of registration puts an end to its Bocobo and Priscila Bocobo as directors and subscribers in place of their
juridical personality, Sec. 122 of the Corporation Code, however provides that a deceased father Francisco Bocobo. Aguirre, who was one of the original
corporation whose corporate existence is terminated in any manner continues to be a subscribers of FQB, was also no longer listed as a subscriber or even stockholder
body corporate for three years after its dissolution for purposes of prosecuting and of the corporation.
11
defending suits by and against it and to enable it to settle and close its affairs. Moreover,

the rights of a corporation, which is dissolved pending litigation, are accorded protection
by law pursuant to Sec. 145 of the Corporation Code, to wit: Aguirre asked the original members of the board of directors to rectify the
Section 145. Amendment or repeal. No right or remedy in favor of or against entries in the GIS and allow him to inspect the corporate books and records.
any corporation, its stockholders, members, directors, trustees, or officers, nor When Aguirre’s requests went unheeded, he filed a complaint with the special
any liability incurred by any such corporation, stockholders, members, directors, commercial court on behalf of FQB.
trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of FQB’s board countered, among others, that the commercial court has no
this Code or of any part thereof. (Emphasis ours) jurisdiction over the case as the registration of FQB had already been revoked.

Dissolution or even the expiration of the three-year liquidation period should not be a bar
12 The Supreme Court declared that the dissolution of the corporation does
to a corporation’s enforcement of its rights as a corporation.
not render the corporation’s board of directors functus officio. The board of
Aguirre v. FQB+7, Inc. GR 170770 (Jan. 9, 2013) directors still has actual legal authority to direct the affairs of the corporation with
Intra-corporate disputes remain even when the corporation is dissolved. Jurisdiction over respect to the winding up and liquidation of corporate affairs.
the subject matter is conferred by law. R.A. No. 8799 conferred jurisdiction over intra-
corporate controversies on courts of general jurisdiction or RTCs, to be designated by the The High Court explained that Section 122 of the Corporation Code allows
Supreme Court. Thus, as long as the nature of the controversy is intra-corporate, the the corporation to continue its existence for these limited purposes. It is
designated RTCs have the authority to exercise jurisdiction over such cases. necessary that the corporation retains the board which should continue to act in
its behalf while winding up its business and liquidating its remaining assets, if
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-
any, within three (3) years from dissolution.
corporate or partnership relations, and (b) the nature of the question subject of the
controversy must be such that it is intrinsically connected with the regulation of the
corporation or the enforcement of the parties’ rights and obligations under the Corporation Given that the board of a dissolved corporation acts as the trustee for
Code and the internal regulatory rules of the corporation. persons in interests including its creditors, the determination of the composition
of the board is a practical relief which a stockholder can still raise. In this case,
Examining the case before us in relation to these two criteria, the Court finds and so holds Aguirre still has the right to question the validity of the appointment of the board
that the case is essentially an intra-corporate dispute. It obviously arose from the intra- which would have conducted the liquidation of FQB.
corporate relations between the parties, and the questions involved pertain to their rights
and obligations under the Corporation Code and matters relating to the regulation of the The Court elaborated that an intra-corporate case exists (a) if the issue
corporation. We further hold that the nature of the case as an intra-corporate dispute was
arose out of intra-corporate or partnership relations;; and (b) if the controversy is
not affected by the subsequent dissolution of the corporation.
In Vitaliano N. Aguirre II and Fidel N. Aguirre vs. FQB, Inc., Nathaniel D. intrinsically connected with the regulation of the corporation or the enforcement
Bocobo et al. (G.R. No. 170770;; January 9, 2013), the Philippine Supreme Court of the parties’ rights and obligations under the Corporation Code and the internal
83
regulatory rules of the corporation. The Court held that these two elements exist 6. The names and addresses of the present directors and officers of the
in this case even though FQB had been dissolved. corporation;;

XX. FOREIGN CORPORATIONS 7. A statement of its authorized capital stock and the aggregate number of
Secs. 123 – 136, 144 shares which the corporation has authority to issue, itemized by classes, par
Section 123. Definition and rights of foreign corporations. – For the purposes value of shares, shares without par value, and series, if any;;
of this Code, a foreign corporation is one formed, organized or existing under
any laws other than those of the Philippines and whose laws allow Filipino 8. A statement of its outstanding capital stock and the aggregate number of
citizens and corporations to do business in its own country or state. It shall shares which the corporation has issued, itemized by classes, par value of
have the right to transact business in the Philippines after it shall have obtained shares, shares without par value, and series, if any;;
a license to transact business in this country in accordance with this Code and
a certificate of authority from the appropriate government agency. (n) 9. A statement of the amount actually paid in;; and

Section 124. Application to existing foreign corporations. – Every foreign 10. Such additional information as may be necessary or appropriate in order
corporation which on the date of the effectivity of this Code is authorized to do to enable the Securities and Exchange Commission to determine whether
business in the Philippines under a license therefore issued to it, shall continue such corporation is entitled to a license to transact business in the Philippines,
to have such authority under the terms and condition of its license, subject to and to determine and assess the fees payable.
the provisions of this Code and other special laws. (n)
Attached to the application for license shall be a duly executed certificate under
Section 125. Application for a license. – A foreign corporation applying for a oath by the authorized official or officials of the jurisdiction of its incorporation,
license to transact business in the Philippines shall submit to the Securities attesting to the fact that the laws of the country or state of the applicant allow
and Exchange Commission a copy of its articles of incorporation and by-laws, Filipino citizens and corporations to do business therein, and that the applicant
certified in accordance with law, and their translation to an official language of is an existing corporation in good standing. If such certificate is in a foreign
the Philippines, if necessary. The application shall be under oath and, unless language, a translation thereof in English under oath of the translator shall be
already stated in its articles of incorporation, shall specifically set forth the attached thereto.
following:
The application for a license to transact business in the Philippines shall
1. The date and term of incorporation;; likewise be accompanied by a statement under oath of the president or any
other person authorized by the corporation, showing to the satisfaction of the
2. The address, including the street number, of the principal office of the Securities and Exchange Commission and other governmental agency in the
corporation in the country or state of incorporation;; proper cases that the applicant is solvent and in sound financial condition, and
setting forth the assets and liabilities of the corporation as of the date not
3. The name and address of its resident agent authorized to accept summons exceeding one (1) year immediately prior to the filing of the application.
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;; Foreign banking, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to
4. The place in the Philippines where the corporation intends to operate;; them. In the case of all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the Securities and
5. The specific purpose or purposes which the corporation intends to pursue Exchange Commission without previous authority from the appropriate
in the transaction of its business in the Philippines: Provided, That said government agency, whenever required by law. (68a)
purpose or purposes are those specifically stated in the certificate of authority
issued by the appropriate government agency;; Section 126. Issuance of a license. – If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations, the
84
Commission shall issue a license to the applicant to transact business in the transacting business in the Philippines: Provided, That in the case of an
Philippines for the purpose or purposes specified in such license. Upon individual, he must be of good moral character and of sound financial standing.
issuance of the license, such foreign corporation may commence to transact (n)
business in the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or state of its Section 128. Resident agent;; service of process. – The Securities and
incorporation, unless such license is sooner surrendered, revoked, suspended Exchange Commission shall require as a condition precedent to the issuance
or annulled in accordance with this Code or other special laws. of the license to transact business in the Philippines by any foreign corporation
that such corporation file with the Securities and Exchange Commission a
Within sixty (60) days after the issuance of the license to transact business in written power of attorney designating some person who must be a resident of
the Philippines, the license, except foreign banking or insurance corporation, the Philippines, on whom any summons and other legal processes may be
shall deposit with the Securities and Exchange Commission for the benefit of served in all actions or other legal proceedings against such corporation, and
present and future creditors of the licensee in the Philippines, securities consenting that service upon such resident agent shall be admitted and held
satisfactory to the Securities and Exchange Commission, consisting of bonds as valid as if served upon the duly authorized officers of the foreign corporation
or other evidence of indebtedness of the Government of the Philippines, its at its home office. Any such foreign corporation shall likewise execute and file
political subdivisions and instrumentalities, or of government-owned or with the Securities and Exchange Commission an agreement or stipulation,
controlled corporations and entities, shares of stock in "registered enterprises" executed by the proper authorities of said corporation, in form and substance
as this term is defined in Republic Act No. 5186, shares of stock in domestic as follows:
corporations registered in the stock exchange, or shares of stock in domestic
insurance companies and banks, or any combination of these kinds of "The (name of foreign corporation) does hereby stipulate and agree, in
securities, with an actual market value of at least one hundred thousand consideration of its being granted by the Securities and Exchange Commission
(P100,000.) pesos;; Provided, however, That within six (6) months after each a license to transact business in the Philippines, that if at any time said
fiscal year of the licensee, the Securities and Exchange Commission shall corporation shall cease to transact business in the Philippines, or shall be
require the licensee to deposit additional securities equivalent in actual market without any resident agent in the Philippines on whom any summons or other
value to two (2%) percent of the amount by which the licensee’s gross income legal processes may be served, then in any action or proceeding arising out of
for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities any business or transaction which occurred in the Philippines, service of any
and Exchange Commission shall also require deposit of additional securities if summons or other legal process may be made upon the Securities and
the actual market value of the securities on deposit has decreased by at least Exchange Commission and that such service shall have the same force and
ten (10%) percent of their actual market value at the time they were deposited. effect as if made upon the duly-authorized officers of the corporation at its
The Securities and Exchange Commission may at its discretion release part home office."
of the additional securities deposited with it if the gross income of the licensee Whenever such service of summons or other process shall be made upon the
has decreased, or if the actual market value of the total securities on deposit Securities and Exchange Commission, the Commission shall, within ten (10)
has increased, by more than ten (10%) percent of the actual market value of days thereafter, transmit by mail a copy of such summons or other legal
the securities at the time they were deposited. The Securities and Exchange process to the corporation at its home or principal office. The sending of such
Commission may, from time to time, allow the licensee to substitute other copy by the Commission shall be necessary part of and shall complete such
securities for those already on deposit as long as the licensee is solvent. Such service. All expenses incurred by the Commission for such service shall be
licensee shall be entitled to collect the interest or dividends on the securities paid in advance by the party at whose instance the service is made.
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee’s In case of a change of address of the resident agent, it shall be his or its duty
application therefor and upon proof to the satisfaction of the Securities and to immediately notify in writing the Securities and Exchange Commission of
Exchange Commission that the licensee has no liability to Philippine residents, the new address. (72a;; and n)
including the Government of the Republic of the Philippines. (n)
Section 129. Law applicable. – Any foreign corporation lawfully doing business
Section 127. Who may be a resident agent. – A resident agent may be either in the Philippines shall be bound by all laws, rules and regulations applicable
an individual residing in the Philippines or a domestic corporation lawfully to domestic corporations of the same class, except such only as provide for
85
the creation, formation, organization or dissolution of corporations or those Section 133. Doing business without a license. – No foreign corporation
which fix the relations, liabilities, responsibilities, or duties of stockholders, transacting business in the Philippines without a license, or its successors or
members, or officers of corporations to each other or to the corporation. (73a) 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
Section 130. Amendments to articles of incorporation or by-laws of foreign corporation may be sued or proceeded against before Philippine courts or
corporations. – Whenever the articles of incorporation or by-laws of a foreign administrative tribunals on any valid cause of action recognized under
corporation authorized to transact business in the Philippines are amended, Philippine laws. (69a)
such foreign corporation shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and Exchange Commission, and in Section 134. Revocation of license. – Without prejudice to other grounds
the proper cases with the appropriate government agency, a duly provided by special laws, the license of a foreign corporation to transact
authenticated copy of the articles of incorporation or by-laws, as amended, business in the Philippines may be revoked or suspended by the Securities
indicating clearly in capital letters or by underscoring the change or changes and Exchange Commission upon any of the following grounds:
made, duly certified by the authorized official or officials of the country or state
of incorporation. The filing thereof shall not of itself enlarge or alter the purpose 1. Failure to file its annual report or pay any fees as required by this Code;;
or purposes for which such corporation is authorized to transact business in
the Philippines. (n) 2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;;
Section 131. Amended license. – A foreign corporation authorized to transact
business in the Philippines shall obtain an amended license in the event it 3. Failure, after change of its resident agent or of his address, to submit to the
changes its corporate name, or desires to pursue in the Philippines other or Securities and Exchange Commission a statement of such change as required
additional purposes, by submitting an application therefor to the Securities and by this Title;;
Exchange Commission, favorably endorsed by the appropriate government
agency in the proper cases. (n) 4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-laws
Section 132. Merger or consolidation involving a foreign corporation licensed or of any articles of merger or consolidation within the time prescribed by this
in the Philippines. – One or more foreign corporations authorized to transact Title;;
business in the Philippines may merge or consolidate with any domestic
corporation or corporations if such is permitted under Philippine laws and by 5. A misrepresentation of any material matter in any application, report,
the law of its incorporation: Provided, That the requirements on merger or affidavit or other document submitted by such corporation pursuant to this
consolidation as provided in this Code are followed. Title;;

Whenever a foreign corporation authorized to transact business in the 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
Philippines shall be a party to a merger or consolidation in its home country or lawfully due to the Philippine Government or any of its agencies or political
state as permitted by the law of its incorporation, such foreign corporation subdivisions;;
shall, within sixty (60) days after such merger or consolidation becomes
effective, file with the Securities and Exchange Commission, and in proper 7. Transacting business in the Philippines outside of the purpose or purposes
cases with the appropriate government agency, a copy of the articles of merger for which such corporation is authorized under its license;;
or consolidation duly authenticated by the proper official or officials of the 8. Transacting business in the Philippines as agent of or acting for and in
country or state under the laws of which merger or consolidation was effected: behalf of any foreign corporation or entity not duly licensed to do business in
Provided, however, That if the absorbed corporation is the foreign corporation the Philippines;; or
doing business in the Philippines, the latter shall at the same time file a petition 9. Any other ground as would render it unfit to transact business in the
for withdrawal of its license in accordance with this Title. (n) Philippines. (n)

86
Section 135. Issuance of certificate of revocation. – Upon the revocation of any Mentholatum v. Mangaliman 72 Phil. 525 (1941)
such license to transact business in the Philippines, the Securities and Held: No general rule or governing principle can be laid down as to what constitutes
Exchange Commission shall issue a corresponding certificate of revocation, "doing" or "engaging in" or "transacting" business. Indeed, each case must be judged in
the light of its peculiar environmental circumstances. The true test, however, seems to be
furnishing a copy thereof to the appropriate government agency in the proper
whether the foreign corporation is continuing the body or substance of the business or
cases. enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial dealings and
The Securities and Exchange Commission shall also mail to the corporation at arrangements, and contemplates, to that extent, the performance of acts or works or the
its registered office in the Philippines a notice of such revocation accompanied exercise of some of the functions normally incident to, and in progressive prosecution of,
by a copy of the certificate of revocation. (n) the purpose and object of its organization. Herein, Mentholatum Co., through its agent,
the Philippine-American Drug Co., Inc., has been doing business in the Philippines by
Section 136. Withdrawal of foreign corporations. – Subject to existing laws and selling its products here since the year 1929, at least. Whatever transactions the
regulations, a foreign corporation licensed to transact business in the Philippine- American Drug Co., Inc., had executed in view of the law, the Mentholatum
Co., Inc., being a foreign corporation doing business in the Philippines without the license
Philippines may be allowed to withdraw from the Philippines by filing a petition
required by section 68 of the Corporation Law, it may not prosecute this action for violation
for withdrawal of license. No certificate of withdrawal shall be issued by the of trade mark and unfair competition. Neither may the Philippine-American Drug Co., Inc.,
Securities and Exchange Commission unless all the following requirements maintain the action here for the reason that the distinguishing features of the agent being
are met;; his representative character and derivative authority, it cannot now, to the advantage of
its principal, claim an independent standing in court. Further, the recognition of the legal
1. All claims which have accrued in the Philippines have been paid, status of a foreign
compromised or settled;;

2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Implementing rules of RA 7042 (Foreign Investments Act of 1991, as amended)

Philippine Government or any of its agencies or political subdivisions have
2. What constitutes “not doing business”
been paid;; and
3. The petition for withdrawal of license has been published once a week for Sec. 1 of implementing rules of RA 7042, as amended
three (3) consecutive weeks in a newspaper of general circulation in the Philippine national shall mean a citizen of the Philippines or a domestic partnership
Philippines. 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
Section 144. Violations of the Code. – Violations of any of the provisions of stock outstanding and entitled to vote is owned and held by citizens of the Philippines;;
this Code or its amendments not otherwise specifically penalized therein shall or a corporation organized abroad and registered as doing business in the Philippines
be punished by a fine of not less than one thousand (P1,000.00) pesos but not under the Corporation Code of which 100% of the capital stock outstanding and entitled
more than ten thousand (P10,000.00) pesos or by imprisonment for not less 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
than thirty (30) days but not more than five (5) years, or both, in the discretion
sixty percent (60%) of the fund will accrue to the benefits of Philippine nationals;;
of the court. If the violation is committed by a corporation, the same may, after Provided, That where a corporation and its non-Filipino stockholders own stocks in a
notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission (SEC) registered enterprise, at least sixty
Securities and Exchange Commission: Provided, That such dissolution shall percent (60%) of the capital stock outstanding and entitled to vote of each of both
not preclude the institution of appropriate action against the director, trustee corporations must be owned and held by citizens of the Philippines and at least sixty
or officer of the corporation responsible for said violation: Provided, further, percent (60%) of the members of the Board of Directors of each of both corporations
That nothing in this section shall be construed to repeal the other causes for must be citizens of the Philippines, in order that the corporation shall be considered a
dissolution of a corporation provided in this Code. (190 1/2 a) Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined
on the basis of outstanding capital stock whether fully paid or not, but only such stocks
1. What constitutes “doing business” which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
87
mere legal title is not enough to meet the required Filipino equity. Full beneficial EXCEPTION:
ownership of the stocks, coupled with appropriate voting rights is essential. Thus, 1. Estopel
stocks, the voting rights of which have been assigned or transferred to aliens cannot 2. On Valid ground accepted by the Philippines
be considered held by Philippine citizens or Philippine nationals. 3. Quasi à accepts benefits

Individuals or juridical entities not meeting the aforementioned qualifications are 3. DOING BUSINESS WITHOUT A LICENSE – Sec. 133
considered as non-Philippine nationals. Section 133. Doing business without a license. – No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
Foreign corporation shall mean one which is formed, organized or existing under laws permitted to maintain or intervene in any action, suit or proceeding in any court or
other than those of the Philippines. administrative agency of the Philippines;; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
Branch office of a foreign company carries out the business activities of the head office cause of action recognized under Philippine laws. (69a)
and derives income from the host country.

Representative or liaison office deals directly with the clients of the parent company but a) Foreign corp. CANNOT sue
does not derive income from the host country and is fully subsidized by its head office. Granger Asso. v. Microwave Systems 189 SCRA 63 (1990)
It undertakes activities such as but not limited to information dissemination and In any event, it is now settled that even one single transaction may be construed as
promotion of the company’s products as well as quality control of products. transacting business in the Philippines under certain circumstances, as we observed in
10
Far East International Import and Export Corporation v. Nankai Kogyo Co., Ltd., thus:
Doing business shall include soliciting orders, service contracts, opening offices, The rule stated in the preceding section that the doing of a single act does not constitute
whether liaison offices or branches;; appointing representatives or distributors, business within the meaning of statutes prescribing the conditions to be complied with by
operating under full control of the foreign corporation, domiciled in the Philippines or foreign corporations must be qualified to this extent, that a single act may bring the
who in any calendar year stay in the country for a period or periods totaling one hundred corporation within the purview of the statute where it is an act of the ordinary business of
eighty (180) days or more;; participating in the management, supervision or control of the corporation. In such a case, the single act or transaction is not merely incidental or
any domestic business, firm, entity or corporation in the Philippines;; and any other act casual, but is of such character as distinctly to indicate a purpose on the part of the foreign
or acts that imply a continuity of commercial dealings or arrangements, and corporation to do other business in the state, and to make the state a base of operations
contemplate to that extent the performance of acts or works, or the exercise of some for the conduct of a part of the corporations' ordinary business. (17 Fletchers Cyc. of
of the functions normally incident to and in progressive prosecution of commercial gain Corporations, sec. 8470, pp. 572, 573, and authorities cited therein.)
or of the purpose and object of the business organization. The following acts shall not
be deemed “doing business” in the Philippines: The purpose of the rule requiring foreign corporations to secure a license to do business
in the Philippines is to enable us to exercise jurisdiction over them for the regulation of
(1) Mere investment as a shareholder by a foreign entity in domestic corporations duly their activities in this country, If a foreign corporation operates in the Philippines without
registered to do business, and/or the exercise of rights as such investor;; submitting to our laws, it is only just that it not be allowed to invoke them in our courts
(2) Having a nominee director or officer to represent its interests in such corporation;; when it should need them later for its own protection. While foreign investors are always
(3) Appointing a representative or distributor domiciled in the Philippines which welcome in this land to collaborate with us for our mutual benefit, they must be prepared
transacts business in the representative’s or distributor’s own name and account;; as an indispensable condition to respect and be bound by Philippine law in proper cases,
(4) The publication of a general advertisement through any print or broadcast media;; as in the one at bar.
(5) Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;; B. Van Zuiden Bros. v. GTVL Mftg. GR 147905;; 5/28/ 2007
(6) Consignment by a foreign entity of equipment with a local company to be used in Section 133 of the Corporation Code provides:
the processing of products for export;; Doing business without license. — No foreign corporation transacting business in
(7) Collecting information in the Philippines;; and the Philippines without a license, or its successors or assigns, shall be permitted
(8) Performing services auxiliary to an existing isolated contract of sale which are not to maintain or intervene in any action, suit or proceeding in any court or
on a continuing basis, such as installing in the Philippines machinery it has administrative agency of the Philippines;; but such corporation may be sued or
manufactured or exported to the Philippines, servicing the same, training domestic proceeded against before Philippine courts or administrative tribunals on any valid
workers to operate it, and similar incidental services. cause of action recognized under Philippine laws.
The law is clear. An unlicensed foreign corporation doing business in the Philippines
GENERALLY: a corporation who is doing businesss in the Philippines but has no cannot sue before Philippine courts. On the other hand, an unlicensed foreign corporation
Philippine License cannot be sued not doing business in the Philippines can sue before Philippine courts.
88
Under Section 3(d) of Republic Act No. 7042 (RA 7042) or "The Foreign Investments Act its own name and on its own account. If no such transaction takes place then
of 1991," the phrase "doing business" includes: the foreign corporation is not deemed to be doing business in the Philippines.
x x x soliciting orders, service contracts, opening offices, whether called "liaison"
offices or branches;; appointing representatives or distributors domiciled in the The Supreme Court said that “The series of transactions between
Philippines or who in any calendar year stay in the country for a period or periods
totalling one hundred eighty (180) days or more;; participating in the management,
petitioner and respondent cannot be classified as “doing business” in the
supervision or control of any domestic business, firm, entity or corporation in the Philippines under Section 3(d) of RA 7042. An essential condition to be
Philippines;; and any other act or acts that imply a continuity of commercial dealings considered as “doing business” in the Philippines is the actual performance of
or arrangements, and contemplate to that extent the performance of acts or works, specific commercial acts within the territory of the Philippines for the plain reason
or the exercise of some of the functions normally incident to, and in progressive that the Philippines has no jurisdiction over commercial acts performed in foreign
prosecution of, commercial gain or of the purpose and object of the business territories. Here, there is no showing that petitioner performed within the
organization: Provided, however, That the phrase "doing business" shall not be Philippine territory the specific acts of doing business mentioned in Section 3(d)
deemed to include mere investment as a shareholder by a foreign entity in of RA 7042. Petitioner did not also open an office here in the Philippines, appoint
domestic corporations duly registered to do business, and/or the exercise of rights a representative or distributor, or manage, supervise or control a local business.
as such investor;; nor having a nominee director or officer to represent its interests
While petitioner and respondent entered into a series of transactions implying a
in such corporation;; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account. continuity of commercial dealings, the perfection and consummation of these
transactions were done outside the Philippines.”
To be doing or "transacting business in the Philippines" for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the The Supreme Court added that “As earlier stated, the series of
Philippines, that is, perform specific business transactions within the Philippine territory transactions between petitioner and respondent transpired and were
on a continuing basis in its own name and for its own account. Actual transaction of consummated in Hong Kong. We also find no single activity which petitioner
business within the Philippine territory is an essential requisite for the Philippines to performed here in the Philippines pursuant to its purpose and object as a
acquire jurisdiction over a foreign corporation and thus require the foreign corporation to business organization. Moreover, petitioner’s desire to do business within the
secure a Philippine business license. If a foreign corporation does not transact such kind
Philippines is not discernible from the allegations of the complaint or from its
of business in the Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to secure a Philippine attachments. Therefore, there is no basis for ruling that petitioner is doing
business license. business in the Philippines.”

Exception --- estoppel on part of party dealing w/ foreign corp. Merrill Lynch Futures v. CA 211 SCRA 824 (1992)

The Supreme Court had the occasion to interpret the said provision in Issue [1]: Whether ML FUTURES was doing business in the Philippines without license.
the case of B.Van Zuiden Bros., Ltd. vs. GTVL Manufacturing Industries, Inc. (GR
No. 147905). In the said case, Petitioner which is a foreign corporation entered Held [1]: The facts on record adequately establish that ML FUTURES, operating in the
into various transactions with the respondent. The respondent made several United States, had indeed done business with the Lara Spouses in the Philippines over
purchases of lace products from the petitioner with the instruction to deliver these several years, had done so at all times through Merrill Lynch Philippines, Inc. (MLPI), a
products to Kenzar Ltd, a Hong Kong corporation. Under the said transaction, corporation organized in this country, and had executed all these transactions without ML
the products are considered sold upon delivery to Kenzar. However, the FUTURES being licensed to so transact business here, and without MLPI being
authorized to operate as a commodity futures trading advisor. These are the factual
respondent failed to make good on its obligation to pay various purchases. Hence
findings to both the Trial Court and the Court of Appeals. These, too, are the conclusions
a complaint for sum of money was filed in Philippine court. of the Securities & Exchange Commission which denied MLPI's application to operate as
a commodity futures trading advisor, a denial subsequently affirmed by the Court of
According to the Supreme Court, one of the indications of “doing Appeals. Prescinding from the proposition that factual findings of the Court of Appeals are
business” in the Philippines is the actual performance of specific commercial generally conclusive, the Supreme Court has been cited to no circumstance of substance
contracts within the territory of the Philippines. to warrant reversal of said Appellate Court's findings or conclusions in this case. Further,
To constitute “doing business” in the Philippines, the foreign corporation the Laras did transact business with ML FUTURES through its agent corporation
must actually transact business in the Philippines. It must perform specific organized in the Philippines, it being unnecessary to determine whether this domestic firm
business transactions within the Philippine territory on a continuing business on was MLPI (Merrill Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith (MLPI's
89
alleged predecessor). The fact is that ML FUTURES did deal with futures contracts in b) May be SUED on any valid COA recognized under PH law and under the
exchanges in the United States in behalf and for the account of the Lara Spouses, and doctrine of quasi-estoppel by acceptance of benefits
that on several occasions the latter received account documents and money in connection
with those transactions. Given these facts, if indeed the last transaction executed by ML b) May be SUED on any valid COA recognized under PH law and
FUTURES in the Laras's behalf had resulted in a loss amounting to US $160,749.69;; that under the doctrine of quasi-estoppel by acceptance of benefits
in relation to this loss, ML FUTURES had credited the Laras with the amount of US $ Marubeni Nederland BV v. Tensuan 190 SCRA 105 (1990)
75,913.42 — which it (ML FUTURES) then admittedly owed the spouses — and thereafter The Court reiterated that there is no general rule or principle that can be laid down to
sought to collect the balance, US $84,836.27, but the Laras had refused to pay (for the determine what constitutes doing or engaging in business. Each case must be judged in
reasons already above stated). the light of its peculiar factual milieu and upon the language of the statute applicable.

Issue [2]: Whether – in light of the fact that the Laras were fully aware of its lack of license It ruled that petitioner can be sued in the regular courts because it is doing business in the
to do business in the Philippines, and in relation to those transactions had made payments Philippines. The applicable law is Republic Act No. 5455 as implemented by the following
to, and received money from it for several years –the Lara Spouses are estopped to rules and regulations of the Board of Investments which took effect on February 3, 1969.
impugn ML FUTURES capacity to sue them in the courts of the forum. In said Act, it enumerates acts that shall constitute “doing business” which includes.

It cannot be denied that petitioner had solicited the lime plant business from DBT through
Held [2]: The Laras received benefits generated by their business relations with ML
the Marubeni Manila branch. Records show that the "turn-key proposal for the 300 T/D
FUTURES. Those business relations, according to the Laras themselves, spanned a
Lime Plant" was initiated by the Manila office through its Mr. T. Hojo. In a follow-up letter
period of 7 years;; and they evidently found those relations to be of such profitability as
dated August 3, 1976, Hojo committed the firm to a price reduction of $200,000.00 and
warranted their maintaining them for that not insignificant period of time;; otherwise, it is
submitted the proposed contract forms.
reasonably certain that they would have terminated their dealings with ML FUTURES

much, much earlier. In fact, even as regards their last transaction, in which the Laras
As reflected in the letterhead used, it was Marubeni Corporation, Tokyo, Japan which
allegedly suffered a loss in the sum of US$160,749.69, the Laras nonetheless still
assumed an active role in the initial stages of the negotiation. Petitioner Marubeni
received some monetary advantage, for ML FUTURES credited them with the amount of
Nederland B.V. had no visible participation until the actual signing of the October 28, 1976
US $75,913.42 then due to them, thus reducing their debt to US $84,836.27. Given these
agreement in Tokyo and even there, in the space reserved for petitioner, it was the
facts, and assuming that the Lara Spouses were aware from the outset that ML FUTURES
signature. of "S. Adachi as General Manager of Marubeni Corporation, Tokyo on behalf
had no license to do business in this country and MLPI, no authority to act as broker for
of Marubeni Nederland B.V." which appeared.
it, 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
4. NOT DOING BUSINESS IN PH
have done business in this country in the first place, or that its agent in this country, MLPI,
Steel Case, Inc. v. Design Intl. GR 171995 (4/8/2012)
had no license either to operate as a "commodity and/or financial futures broker."
Doing business” With or Without License: Suits By or Against Foreign
Considerations of equity dictate that, at the very least, the issue of whether the Laras are
Corporation
in truth liable to ML FUTURES and if so in what amount, and whether they were so far
Based on this list, the Supreme Court said that the appointment of a distributor in the
aware of the absence of the requisite licenses on the part of ML FUTURES and its
Philippines is not sufficient to constitute "doing business" unless it is under the full control
Philippine correspondent, MLPI, as to be estopped from alleging that fact as a defense to
of the foreign corporation. If the distributor is an independent entity which buys and
such liability, should be ventilated and adjudicated on the merits by the proper trial court.
distributes products, other than those of the foreign corporation, for its own name and its
Global Business Holdings v. Surecomp Software;; GR 173463;; own account, the latter cannot be considered to be doing business in the Philippines.
It cannot be denied that there is indeed a contract entered into between
Surecomp and Global, the latter as a successor-in-interest of the merging, Global Applying these rules, the Supreme Court said that DISI was founded in 1979 and is
is estopped from denying Surecomp’s capacity to sue it for alleged breach of that independently owned and managed. In addition to Steelcase products, DISI also
distributed products of other companies including carpet tiles, relocatable walls and
contract with damages.
theater settings. The dealership agreement between Steelcase and DISI had been
described by the owner himself as a buy and sell arrangement. This clearly belies DISI’s
In the merger of two existing corporations, one of the corporations survives and assertion that it was a mere conduit through which Steelcase conducted its business in
continues the business, while the other is dissolved, and all its rights, properties, the country. From the preceding facts, the only reasonable conclusion that can be reached
and liabilities are acquired by the surviving corporation. is that DISI was an independent contractor, distributing various products of Steelcase and
of other companies, acting 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.
90
PROMOTIONof the company's products as well as quality control of products."
A foreign corporation doing business in the Philippines without a license may maintain suit
in the Philippines against a domestic corporation or person who is party to a contract as - to protect its reputation, name, and goodwill
the domestic corporation or person is deemed estopped from challenging the personality Gen. Garments v. Dir. of Patents 41 SCRA 50 (1971)
of the foreign corporation.
A foreign corporation which has never done ... business in the Philippine Islands and which
a) CAN sue on the following: is unlicensed and unregistered to do business here, but is widely and favorably known in
- on an isolated transaction the Islands through the use therein of its products bearing its corporate and trade name
Marshall Wells v. Elser 46 Phil 71 (1924) has a legal right to maintain an action in the Islands.
- to protect its reputation, name, and goodwill xxx xxx xxx

The purpose of such a suit is to protect its reputation, corporate name and goodwill which
The doctrine of lack of capacity to sue based on the failure to acquire a local
has been established, through the natural development of its trade for a long period of
license is based on considerations of sound public policy.The license years, in the doing of which it does not seek to enforce any legal or contract rights arising
requirement was imposed to subject the foreign corporation doing business in from, or growing out of any business which it has transacted in the Philippine Islands.
the Philippines to the jurisdiction of its courts. This was never intended to favor
domestic corporations who enter into solitary transactions with unwary foreign The right to the use of the corporate or trade name is a property right, a right in rem, which
firms and then repudiate their obligations simply because the latter are not it may assert and protect in any of the courts of the world — even in jurisdictions where it
does not transact business — just the same as it may protect its tangible property, real or
licensed to do business in this country. - Marshall-Wells Co. v. Elser and Co.,
personal against trespass or conversion.
G.R. No. 22015, 1 September 1924, 46 Phil. 71
- infringement of trademark and unfair competition
... If, on the other hand, the foreign corporation is not doing business in the Le Chemise Lacoste v. Fernandez 129 SCRA 377
Philippines, it does not need a license to sue before Philippine courts, This is so The petitioner is a foreign corporation not doing business in the Philippines. The
because what the law prevents is a foreign corporation doing business in the marketing of its products in the Philippines is done through an exclusive
Philippines without a license from gaining access to Philippine courts.5 It is not distributor, Rustan Commercial Corporation. The latter is an independent entity
therefore the absence of the prescribed license, but "doing business" in the which buys and then markets not only products of the petitioner but also many
Philippines without the proper license which bars the foreign corporation from other products bearing equally well-known and established trademarks and
gaining access to Philippine courts. In other words, although a foreign tradenames. In other words, Rustan is not a mere agent or conduit of the
corporation has no license to do business in the Philippines, it does not petitioner.
necessarily follow that it has no capacity to bring an action because a license is
not necessary if the foreign corporation is not doing business in the Philippines. The court finds and concludes that the petitioner is not doing business in the
Philippines. Rustan is actually a middleman acting and transacting business in
* A Branch Office of a foreign corporation "carries out the business activities of its own name and or its own account and not in the name or for the account of
the head office and the petitioner. More important is the nature of the case which led to this petition.
What preceded this petition for certiorari was a letter-complaint filed before the
derives income from the host country." (Section l(c) of the Implementing Rules NBI charging Hemandas with a criminal offense, i.e., violation of Article 189 of
and Regulations of the Revised Penal Code. If prosecution follows after the completion of the
preliminary investigation being conducted by the Special Prosecutor the
the Foreign Investments Act (R.A. 7042). information shall be in the name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party since a criminal offense is
* A Representative or Liaison Office of a foreign corporation "deals directly, with essentially an act against the State.
the clients of the of
the parent company but does not derive income from the host country and is fully It is the latter which is principally the injured party although there is a private right
subsidized by its violated. Petitioner's capacity to sue would become, therefore, of not much
heal office. It undertakes activities such as but not limited to information significance in the main case. We cannot allow a possible violator of our criminal
dissemination and statutes to escape prosecution upon a far-fetched contention that the aggrieved
91
party or victim of a crime has no standing to sue. In upholding the right of the A foreign corporation without a license is not ipso facto incapacitated from
petitioner to maintain the present suit before our courts for unfair competition or bringing an action in Philippine courts. A license is necessary only if a foreign
infringement of trademarks of a foreign corporation, we are moreover recognizing corporation is “transacting” or “doing business” in the country. The Corporation
our duties and the rights of foreign states under the Paris Convention for the Code provides:
Protection of Industrial Property to which the Philippines and France are parties. Sec. 133. Doing business without a license. — No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall
- Sec. 160 of R.A. 8293 (Intellectual Property Code) be permitted to maintain or intervene in any action, suit or proceeding in any court
Section 160. Right of Foreign Corporation to Sue in Trademark or Service Mark or administrative agency of the Philippines;; but such corporation may be sued or
Enforcement Action. - Any foreign national or juridical person who meets the proceeded against before Philippine courts or administrative tribunals on any
requirements of Section 3 of this Act and does not engage in business in the Philippines
valid cause of action recognized under Philippine laws.The aforementioned
may bring a civil or administrative action hereunder for opposition, cancellation,
infringement, unfair competition, or false designation of origin and false description, provision prevents an unlicensed foreign corporation “doing business” in the
whether or not it is licensed to do business in the Philippines under existing laws. (Sec. Philippines from accessing our courts.
21-A, R.A. No. 166a)
[In a number of cases, however, we have held that an unlicensed foreign
- to enforce its right not arising out of a business transaction corporation doing business in the Philippines may bring suit in Philippine courts
against a Philippine citizen or entity who had contracted with and benefited from
b) CAN BE SUED for actionable acts or omissions said corporation. Such a suit is premised on the doctrine of estoppel. A party is
- acts done vs. a person(s) in the Phil. estopped from challenging the personality of a corporation after having
Sygnetics Corp. v. CA Aug. 13, 1993 acknowledged the same by entering into a contract with it. This doctrine of
1. Signetics cannot, at least in this early stage, assail, on the one hand, the
estoppel to deny corporate existence and capacity applies to foreign as well as
veracity and correctness of the allegations in the complaint and proceed, on the domestic corporations. The application of this principle prevents a person
other hand, to prove its own, in order to hasten a peremptory escape. As contracting with a foreign corporation from later taking advantage of its
explained by the Court in Pacific Micronisian, summons may be served upon an noncompliance with the statutes chiefly in cases where such person has received
agent of the defendant who may not necessarily be its "resident agent designated the benefits of the contract.]
in accordance with law." The term "agent", in the context it is used in Section 14, The principles regarding the right of a foreign corporation to bring suit in
refers to its general meaning, i.e., one who acts on behalf of a principal. Philippine courts may thus be condensed in four statements:

The allegations in the complaint have thus been able to amply convey that not
• if a foreign corporation does business in the Philippines without a license,
only is TEAM Pacific the business conduit of the petitioner in the Philippines but
it cannot sue before the Philippine courts;;
that, also, by the charge of fraud, is none other than the petitioner itself.

• if a foreign corporation is not doing business in the Philippines, it needs
2. The rule is that, a foreign corporation, although not engaged in business in the
no license to sue before Philippine courts on an isolated transaction or
Philippines, may still look up to our courts for relief;; reciprocally, such corporation
on a cause of action entirely independent of any business transaction;;
may likewise be "sued in Philippine courts for acts done against a person or

persons in the Philippines" (Facilities Management Corporation v. De la Osa),
provided that, in the latter case, it would not be impossible for court processes to • if a foreign corporation does business in the Philippines without a license,
reach the foreign corporation, a matter that can later be consequential in the a Philippine citizen or entity which has contracted with said corporation
proper execution of judgment. Hence, a State may not exercise jurisdiction in the may be estopped from challenging the foreign corporation’s corporate
absence of some good basis (and not offensive to traditional notions of fair play personality in a suit brought before Philippine courts;; and
and substantial justice) for effectively exercising it, whether the proceedings are
in rem, quasi in rem or in personam. • if a foreign corporation does business in the Philippines with the required
license, it can sue before Philippine courts on any transaction.
5. Relate Nos. 1, 2, 3, 4 above to the ff. cases:
Agilent Tech. v. Integrated Silicon April 14, 2004 **
92
The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is An analysis of the relevant case law, in conjunction with Sec 1 of the IRR of the
doing business in the Philippines. However, there is no definitive rule on what FIA (as amended by RA 8179), would demonstrate that the acts enumerated in
constitutes “doing”, “engaging in”, or “transacting” business in the Philippines. the VAASA do not constitute “doing business” in the Philippines. The said
The Corporation Code itself is silent as to what acts constitute doing or provision provides that the following shall not be deemed “doing business”:
transacting business in the Philippines.
(1) Mere investment as a shareholder by a foreign entity in domestic corporations
[Jurisprudence has it, however, that the term “implies a continuity of commercial duly registered to do business, and/or the exercise of rights as such investor;;
dealings and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally incident to or (2) Having a nominee director or officer to represent its interest in such
in progressive prosecution of the purpose and subject of its organization.” corporation;;

In the Mentholatum case this Court discoursed on the two general tests to (3) Appointing a representative or distributor domiciled in the Philippines which
determine whether or not a foreign corporation can be considered as “doing transacts business in the representative’s or distributor’s own name and account;;
business” in the Philippines. The first of these is the substance test, thus:
(4) The publication of a general advertisement through any print or broadcast
The true test [for doing business], however, seems to be whether the foreign media;;
corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to (5) Maintaining a stock of goods in the Philippines solely for the purpose of having
another. the same processed by another entity in the Philippines;;

The second test is the continuity test, expressed thus: (6) Consignment by a foreign entity of equipment with a local company to be used
in the processing of products for export;;
The term [doing business] implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or (7) Collecting information in the Philippines;; and
works or the exercise of some of the functions normally incident to, and in the
progressive prosecution of, the purpose and object of its organization.] (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
The Foreign Investments Act of 1991 (the “FIA”;; Republic Act No. 7042, as domestic workers to operate it, and similar incidental services.
amended), defines “doing business” as follows:
By and large, to constitute “doing business”, the activity to be undertaken in the
Sec. 3, par. (d). The phrase “doing business” shall include soliciting orders, Philippines is one that is for profit-making.
service contracts, opening offices, whether called “liaison” offices or branches;;
appointing representatives or distributors domiciled in the Philippines or who in By the clear terms of the VAASA, Agilent’s activities in the Philippines were
any calendar year stay in the country for a period or periods totaling one hundred confined to (1) maintaining a stock of goods in the Philippines solely for the
eighty (180) days or more;; participating in the management, supervision or purpose of having the same processed by Integrated Silicon;; and (2)
control of any domestic business, firm, entity, or corporation in the Philippines;; consignment of equipment with Integrated Silicon to be used in the processing of
and any other act or acts that imply a continuity of commercial dealings or products for export. As such, we hold that, based on the evidence presented thus
arrangements, and contemplate to that extent the performance of acts or works, far, Agilent cannot be deemed to be “doing business” in the Philippines.
or the exercise of some of the functions normally incident to, and in the Respondents’ contention that Agilent lacks the legal capacity to file suit is
progressive prosecution of, commercial gain or of the purpose and object of the therefore devoid of merit. As a foreign corporation not doing business in the
business organization. Philippines, it needed no license before it can sue before our courts.

Home Insurance v. Eastern Shipping 123 SCRA 424
93
Issue: Whether Home Insurance, a foreign corporation licensed to do business at he time ownership.
of the filing of the case, has the capacity to sue for claims on contracts made when it has (b) To affect, alone or with others, a securities or transactions in securities that:
no license yet to do business in the Philippines. (I) Raises their price to induce the purchase of a security, whether of the same
or a different class of the same issuer or of controlling, controlled, or commonly
The court held that the objective of the law is to subject the foreign corporation controlled company by others;; or (iii) Creates active trading to induce such a
to the jurisdiction of our court. The Corporation Law must be given reasonable, purchase or sale through manipulative devices such as marking the close,
not an unduly harsh interpretation which does not hamper the development of painting the tape, squeezing the float, hype and dump, boiler room operations
and such other similar devices.
trade relations and which fosters friendly commercial intercourse among
(c) To circulate or disseminate information that the price of any security listed
countries. Counsel for appellant contends that at the time of the service of in an Exchange will or is likely to rise or fall because of manipulative market
summons, the appellant had not yet been authorized to do business. But, the operations of any one or more persons conducted for the purpose of raising or
lack of capacity at the time of the execution of the contracts was cured by the depressing the price of the security for the purpose of inducing the purpose of
subsequent registration is also strengthened by the procedural aspects of the sale of such security.
case. The court find the general denials inadequate to attack the foreign (d) To make false or misleading statement with respect to any material fact,
corporations lack of capacity to sue in the light of its positive averment that it is which he knew or had reasonable ground to believe was so false or misleading,
authorized to do so. Section 4, Rule 8 requires that "a party desiring to raise an for the purpose of inducing the purchase or sale of any security listed or traded
issue as to the legal existence of any party or the capacity of any party to sue or in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase
be sued in a representative capacity shall do so by specific denial, which shall
and/or sale of any security traded in an Exchange for the purpose of pegging,
include such supporting particulars as are particularly within the pleader's fixing or stabilizing the price of such security;; unless otherwise allowed by this
knowledge. At the very least, the private respondents should have stated Code or by rules of the Commission.
particulars in their answers upon which a specific denial of the petitioner's
capacity to sue could have been based or which could have supported its denial 24.2. No person shall use or employ, in connection with the purchase or sale of any
for lack of knowledge. And yet, even if the plaintiff's lack of capacity to sue was security any manipulative or deceptive device or contrivance. Neither shall any short
not properly raised as an issue by the answers, the petitioner introduced sale be effected nor any stop-loss order be executed in connection with the purchase
documentary evidence that it had the authority to engage in the insurance or sale of any security except in accordance with such rules and regulations as the
business at the time it filed the complaints. The Supreme Court granted the Commission may prescribe as necessary or appropriate in the public interest for the
protection of investors.
petition, reversing the decision of the lower court

24.3. The foregoing provisions notwithstanding, the Commission, having due regard to
XXI. SECURITIES REGULATION CODE (R.A. 8799)
the public interest and the protection of investors, may, by rules and regulations, allow

certain acts or transactions that may otherwise be prohibited under this Section.
Sec. 24 - 27 ;; Purpose(s ) of SRC;; OTHER PROVS.

CHAPTER VII PROHIBITIONS AND FRAUD, MANIPULATION AND INSIDER Section 25. Regulation of Option Trading. – No member of an Exchange shall, directly
TRADING or indirectly endorse or guarantee the performance of any put, call, straddle, option or
Section 24. Manipulation of Security Prices;; Devices and Practices. – 24.1 It shall be privilege in relation to any security registered on a securities exchange. The terms "put",
unlawful for any person acting for himself or through a dealer or broker, directly or "call", "straddle", "option", or "privilege" shall not include any registered warrant, right
indirectly: or convertible security.
(a) To create a false or misleading appearance of active trading in any listed
security traded in an Exchange of any other trading market (hereafter referred Section 26. Fraudulent Transactions. – It shall be unlawful for any person, directly or
to purposes of this Chapter as "Exchange"): indirectly, in connection with the purchase or sale of any securities to:
(i) By effecting any transaction in such security which involves no
change in the beneficial ownership thereof;; 26.1. Employ any device, scheme, or artifice to defraud;;
(ii) By entering an order or orders for the purchase or sale of such
security with the knowledge that a simultaneous order or orders of 26.2. Obtain money or property by means of any untrue statement of a material fact of
substantially the same size, time and price, for the sale or purchase of any omission to state a material fact necessary in order to make the statements made,
any such security, has or will be entered by or for the same or different in the light of the circumstances under which they were made, not misleading;; or
parties;; or
(iii) By performing similar act where there is no change in beneficial 26.3. Engage in any act, transaction, practice or course of business which operates or
94
would operate as a fraud or deceit upon any person. into such securities or any options or rights in any of the foregoing securities.

Section 27. Insider’s Duty to Disclose When Trading. –
CEMCO v. Nat. Life Insurance
27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in (1) WON SEC has jurisdiction
possession of material information with respect to the issuer or the security that is not (2) WON mandatory tender offer rule applies only to direct acquisition of shares
generally available to the public, unless: (a) The insider proves that the information was in the public company.
not gained from such relationship;; or (b) If the other party selling to or buying from the

insider (or his agent) is identified, the insider proves: (I) that he disclosed the
information to the other party, or (ii) that he had reason to believe that the other party
HELD:
otherwise is also in possession of the information. A purchase or sale of a security of (1) YES. SEC was acting pursuant to Rule 19(13) of the Amended Implementing
the issuer made by an insider defined in Subsection 3.8, or such insider’s spouse or Rules and Regulations of the Securities Regulation Code. The foregoing rule
relatives by affinity or consanguinity within the second degree, legitimate or common- emanates from the SEC’s power and authority to regulate, investigate or
law, shall be presumed to have been effected while in possession of material nonpublic supervise the activities of persons to ensure compliance with the Securities
information if transacted after such information came into existence but prior to Regulation Code, more specifically the provision on mandatory tender offer under
dissemination of such information to the public and the lapse of a reasonable time for Section 19 thereof.
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
(2) NO. Tender offer is a publicly announced intention by a person acting alone
nonpublic information at the time of the purchase or sale.

or in concert with other persons to acquire equity securities of a public company.
27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not A public company is defined as a corporation which is listed on an exchange,
been generally disclosed to the public and would likely affect the market price of the or a corporation with assets exceeding P50,000,000.00 and with 200 or more
security after being disseminated to the public and the lapse of a reasonable time for stockholders, at least 200 of them holding not less than 100 shares of such
the market to absorb the information;; or (b) would be considered by a reasonable company. Stated differently, a tender offer is an offer by the acquiring person to
person important under the circumstances in determining his course of action whether stockholders of a public company for them to tender their shares therein on the
to buy, sell or hold a security. terms specified in the offer.

27.3. It shall be unlawful for any insider to communicate material nonpublic information
Under existing SEC Rules, the 15% and 30% threshold acquisition of shares
about the issuer or the security to any person who, by virtue of the communication,
becomes an insider as defined in Subsection 3.8, where the insider communicating the under the foregoing provision was increased to thirty-five percent (35%). It is
information knows or has reason to believe that such person will likely buy or sell a further provided therein that mandatory tender offer is still applicable even if the
security of the issuer whole in possession of such information. 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.
27.4. (a) It shall be unlawful where a tender offer has commenced or is about to
commence for: The SEC and the Court of Appeals ruled that the indirect acquisition by
(i) Any person (other than the tender offeror) who is in possession of material petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC
nonpublic information relating to such tender offer, to buy or sell the securities shares is covered by the mandatory tender offer rule. It accurately pointed out
of the issuer that are sought or to be sought by such tender offer if such person
that the coverage of the mandatory tender offer rule covers not only direct
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,
acquisition but also indirect acquisition or “any type of acquisition.”
the issuer of the securities sought or to be sought by such tender offer, or any
insider of such issuer;; and SEC v. Interport Resources Corp.
(ii) Any tender offeror, those acting on its behalf, the issuer of the securities The mere absence of implementing rules cannot effectively invalidate provisions of law
sought or to be sought by such tender offer, and any insider of such issuer to where a reasonable construction that will support the law may be given. It is well
communicate material nonpublic information relating to the tender offer to any established that administrative authorities have the power to promulgate rules and
other person where such communication is likely to result in a violation of regulations to confirm to the terms and standards prescribed by the statute as well as
Subsection 27.4 (a)(I). purport to carry into effect its general policies.
(b) For purposes of this subsection the term "securities of the issuer sought or to be
sought by such tender offer" shall include any securities convertible or exchangeable The insider's misuse of nonpublic and undisclosed information is the gravamen of illegal
95
conduct. The intent of the law is the protection of investors against fraud, committed when because under the provision of the said law what is required to be disclosed is a
an insider, using secret information, takes advantage of an uninformed investor. Insiders fact of special significance, meaning:
are obligated to disclose material information to the other party or abstain from trading the 1. a material fact which would be likely to affect the
shares of his corporation. This duty to disclose or abstain is based n 2 factors: 1) the market price of a security or;;
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
2. one which a reasonable person would consider
2) the inherent unfairness involved when a party takes advantage of such information especially important in determining his course of action with regard to the shares
knowing it is unavailable to those with whom he is dealing. of stock.

Ratio:- The Revised Securities Act does not require the enactment of - But the court dismissed said contention and stated that material fact is already
implementing rules to make it binding and effective. The provisions of the RSA defined and explained as one which induces or tends to induce or otherwise
are sufficiently clear and complete by themselves. The requirements are affect the sale or purchase of securities. On the other hand, "reasonable person"
specifically set out and the acts which are enjoined are determinable. To tule that has already been used many times in jurisprudence and in law since it is a
absence of implementing rules can render ineffective an act of Congress would standard on which most of legal doctrines stand (even the doctrine on negligence
empower administrative bodies to defeat the legislative will by delaying the uses such standard) and it has been held to mean "a man who relies on the
implementing rules. Where the statute contains sufficient standards and an calculus of common sense of which all reasonable men have in abundance"
unmistakable intent (as in this case, the RSA) there should be no impediment as
to its implementation. - As to "nature and reliability" the proper adjudicative body would be able to
determine if facts of a certain nature and reliability can influence a reasonable
- The court does not discern any vagueness or ambiguity in the RSA such that person's decision to retain, buy or sell securities and thereafter explain and justify
the acts proscribed and/or required would not be understood by a person of its factual findings in its decision since the same must be viewed in connection
ordinary intelligence. The provision explains in simple terms that the insider's with the particular circumstances of a case.
misuse of nonpublic and undisclosed information is the gravamen of illegal As to "generally available", the court held also that such is a matter which may
conduct and that the intent of the law is the protection of investors against fraud be adjudged given the particular circumstances of the case. The standards of
committed when an insider, using secret information, takes advantage of an which cannot remain at a standstill.
uninformed investor. Insiders are obligatd to disclose material information to the
other party or abstain from trading the shares of his corporation. This duty to - There is no violation of due process in this case since the proceedings before
disclose or abstain is based n 2 factors: 1) the existence of a relationship giving the PED are summary in nature. The hearing officer may require the parties to
access, directly or indirectly to information intended to be available only for a submit their respective verified position papers together will all supporting
corporate purpose and not for the personal benefit of anyone and 2) the inherent documents and affidavits of witnesses. A formal hearing is not mandatory and it
unfairness involved when a party takes advantage of such information knowing is within the discretion of the hearing officer to determine whether or not there is
it is unavailable to those with whom he is dealing. a need for a formal hearing.

- This obligation to disclose is imposed upon "insiders" which are particularly - Moreover, the law creating the PED empowers it to investigate violations of the
officers, directors or controlling stockholders but that definition has already been rules and regulations and to file and prosecute such cases. It does not have an
expanded and not includes those persons whose relationship of former adjudicatory powers. Thus, the PED need not comply with the provisions of the
relationship to the issuer or the security that is not generally available and the Administrative Code on adjudication.
one who learns such a fact from an insider knowing that the person from whom
he learns such fact is an insider. In some case, however, there may be valid - The SEC retained jurisdiction to investigate violations of the RSA, reenacted in
corporate reasons for the nondisclosure of material information but it should not the Securities Regulations Code despite the abolition of the PED. In this case,
be used for non-corporate purposes. the SEC already commenced investigating the respondents for violations of the
RSA but during the pendency of the case the Securities and Regulations Code
- Respondent contends that the terms "material fact", "reasonable person", was passed thereby repealing the RSA. However, the repeal cannot deprive the
"nature and reliability" and "generally available" are vaguely used in the RSA SEC of its jurisdiction to continue investigating the case.

96
- Investigations by the SEC is a requisite before a criminal case may be referred A "public company" as
to the DOJ since the SEC is an administrative agency with the special
competence to do so. According to the doctrine of primary jurisdiction, the courts - (1) any corporation with a class of equity securities listed on an Exchange or
will not determine a controversy involving a question within the jurisdiction of an
administrative tribunal where the question demands the exercise of sound - (2) (a corporation) with assets in excess of Fifty Million Pesos (P50,000,000.00)
administrative discretion requiring the specialized knowledge and expertise of and having two hundred (200) or more holders, at least two hundred (200) of
said administrative tribunal to determine technical and intricate matters of fact. which are holding at least one hundred (100) shares of a class of its equity
securities."

Timeshare Realty Corp. V. Lao GR 158941 (Feb. 11, 2008)
No. The provisions of B.P. Blg. 178 do not support the contention of petitioner - From these provisions, it is clear that a "public company," as contemplated by
the SRC, is not limited to a company whose shares of stock are publicly listed;;
that its mere registration as a corporation already authorizes it to deal with
even companies like the Bank, whose shares are offered only to a specific
unregistered timeshares. Corporate registration is just one of several group of people, are considered a public company, provided they meet the
requirements before it may deal with timeshares: requirements enumerated above.

Section 8. Procedure for registration. - (a) All securities required to be XXII. JURISDICTION
registered under subsection (a) of Section four of this Act shall be registered
through the filing by the issuer or by any dealer or underwriter interested in the 1) A.M. No.00-8-10-SC (Interim Rules of Proc. for Intra-corp. Matters)
sale thereof, in the office of the Commission, of a sworn registration statement A.M. No. 01-2-04-SC. March 13, 2001
with respect to such securities, containing or having attached thereto, the Re: PROPOSED INTERIM RULES OF PROCEDURE GOVERNING INTRA-
following: CORPORATE CONTROVERSIES UNDER R. A. NO. 8799
x x x x RESOLUTION

(36) Unless previously filed and registered with the Commission and brought up
INTERIM RULES OF PROCEDURE FOR INTRA-CORPORATE CONTROVERSIES
to date:
RULE 1
(a) A copy of its articles of incorporation with all amendments thereof and its GENERAL PROVISIONS
existing by-laws or instruments corresponding thereto, whatever the name, if the SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be
issuer be a corporation. observed in civil cases involving the following:

Prior to fulfillment of all the other requirements of Section 8, petitioner is 1. Devices or schemes employed by, or any act of, the board of directors,
absolutely proscribed under Section 4 from dealing with unregistered timeshares, business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public
thus:
and/or of the stockholders, partners, or members of any corporation,
partnership, or association;;
Section 4. Requirement of registration of securities. - (a) No securities, except 2. Controversies arising out of intra-corporate, partnership, or association
of a class exempt under any of the provisions of Section five hereof or unless relations, between and among stockholders, members, or associates;; and
sold in any transaction exempt under any of the provisions of Section six hereof, between, any or all of them and the corporation, partnership, or
shall be sold or offered for sale or distribution to the public within the Philippines association of which they are stockholders, members, or associates,
unless such securities shall have been registered and permitted to be sold as respectively;;
hereinafter provided. 3. Controversies in the election or appointment of directors, trustees, officers,
or managers of corporations, partnerships, or associations;;
Phil. Veterans Bank v. CallanganGR 191995 (Aug. 3, 2011) 4. Derivative suits;; and
The Bank reiterates that it is not a "public company" subject to the reportorial 5. Inspection of corporate books.
requirements under Section 17.1 of the SRC because its shares can be owned only by a
specific group of people, namely, World War II veterans and their widows, orphans and (b) prohibition against nuisance and harassment suits. - Nuisance and
compulsory heirs, and is not open to the investing public in general. harassment suits are prohibited. In determining whether a suit is a nuisance or
harassment suit, the court shall consider, among others, the following:
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or reversal of existing jurisprudence;; and that it is not interposed for any improper
1. The extent of the shareholding or interest of the initiating stockholder or purpose, such as to harass or to cause unnecessary delay or needless increase in
member;; the cost of litigation.
2. Subject matter of the suit;;
3. Legal and factual basis of the complaint;; If a pleading, motion, or other paper is not signed, it shall be stricken off the record
4. Availability of appraisal rights for the act or acts complained of;; and unless it is promptly signed by the pleader or movant, after he is notified of the
5. Prejudice or damage to the corporation, partnership, or association in omission.
relation to the relief sought.
SEC. 8. Prohibited pleadings. – The following pleadings are prohibited:
In case of nuisance or harassment suits, the court may, moto proprio or upon motion,
forthwith dismiss the case. 1. Motion to dismiss;; 
2. Motion for a bill of particulars;;
SEC. 2. Suppletory application of the Rules of Court. – The Rules of Court, in so 3. Motion for new trial, or for reconsideration of judgment or order, or for re-
far as they may be applicable and are not inconsistent with these Rules, are hereby opening of trial;;
adopted to form an integral part of these Rules. 4. Motion for extension of time to file pleadings, affidavits or any other paper,
except those filed due to clearly compelling reasons. Such motion must be
SEC. 3. Construction. – These Rules shall be liberally construed in order to promote verified and under oath;; and
their objective of securing a just, summary, speedy and inexpensive determination of 5. Motion for postponement and other motions of similar intent, except those
every action or proceeding. filed due to clearly compelling reasons. Such motion must be verified and
under oath.
SEC. 4. Executory nature of decisions and orders. – All decisions and orders
issued under these Rules shall immediately be executory. No appeal or petition taken SEC. 9. Assignment of cases. – All cases filed under these Rules shall be tried by
therefrom shall stay the enforcement or implementation of the decision or order, judges designated by the Supreme Court to hear and decide cases transferred from
unless restrained by an appellate court. Interlocutory orders shall not be subject to the Securities and Exchange Commission to the Regional Trial Courts and filed
appeal. directly with said courts pursuant to Republic Act No. 8799, otherwise known as the
Securities and Regulation Cod
SEC. 5. Venue. – All actions covered by these Rules shall be commenced and tried
in the Regional Trial Court which has jurisdiction over the principal office of the RULE 2
corporation, partnership, or association concerned. Where the principal office of the COMMENCEMENT OF ACTION AND PLEADINGS
corporation, partnership or association is registered in the Securities and Exchange
Commission as Metro Manila, the action must be filed in the city or municipality where SECTION 1. Commencement of action. – An action under these Rules is
the head office is located. commenced by the filing of a verified complaint with the proper Regional Trial Court.

SEC. 6. Service of pleadings. – When so authorized by the court, any pleading SEC. 2. Pleadings allowed. – The only pleadings allowed to be filed under these
and/or document required by these Rules may be filed with the court and/or served Rules are the complaint, answer, compulsory counterclaims or cross-claims pleaded
upon the other parties by facsimile transmission (tax) or electronic mail (e-mail. In in the answer, and the answer to the counterclaims or cross-claims.
such cases, the date of transmission shall be deemed to be prima facie the date of
service. SEC. 3. Verification. – The complaint and the answer shall be verified by an affidavit
stating that the affiant has read the pleading and the allegations therein are true and
SEC. 7. Signing of pleadings, motions and other papers. – Every pleading, correct based on his own personal knowledge or on authentic records.
motion, and other paper of a party represented by an attorney shall be signed by at
least one attorney of record in the attorney’s individual name, whose address shall be SEC. 4. Complaint. – The complaint shall state or contain:
stated. A party who is not represented by an attorney shall sign the pleading, motion,
or other paper and state his address. 1. the names, addresses, and other relevant personal or juridical
circumstances of the parties;; 
The signature of an attorney or party constitutes a certification by the signer that he 2. all facts material and relevant to the plaintiff’s cause or causes of
has read the pleading, motion, or other paper;; that to the best of his knowledge, action, which shall be supported by affidavits of the plaintiff or his
information, and belief formed after reasonable inquiry, it is well grounded in fact and witnesses and copies of documentary and other evidence
is warranted by existing law or a good faith argument for the extension, modification,
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supportive of such cause or causes of action;; 4 State the defenses, including grounds for a motion to dismiss under
3. the law, rule, or regulation relied upon, violated, or sought to be the Rules of Court;;
enforced;; 5 State the law, rule, or regulation relied upon;;
4. a certification that (a) the plaintiff has not theretofore commenced 6 Address each of the causes of action stated in the complaint;;
any action or filed any claim involving the same issues in any court, 7 State the facts upon which he relies for his defense, including
tribunal or quasi-judicial agency, and, to the best of his knowledge, affidavits of witnesses and copies of documentary and other
no such other action or claim is pending therein;; (b) if there is such evidence supportive of such cause or causes of action;;
other action or claim, a complete statement of the present status 8 State any compulsory counterclaim/s and cross-claim/s;; and
thereof;; and (c) if he should thereafter learn that the same or similar 9 State the relief sought.
action or claim has been filed or is pending, he shall report that fact
within five (5) days therefrom to the court;; and The answer to counterclaims or cross-claims shall be filed within ten (10) days from
5. the relief sought. service of the answer in which they are pleaded.

SEC. 5. Summons. – The summons and the complaint shall be served together not SEC. 7. Effect of failure to answer. – If the defendant fails to answer within the
later than five (5) days from the date of filing of the complaint. period above provided, he shall be considered in default. Upon motion or motu
proprio, the court shall render judgment either dismissing the complaint or granting
a) Service upon domestic private juridical entities. – If the defendant is the relief prayed for as the records may warrant. In no case shall the court award a
a domestic corporation, service shall be deemed adequate if made relief beyond or different from that prayed for.
upon any of the statutory or corporate officers as fixed by the by-
laws or their respective secretaries. If the defendant is a SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based
partnership, service shall be deemed adequate if made upon any of on personal knowledge, shall set forth such facts as would be admissible in evidence,
the managing or general partners or upon their respective and shall show affirmatively that the affiant is competent to testify on the matters
secretaries. If the defendant is an association, service shall be stated therein. The affidavits shall be in question and answer form, and shall comply
deemed adequate if made upon any of its officers or their with the rules on admissibility of evidence.
respective secretaries.
Affidavits of witnesses as well as documentary and other evidence shall be attached
b) Service upon foreign private juridical entity. – When the defendant to the appropriate pleading;; Provided, however, that affidavits, documentary and
is a foreign private juridical entity which is transacting or has other evidence not so submitted may be attached to the pre-trial brief required under
transacted business in the Philippines, service may be made on its these Rules. Affidavits and other evidence not so submitted shall not be admitted in
resident agent designated in accordance with law for that purpose, evidence, except in the following cases:
or, if there be no such agent, on the government official designated
by law to that effect, or on any of its officers or agents within the 1. Testimony of unwilling, hostile, or adverse party witnesses. A
Philippines. witness is presumed prima facie hostile if he fails or refuses to
execute an affidavit after a written request therefor;; 
SEC. 6. Answer. – The defendant shall file his answer to the complaint, serving a 2. If the failure to submit the evidence is for meritorious and
copy thereof on the plaintiff, within fifteen (15) days from service of summons. compelling reasons;; and
3. Newly discovered evidence.
In the answer, the defendant shall:
In case of (2) and (3) above, the affidavit and evidence must be submitted not later
1 Specify each material allegation of fact the truth of which he than five (5) days prior to its introduction in evidence.
admits;; 
2 Specify each material allegation of fact the truth of which he does RULE 3
not admit. Where the defendant desires to deny only a part of an MODES OF DISCOVERY
averment, he shall specify so much of it as true and material and SECTION 1. In general. – A party can only avail of any of the modes of discovery not
shall deny only the remainder;; later than fifteen (15) days from the joinder of issues.
3 Specify each material allegation of fact as to which truth he has no
knowledge or information sufficient to form a belief, and this shall SEC. 2. Objections. – Any mode of discovery such as interrogatories, request for
have the effect of a denial;; admission, production or inspection of documents or things, may be objected to within
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ten (10) days from receipt of the discovery device and only on the ground that the conference, the court shall, with its active participation, ensure that the parties
matter requested is patently incompetent, immaterial, irrelevant or privileged in consider in detail all of the following:
nature.
1. The possibility of an amicable settlement;; 
The court shall rule on the objections not later than fifteen (15) days from the filing 2. Referral of the dispute to mediation or other forms of dispute resolution;;
thereof. 3. Facts that need not be proven, either because they are matters of judicial
notice or expressly or deemed admitted;;
SEC. 3. Compliance. – Compliance with any mode of discovery shall be made within 4. Amendments to the pleadings;;
ten (10) days from receipt of the discovery device, or if there are objections, from 5. The possibility of obtaining stipulations and admissions of facts and
receipt of the ruling of the court. documents;;
6. Objections to the admissibility of testimonial, documentary and other
SEC. 4. Sanctions. – The sanctions prescribed in the Rules of Court for failure to evidence;;
avail of, or refusal to comply with, the modes of discovery shall apply. In addition, the 7. Objections to the form or substance of any affidavit, or part thereof;;
court may, upon motion, declare a party non-suited or as in default, as the case may 8. Simplification of the issues;;
be, if the refusal to comply with a mode of discovery is patently unjustified. 9. The possibility of submitting the case for decision on the basis of position
papers, affidavits, documentary and real evidence;;
RULE 4 10. A complete schedule of hearing dates;; and
PRE-TRIAL 11. Such other matters as may aid in the speedy and summary disposition of the
SECTION 1. Pre-trial conference;; mandatory nature. – Within five (5) days after case.
the period for availment of, and compliance with, the modes of discovery prescribed
in Rule 3 hereof, whichever comes later, the court shall issue and serve an order SEC. 3. Termination. – The preliminary conference shall be terminated not later than
immediately setting the case for pre-trial conference and directing the parties to ten (10) days after its commencement, whether or not the parties have agreed to
submit their respective pre-trial briefs. The parties shall file with the court and furnish settle amicably.
each other copies of their respective pre-trial brief in such manner as to ensure its
receipt by the court and the other party at least five (5) days before the date set for SEC. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the
the pre-trial. court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may order
The parties shall set forth in their pre-trial briefs, among other matters, the following: the parties to file simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court shall render
1. Brief statement of the nature of the case, which shall summarize the theory judgment, either full or otherwise, not later than ninety (90) days from the expiration of
or theories of the party in clear and concise language;; the period to file the memoranda.
2. Allegations expressly admitted by either or both parties;;
3. Allegations deemed admitted by either or both parties;; SEC. 5. Pre-trial order;; judgment after pre-trial. – The proceedings in the pre-trial
4. Documents not specifically denied under oath by either or both parties;; shall be recorded. Within ten (10) days after the termination of the pre-trial, the court
5. Amendments to the pleadings;; shall issue an order which shall recite in detail the matters taken up in the conference,
6. Statement of the issues, which shall separately summarize the factual and the actions taken thereon, the amendments allowed in the pleadings, and the
legal issues involved in the case;; agreements or admissions made by the parties as to any of the matters considered.
7. Names of witnesses to be presented and the summary of their testimony as The court shall rule on all objections to or comments on the admissibility of any
contained in their affidavits supporting their positions on each of the issues;; documentary or other evidence, including any affidavit or any part thereof. Should the
8. All other pieces of evidence, whether documentary or otherwise and their action proceed to trial, the order shall explicitly define and limit the issues to be tried
respective purposes;; and shall strictly follow the form set forth in Annex "A" of these Rules.
9. Specific proposals for an amicable settlement;;
10. Possibility of referral to mediation or other alternative modes of dispute The contents of the order shall control the subsequent course of the action, unless
resolution;; modified before trial to prevent manifest injustice.
11. Proposed schedule of hearings;; and
12. Such other matters as may aid in the just and speedy disposition of the After the pre-trial, the court may render judgment, either full or partial, as the evidence
case. presented during the pre-trial may warrant.

SEC. 2. Nature and purpose of pre-trial conference. – During the pre-trial
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RULE 5
TRIAL RULE 6
SECTION 1. Witnesses. – If the court deems necessary to hold hearings to ELECTION CONTESTS
determine specific factual matters before rendering judgment, it shall, in the pre-trial SECTION 1. Cases covered. – The provisions of this rule shall apply to election
order, set the case for trial on the dates agreed upon by the parties. contests in stock and non-stock corporations.

Only persons whose affidavits were submitted may be presented as witnesses, SEC. 2. Definition. – An election contest refers to any controversy or dispute
except in cases specified in section 8, Rule 2 of these Rules. The affidavits of the involving title or claim to any elective office in a stock or non-stock corporation, the
witnesses shall serve as their direct testimonies, subject to cross-examination in validation of proxies, the manner and validity of elections, and the qualifications of
accordance with existing rules on evidence. candidates, including the proclamation of winners, to the office of director, trustee or
other officer directly elected by the stockholders in a close corporation or by members
SEC. 2. Trial schedule. – Unless judgment is rendered pursuant to Rule 4 of these of a non-stock corporation where the articles of incorporation or by-laws so provide.
Rules, the initial hearing shall be held not later than thirty (30) days from the date of
the pre-trial order. The hearings shall be completed not later than sixty (60) days from SEC. 3. Complaint. – In addition to the requirements in section 4, Rule 2 of these
the date of the initial hearing, thirty (30) days of which shall be allotted to the plaintiffs Rules, the complaint in an election contest must state the following:
and thirty (30) days to the defendants in the manner prescribed in the rep-trial order.
The failure of a party to present a witness on a scheduled hearing date shall be 1. The case was filed within fifteen (15) days from the date of the
deemed a waiver of such hearing date. However, a party may present such witness election if the by-laws of the corporation do not provide for a
or witnesses within his remaining allotted hearing dates. procedure for resolution of the controversy, or within fifteen (15)
days from the resolution of the controversy by the corporation as
SEC. 3. Written offer of evidence. – Evidence not otherwise admitted by the parties provided in its by-laws;; and 
or ruled upon by the court during the pre-trial conference shall be offered in writing 2. The plaintiff has exhausted all intra-corporate remedies in election
not later than five (5) days from the completion of the presentation of evidence of the cases as provided for in the by-laws of the corporation.
party concerned. The opposing party shall have five (5) days from receipt of the offer
to file his comments or objections. The court shall make its ruling on the offer within SEC. 4. Duty of the court upon the filing of the complaint. – Within two (2) days
five (5) days from the expiration of the period to file comments or objections. from the filing of the complaint, the court, upon a consideration of the allegations
thereof, may dismiss the complaint outright if it is not sufficient in form and substance,
SEC. 4. Memoranda. – Immediately after ruling on the last offer of evidence, the or, if it is sufficient, order the issuance of summons which shall be served, together
court shall order the parties to simultaneously file, within thirty (30) days from receipt with a copy of the complaint, on the defendant within two (2) days from its issuance.
of the order, their respective memoranda. The memoranda shall contain the following:
SEC. 5. Answer. – The defendant shall file his answer to the complaint, serving a
1. A "Statement of the Case," which is a clear and concise statement of the copy thereof on the plaintiff, within ten (10) days from service of summons and the
nature of the action and a summary of the proceedings;;  complaint. The answer shall contain the matters required in section 6, Rule 2 of these
2. A "Statement of the Facts," which is a clear and concise statement in Rules.
narrative form of the established facts, with reference to the testimonial,
documentary or other evidence in support thereof;; SEC. 6. Affidavits, documentary and other evidence. – The parties shall attach to
3. A "Statement of the issues," which is a clear and concise statement of the the complaint and answer the affidavits of witnesses, documentary and other
issues presented to the court for resolution;; evidence in support thereof, if any.
4. The "Arguments," which is a clear and concise presentation of the argument
in support of each issue;; and 2) Securities Regulation Code (Sec. 5/ reportorial reqs./ compel mtgs)
5. The "Relief," which is a specification of the order or judgment which the party PURPOSE
seeks to obtain. ACTS PENALIZED
JURISDICTION
No reply memorandum shall be allowed.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
SEC. 5. Decision after trial. – The court shall render a decision not later than (90) with transparency and shall have the powers and functions provided by this Code,
days from the lapse of the period to file the memoranda, with or without said pleading Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
having been filed. the Financing Company Act and other existing laws. Pursuant thereto the
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Commission shall have, among others, the following powers and functions: (m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnerships or associations, upon
(a) Have jurisdiction and supervision over all corporations, partnerships or any of the grounds provided by law;; and
associations who are the grantees of primary franchises and/or a license or
permit issued by the Government;; (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
(b) Formulate policies and recommendations on issues concerning the carrying out of, the express powers granted the Commission to achieve the
securities market, advise Congress and other government agencies on all objectives and purposes of these laws.
aspects of the securities market and propose legislation and amendments
thereto;; 5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general
(c) Approve, reject, suspend, revoke or require amendments to registration jurisdiction or the appropriate Regional Trial Court: Provided, that the
statements, and registration and licensing applications;; Supreme Court in the exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction over these cases. The
(d) Regulate, investigate or supervise the activities of persons to ensure Commission shall retain jurisdiction over pending cases involving intra-
compliance;; corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall
(e) Supervise, monitor, suspend or take over the activities of exchanges, retain jurisdiction over pending suspension of payments/rehabilitation cases
clearing agencies and other SROs;; filed as of 30 June 2000 until finally disposed.

(f) Impose sanctions for the violation of laws and the rules, regulations and SEC. 10. Exempt Transactions. - 10.1. The requirement of registration under
orders issued pursuant thereto;; Subsection 8.1. shall not apply to the sale of any security in any of the following
transactions:
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such (a) At any judicial sale, or sale by an executor, administrator, guardian or
rules, regulations and orders;; receiver or trustee in insolvency or bankruptcy.

(h) Enlist the aid and support of and/or deputize any and all enforcement (b) By or for the account of a pledge holder, or mortgagee or any other similar
agencies of the Government, civil or military as well as any private institution, lien holder selling or offering for sale or delivery in the ordinary course of
corporation, firm, association or person in the implementation of its powers business and not for the purpose of avoiding the provisions of this Code, to
and functions under this Code;; liquidate a bona fide debt, a security pledged in good faith as security for such
debt.
(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;; (c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the
(j) Punish for contempt of the Commission, both direct and indirect, in owner’s account, such sale or offer for sale, subscription or delivery not being
accordance with the pertinent provisions of and penalties prescribed by the made in the course of repeated and successive transactions of a like character
Rules of Court;; by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security.
(k) Compel the officers of any registered corporation or association to call
meetings of stockholders or members thereof under its supervision;; (d) The distribution by a corporation, actively engaged in the business
authorized by its articles of incorporation, of securities to its stockholders or
(l) Issue subpoena duces tecum and summon witnesses to appear in any other security holders as a stock dividend or other distribution out of surplus.
proceedings of the Commission and in appropriate cases, order the
examination, search and seizure of all documents, papers, files and records, (e) The sale of capital stock of a corporation to its own stockholders exclusively,
tax returns, and books of accounts of any entity or person under investigation where no commission or other remuneration is paid or given directly or indirectly
as may be necessary for the proper disposition of the cases before it, subject in connection with the sale of such capital stock.
to the provisions of existing laws;;
(f) The issuance of bonds or notes secured by mortgage upon real estate or
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tangible personal property, where the entire mortgage together with all the qualified buyers, on the basis of such factors as financial sophistication,
bonds or notes secured thereby are sold to a single purchaser at a single sale. net worth, knowledge, and experience in financial and business matters,
or amount of assets under management.
(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 10.2. The Commission may exempt other transactions, if it finds that the requirements
security surrendered in exchange to make such conversion: Provided, That the of registration under this Code is not necessary in the public interest or for the
security so surrendered has been registered under this Code or was, when sold, protection of the investors such as by reason of the small amount involved or the limited
exempt from the provisions of this Code, and that the security issued and character of the public offering.
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 10.3. Any person applying for an exemption under this Section, shall file with the
Code. Upon such conversion the par value of the security surrendered in such Commission a notice identifying the exemption relied upon on such form and at such
exchange shall be deemed the price at which the securities issued and time as the Commission by rule may prescribe and with such notice shall pay to the
delivered in such exchange are sold. Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum
aggregate price or issued value of the securities.
(h) Broker’s transactions, executed upon customer’s orders, on any registered PD 902 – A Sec 5 and 5.2 RELATE to RA 8799 (JURISDICTION) – MEM AID
Exchange or other trading market. à powers of SEC transferred to RTC
- RA 8799 amended Sec 5 of PD 902-A. Jurisdiction over intra-corporate disputes
(i) Subscriptions for shares of the capital stock of a corporation prior to the is now vested in the RTC. However while Sec 5 was amended there is no repeal
incorporation thereof or in pursuance of an increase in its authorized capital of Sec 6 thereof declaring that fraudulent acts or schemes which the SEC shall
stock under the Corporation Code, when no expense is incurred, or no exclusively investigate and prosecute, are those in violation of any law or rules
commission, compensation or remuneration is paid or given in connection with and regulations administered and enforced by the SEC alone.
the sale or disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital stock of a 3) R.A. 9520 (Magna Carta for Homeowners Asso.) -- w/ HLURB
corporation which should be subscribed before it can be registered and duly Republic Act No. 9904
incorporated, or its authorized capital increased. AN ACT PROVIDING FOR A MAGNA CARTA FOR HOMEOWNERS AND
HOMEOWNERS’ ASSOCIATIONS, AND FOR OTHER PURPOSES
(j) The exchange of securities by the issuer with its existing security holders Be it enacted by the Senate and House of Representatives of the Philippines in
exclusively, where no commission or other remuneration is paid or given directly Congress assembled:
or indirectly for soliciting such exchange. CHAPTER I TITLE AND DECLARATION OF POLICY
Section 1. Title. – This Act shall be known as the "Magna Carta for Homeowners
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the and Homeowners’ Associations".
Philippines during any twelve-month period.
Section 2. Declaration of Policy. - In fulfillment of the constitutional principles directing
(l) The sale of securities to any number of the following qualified buyers: the State to encourage, promote and respect nongovernmental, community - based
(i) Bank;; and people’s organizations in serving their legitimate collective interests in our
participatory democracy, it is hereby declared the policy of the State to uphold the rights
(ii) Registered investment house;; of the people to form unions, associations, or societies, and to recognize and promote
the rights and the roles of homeowners as individuals and as members of the society
(iii) Insurance company;; and of homeowners' associations. To this end, the State shall endeavor to make
available resources and assistance that will help them fulfill their roles In serving the
(iv) Pension fund or retirement plan maintained by the Government of needs and interests of their communities, in complementing the efforts of local
the Philippines or any political subdivision thereof or managed by a bank government units (LGUs) in providing vital and basic services to our citizens, and in
or other persons authorized by the Bangko Sentral to engage in trust helping implement local and national government policies, programs, rules and
functions;; ordinances for the development of the nation.

(v) Investment company;; or Section 3. Definition of Terms. - For purposes of this Act, the following terms shall
mean:
(vi) Such other person as the Commission may by rule determine as
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(a) "Accounting period" refers to the fiscal or calendar year adopted by a limited by law to primarily residential purposes.
homeowners’ association in the recording and reporting of its fiscal (l) "Simple majority" refers to fifty percent (50%) plus one (1) of the total number
transactions. of association members.
(b) "Association" refers to the homeowners’ association which is a nonstick, (m) "Socialized housing" refers to housing programs and projects covering
nonprofit corporation registered with the Housing and Land Use Regulatory houses and lots or home lots only undertaken by the government or the private
Board (HLURB), or one previously registered with the Home Insurance sector for the underprivileged and homeless citizens which shall include sites
Guarantee Corporation (now Home Guaranty Corporation) or the Securities and and services development, long - term financing, liberalized terms on interest
Exchange Commission (SEC), organized by owners or purchasers of a lot in a payments, and other benefits in accordance with the provisions of Republic Act
subdivision/village or other residential real property located within the No. 7279, otherwise known as the Urban Development and Housing Act of 1992
jurisdiction of the association;; or awardees, usufructuaries, legal occupants (UDHA).
and/or lessees of a housing unit and/or lot in a government socialized or (n) "Subdivision/Village" refers to a tract or parcel of land partitioned into
economic housing or relocation project and other urban estates;; or individual lots, with or without improvements thereon, primarily for residential
underprivileged and homeless citizens as defined under existing laws in the purposes.
process of being accredited as usufructuaries or awardees of ownership rights
under the Community Mortgage Program (CMP), Land Tenure Assistance Section 4. Registration with the HLURB. - Every association of homeowners shall be
Program (LTAP) and other similar programs in relation to a socialized housing required to register with the HLURB. This registration shall serve to grant juridical
project actually being Implemented by the national government or the LGU. personality to all such associations that have not previously acquired the same by
(c) "Association member" refers to a homeowner who is a member of the operation of the General Corporation Law or by any other general law.
association where his/her housing unit or lot is situated and those defined in the
articles of incorporation and bylaws of the association. The procedure for registration shall be specifically provided for in the implementing
(d) "Basic community services and facilities" refer to services and facilities that rules and regulations to be promulgated by the HLURB pursuant to Section 28 of this
redound to the benefit of all homeowners and from which, by reason of Act.1avvphi1 Such procedure shall provide for an adjudicatory mechanism that will be
practicality, no homeowner may be excluded such as, but not limited to: observed in the event there is a dispute involving two (2) or more associations
security;; street and vicinity lights;; maintenance, repairs and cleaning of streets;; established within the same subdivision/village), community/area, or housing project
garbage collection and disposal;; and other similar services and facilities. seeking registration. In resolving this type of dispute, the HLURB shall take into account
(e) "Board" refers to the board of directors or trustees of the association which the date each association was legally established, the date of submission of its
has primary authority to manage the affairs of the association. application for registration, the number of members, and other similar factors.
(f) "Common areas" refer to property owned or otherwise maintained, repaired The existence of associations previously registered with the Home Insurance
or administered in whole or in part by the association including, but not limited Guarantee Corporation or the SEC shall be respected, and the said associations shall
to, roads, parks, playgrounds and open spaces as provided in Presidential not be charged a penalty when they register with the HLURB after this Act takes effect.
Decree No. 1216.
(g) "Common expense" refers to costs incurred by the association to exercise CHAPTER II HOMEOWNERS
any of the powers provided for in this Act. Section 5. Rights and Duties of Every Homeowner. - Every homeowner has the right
(h) "Economic housing" refers to a type of housing project with lower interest to enjoy the basic community services and facilities: Provided, That he/she pays the
rates and longer amortization periods provided to moderately low - income necessary fees and other pertinent charges.
families, as defined under existing laws, rules and regulations.
(i) "Governing document" refers to the articles of incorporation, bylaws, Section 6. Qualification of a Member. - A homeowner as defined under this Act shall
conditions, rules and regulations of the association, or other written instrument be qualified to be a member of an association: Provided, however, That a lessee,
by which the association has the authority to exercise any of the powers usufructuary, or legal occupant shall have the right of a homeowner as set forth under
provided for in this Act. this Act upon procurement of a written consent or authorization from the owner of the
(j) "Homeowner" refers to any of the following;; lot or housing unit.
(1) An owner or purchaser of a lot in a subdivision/village;;
(2) An awardee, usufructuary, or legal occupant of a unit, house and/or lot Until such consent or authorization is revoked in writing, the owner of the lot or housing
in a government socialized or economic housing or relocation project and unit is deemed to have waived his/her rights enumerated under Section 7 of this Act,
other urban estates;; or except subsection (b) of the same section which can be simultaneously enjoyed by
(3) An informal settler in the process of being accredited as beneficiary or both the owner and the lessee.
awardee of ownership rights under the CMP, LTAP, and other similar
programs. For purposes of this Act, the lessee authorized in accordance with this sect shall qualify
(k) "Residential real property" refers to any real property, the use of which is
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as a member with all the rights enumerated in this Act, including the duties and (d) Regulate access to, or passage through the subdivision/village roads for
obligations enumerated under Sections 7, 8 and 9 hereof: Provided, further, That purposes of preserving privacy, tranquility, internal security, and safety and
lessees in government socialized housing projects or urban estates and those in traffic order: Provided, That: (1) public consultations are held;; (2) existing laws
communities of underprivileged and homeless citizens covered under the term under and regulations are met;; (3) the authority of the concerned government
Section 3 of this Act will be considered as homeowners for the purpose of qualifying as agencies or units are obtained;; and (4) the appropriate and necessary
a member of a homeowners' association without need of such written consent or memoranda of agreement are executed among the concerned parties;;
authorization. (e) Hire, discharge or contract managing agents and other employees, agents
and independent contractors to ensure the full functioning and operation of the
Section 7. Rights of a Member. - An association member has full rights: association;;
(a) to avail of and enjoy all basic community services and the use of common (I) Subject to consultation with and the approval of a simple majority of the
areas and facilities;; association members, acquire, hold, encumber and convey in its own name any
(b) to inspect association books and records during office hours and to be right, title to or interest in real or personal property: Provided, That such
provided upon request with annual reports, including financial statements;; approval of a simple majority of the association members shall not be required
(c) to participate, vote and be eligible for any elective or appointive office of the for the acquisition, holding, encumbrance and conveyance of personal
association subject to the qualifications as provided for in the bylaws;; properties in amounts not exceeding ten percent (10%) of the association’s
(d) to demand and promptly receive deposits required by the association as cash holdings for its use in the course of its normal operations;;
soon as the condition for the deposit has been complied with or the period has (g) Ensure the availability of quality water services at a reasonable price and at
expired;; its option, administer and manage the waterworks system of the subdivision;;
(e) to participate in association meetings, elections and referenda, as long as (h) Upon consultation, grant easements, leases, concessions and authority to
his/her bona fide membership subsists;; and use common areas and petition for or consent to the vacation of streets and
(f) to enjoy all other rights as may be provided for in the association bylaws. alleys: Provided, That the said grant of easements, leases, concessions and
authority shall not be applicable to access roads, main interconnecting roads,
Section 8. Duties of a Member. - A member shall have the following duties: alleys and sidewalks within the subdivision;;
(a) to pay membership fees, dues and special assessments;; (i) Impose or collect reasonable fees for the use of open spaces, facilities, and
(b) to attend meetings of the association;; and services of the association to defray necessary operational expenses, subject
(c) to support and participate In projects and activities of the association. to the limitations and conditions imposed under the law, the regulations of the
board and the association’s bylaws;;
Section 9. Delinquent Member. - The bylaws shall provide for guidelines and (j) Cause compliance with regard to height regulations, easements, use of
procedures in determining who is a delinquent member, or a member not in good homes, buildings, edifices, or structures that may be built within the subdivision,
standing, and to prescribe the administrative sanctions to be imposed on such member. in accordance with the National Building Code, zoning laws, HLURB rules and
The right to due process shall be observed in cases where administrative sanctions are regulations, existing local ordinances, and existing deeds of restriction;;
imposed on a delinquent member. (k) Subject to consultation and with the approval of a simple majority of the
association members, allow the establishment of certain institutions such as,
CHAPTER III HOMEOWNERS’ ASSOCIATION but not limited to, schools, hospitals, markets, grocery stores and other similar
establishments that will necessarily affect the character of the
Section 10. Rights and Powers of the Association. - An association shall have the subdivision/village in terms of traffic generation, and/or opening the area to
following rights and shall exercise the following powers: outsiders which may result in the loss of privacy, security, safety, and tranquility
(a) Subject to consultation and with the approval of a simple majority of the to its residents, in accordance with the National Building Code, zoning laws,
members, adopt and amend the articles of incorporation and bylaws, rules and existing local ordinances, HLURB rules and regulations, and existing
regulations, pursuant to existing laws and regulations;; jurisprudence: Provided, That such prior approval shall not be necessary for the
(b) In behalf of its members, institute, defend, or intervene in litigation and/or establishment of sari - sari stores, home industries and similar small - scale
administrative proceedings affecting the welfare of the association and the business enterprises within the subdivision/village classified as socialized
subdivision/village as a whole, excluding, however, disputes that are not the housing;;
responsibility of the association;; (l) Suspend privileges of and services to and/or impose sanctions upon its
(c) Regulate the use, maintenance, repair, replacement and modification of members for violations and/or noncompliance with the association's bylaws,
common areas and cause additional improvements to be made part of the and rules and regulations;;
common areas: Provided, That the aforementioned do not contradict the (m) Petition for the creation of a separate barangay, independently or together
provisions of the approved subdivision plan;; with neighboring subdivisions: Provided, That all the requirements of the Local
Government Code of 1991 are met;; and
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(n) Exercise any other powers conferred by the bylaws and the HLURB Within sixty (60) days after the removal of a director or trustee, an election shall be
necessary for the governance and operation of the association. called by the remainder of the board for the purpose of determining who shall hold
office for the unexpired term of the removed director/trustee.
Section 11. Board of Directors or Trustees. - The bylaws of the association shall
provide for the qualifications and number of the directors or trustees that will comprise Section 14. Dissolution of the Board. - Through a signed petition of two - thirds (2/3) of
the board. the association members subject to a verification and validation by the HLURB, the
board of the association may be dissolved for causes provided in the bylaws of the
Section 12. Duties and Responsibilities of the Board. In addition to the duties and association.
responsibilities stated in the bylaws of the association, the board shall have the
following duties and responsibilities: Within sixty (60) days from the above dissolution, an election for a new board shall be
(a) Regularly maintain an accounting system using generally accepted called and conducted by the HLURB for the purpose of determining who shall hold
accounting principles, and keep books of accounts, which shall be open for office for the unexpired term of the dissolved board.
inspection to any homeowner and duly authorized representatives of
government agencies upon request, during reasonable hours, on business Until the new board members shall have been elected and qualified, the HLURB shall
days;; designate an interim board: Provided, That such board shall be composed of
(b) Collect the fees, dues and assessments that may be provided for in the association members in good standing: Provided, further, That such interim board
bylaws and approved by a majority of the members;; members shall not be eligible to run in the election called for the purpose of replacing
(c) Collect reasonable charges for assessments, and after due notice and the members of the dissolved board.
hearing by the board in accordance with the procedures as provided in the
bylaws, and rules and regulations adopted by the board, charge reasonable Section 15. Association Bylaws. - The bylaws of the association shall be adopted by a
fines for late payments and for violation of the bylaws, rules, and regulations of simple majority of the members of the association. Consistent with the provisions of
the association, in accordance with a previously established schedule adopted this Act, it shall provide for:
by the board and furnished to the homeowners;; (a) The rights, duties and obligations of members;;
(d) Propose measures to raise funds and the utilization of such funds and (b) The circumstances under which membership is acquired, maintained, and
submit the same for consideration of the members of the association;; lost;;
(e) Undergo a free orientation by the HLURB or any other competent agency (c) The schedule, venue, and manner of conducting the regular, special, and
deputized by it on how to conduct meetings, preparation of minutes, handling emergency meetings of the general membership, the required quorum, and
of accounts, laws and pertinent rules and regulations within thirty (30) days after allowable proxies in such meetings;;
election or appointment;; (d) The number, qualifications, powers and duties, terms of office, manner of
(f) Discharge the duties and responsibilities provided for in the association’s electing and removing the board and the filling of vacancies in the board:
bylaws;; and Provided, That the term of office of the members of the board shall not exceed
(g) Exercise such other powers as may be necessary and proper in accordance two (2) years;;
with this Act and for the accomplishment of the purposes for which the (e) The qualifications, positions, duties, election or appointment, and
association was organized. compensation of other officers and employees of the association: Provided,
The board shall act in all instances on behalf of the association, except to That the term of office of the other officers shall not exceed two (2) years:
amend the articles of incorporation, to dissolve the association, to elect Provided, further, That no officer of the association holding a rank of director or
members of the board or to determine the qualifications, powers and duties, or trustee shall likewise be entitled to any compensation;;
terms of office of the board, and other instances that require the vote or approval (f) The schedule, venue, and manner of conducting the regular, special, and
of the members themselves. In the performance of their duties, the officers and emergency meetings of the board, the required quorum, and allowable proxies
members of the board shall exercise the degree of care and loyalty required by in such meetings;;
such position. (g) Such powers that the board may delegate to a managing agent, if any, or to
other persons;;
Section 13. Removal of a Director or Trustee. - Through a signed petition of a simple (h) Which of its officers may prepare, execute, certify and record amendments
majority of the association members in good standing, subject to a verification and to the governing documents on behalf of the association;;
validation by the HLURB, a director/trustee may be removed for causes provided in the (i) The grounds and procedure for removal of director or trustee, and the manner
bylaws of the association: Provided, That if a majority of the members of the board is of filling up vacancies in the board, consistent with Section 13 of this Act;;
removed, it shall be considered a dissolution of the entire board, in which case, Section (j) The grounds and procedure for dissolution of the board, and the manner of
14 hereof shall govern. reconstituting the board, consistent with Sections 13 and 14 of this Act;;
(k) The actions for limiting, broadening or denying the right to vote, and the
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extent thereof;; ninety (90) days from the end of the accounting period to be posted in the
(I) The designation of the presiding officer at meetings of directors or trustees association office, bulletin boards, or other conspicuous places within the
and members;; subdivision/village, and to be submitted to the HLURB;; and
(m) The time for holding the regular election of directors or trustees and the (d) The funds of the association shall be kept in accounts in the name of the
mode or manner of giving notice thereof;; association and shall not be joined with the funds of any other association, or
(n) The creation of election, grievance and audit committees, and such other any person responsible for the custody of such funds.
committees which the association may deem necessary;; as well as a
conciliation or mediation mechanism for the amicable settlement of disputes Section 18. Relationship with LGUs. - Homeowners' associations shall complement,
among members, directors or trustees, officers and committee members of the support and strengthen LGUs in providing vital services to their members and help
association;; implement local government policies, programs, ordinances, and rules.
(o) The dues, fees, and special assessments to be imposed on a regular basis,
and the manner in which the same may be imposed and/or increased;; Associations are encouraged to actively cooperate with LGUs in furtherance of their
(p) The method of adopting, amending, repealing and abrogating the bylaws;; common goals and activities for the benefit of the residents of the subdivisions/villages
(q) The list of acts constituting a violation by its officers and the corresponding and their environs.
penalties therefor;;
(r) The penalties for violation of the bylaws;; and Where the LGUs lack resources to provide for basic services, the associations shall
(s) Such other matters necessary for the proper or convenient transaction of its endeavor to tap the means to provide for the same. In recognition of the associations’
corporate business and affairs. efforts to assist the LGUs III providing such basic services, association dues and
income derived from rentals of their facilities shall be tax - exempt: Provided, That such
Section 16. Proxies. - Association members may vote in person or by proxy in all income and dues shall be used for the cleanliness, safety, security and other basic
meetings of members. Proxies shall be in writing, signed by the member and filed services needed by the members, including the maintenance of the facilities of their
before the scheduled meeting with the association secretary. Unless otherwise respective subdivisions or villages.
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 three (3) years at anyone time LGUs shall, upon due notice, hold public consultations with the members of the affected
unless earlier revoked by the member. associations, especially their officers and directors, where proposed rules, zoning and
other ordinances, projects and/or programs affecting their jurisdiction and surrounding
Section 17. Financial and Other Records. - The homeowners’ association is enjoined vicinity are to be implemented prior to the effectivity or implementation of such rules,
to observe the following, with regard to its funds, financial and other records: zoning, ordinances, projects or programs: Provided, That in cases of zonal
reclassification, the approval of a simple majority of homeowners shall be required.
(a) The association or its managing agent shall keep financial and other records
sufficiently detailed to enable the association to fully declare to each member Such public consultations shall conform to the manner as specified in Rule XI, Article
the true statement of its financial status. All financial and other records of the 54 of the implementing rules and regulations of Republic Act No. 7160, otherwise
association including, but not limited to, checks, bank records and invoices, in known as the Local Government Code of 1991.
whatever form these are kept, are the property of the association. Each
association’s managing agent shall turn over all original books and records to Section 19. Relationship with National Government Agencies. - The associations shall
the association immediately upon termination of the management relationship complement, support and strengthen the efforts of the national government agencies
with the association, or upon such other demand as is made by the board. An in providing vital services to their members and help implement the national
association’s managing agent is entitled to keep association records. All government policies and programs.
records which the managing agent has turned over to the association shall be
made reasonably available for the examination and copying by the managing Associations are encouraged to actively cooperate with national government agencies
agent;; in the furtherance of their common goals and activities for the benefit of the residents
(b) All records involving the affairs of the association shall be available for of the subdivisions and its environs. National government agencies shall consult the
examination by all owners, holders of mortgages on the lots, and their associations where proposed rules, projects and/or programs may affect their welfare.
respective authorized agents upon reasonable advanced notice, during normal
working hours at the office of the association: Provided, That holders of CHAPTER IV DUTIES AND RESPONSlBILlTIES OF THE HLURB
mortgages on lots may have access to the information about the property held Section 20. Duties and Responsibilities of the HLURB. - In addition to the powers,
in mortgage with the written consent of the registered owner;; authorities and responsibilities vested in it by Republic Act No. 8763, Presidential
(c) A financial statement of the association shall be prepared annually by an Decree No. 902 - A, Batas Pambansa Big. 68 and Executive Order No. 535, Series of
auditor, the treasurer and/or an independent certified public accountant within
107
1981, as amended, the HLURB shall: (e) To deny any member due process in the imposition of administrative
(a) Regularly conduct free orientation for officers of homeowners’ associations sanctions;;
or deputize another competent agency to conduct the orientation;; (f) To exercise rights and powers as stated m Section 10 in violation of the
(b) Formulate and publish a Code of Ethics and Ethical Standards for board required consultation and approval of the required number of homeowners or
members detailing prohibited conflicts of interest;; members;;
(c) Register all associations, federations, confederations or umbrella (g) To unreasonably fail to provide basic community services and facilities and
organizations of the associations;; maintain, repair, replace, or modify such facilities;;
(d) Hear and decide inter - association and/or inter - association controversies (h) To unreasonably fail to comply with Section 17 of this Act;; or
and/or conflicts, without prejudice to filing civil and criminal cases by the parties (i) To violate any other provision of this Act.
concerned before the regular courts: Provided, That all decisions of the HLURB
are appealable directly to the Court of Appeals;; Section 23. Penalties and Sanctions. - Any person who, intentionally or by gross
(e) Formulate the rules or manner of verification and validation of petitions for negligence, violates any provision of this Act, fails to perform his/her functions under
the removal of director(s) or trustee(s) of the association or dissolution of the this Act and/or violates the rights of the members, shall be punished with a fine of not
board pursuant to Sections 13 and 14 of this Act;; less than Five thousand pesos (Php5, 000.00) but not more than Fifty thousand pesos
(f) Exercise the same powers over federations, confederations or umbrella (Php50, 000.00) and permanent disqualification from being elected or appointed as
organizations of the associations;; member of the board, officer or employee of the association, without prejudice to being
(g) Formulate, in consultation with the representatives of associations, charged before a regular court for violations of the provisions of the Revised Penal
federations, confederations or umbrella organizations of the associations, Code, Civil Code and other pertinent laws.
standard nomenclatures to be used for the associations' books of accounts, and
a standard articles of incorporation and bylaws for homeowners' association for If the violation is committed by the association, the members, officers, directors or
reference purposes;; trustees of the association who have actually participated in, authorized, or ratified the
(h) Formulate, in consultation with the representatives of associations, prohibited act shall be held liable.
federations, confederations or umbrella organizations of the associations, the
guidelines in regulating the kinds of contributions and fees that may be charged If the violation is committed by the employees and agents who acted in gross violation
and/or collected by associations;; and of the provisions of this Act, the officers, directors or trustees, or incorporators of the
(i) Call upon the Philippine National Police, other law enforcement agencies, association shall be jointly and severally liable with the offending employees, agents,
and other instrumentalities of the government, if necessary, for the enforcement and the association.1avvphi1
of its functions.
Section 21. Additional Positions and Personnel for the HLURB. - For purposes Section 24. Review of Association's Bylaws. - In order to comply with the provisions of
of this Act, the HLURB shall, upon its discretion, create positions and enlist this Act, the homeowners' association shall, within six (6) months from the effectivity of
additional personnel to carry out its mandate. this Act, conduct a review of its bylaws, draft its own rules of procedure to be
incorporated in the bylaws and conduct a plebiscite for the approval of the members of
CHAPTER V FINAL PROVISIONS the association. A simple majority shall be used to determine the approval of the
bylaws.
Section 22. Prohibited Acts. - It shall be prohibited for any person:
(a) To compel a homeowner to join the association, without prejudice to the Section 25. Appropriations. - The amounts necessary for the implementation of this
provisions of the deed of restrictions, its extensions or renewals as approved Act and for carrying out the additional functions and responsibilities of the HLURB shall
by the majority vote of the members or as annotated on the title of the property;; be included in the annual General Appropriations Act.
the contract for the purchase of a lot in the subdivision project;; or an award
under a CMP project or a similar tenurial arrangement;; Section 26. Separability Clause. - If any provision of this Act is declared invalid or
(b) To deprive any homeowner of his/her right to avail of or enjoy basic unconstitutional, the remainder of the Act shall remain valid and subsisting.
community services and facilities where he/she has paid the dues, charges, and
other fees for such services;; Section 27. Repealing Clause. - All other issuances, laws, decrees, orders, rules and
(c) To prevent any homeowner who has paid the required fees and charges regulations, or parts thereof inconsistent with this Act are hereby repealed or modified
from reasonably exercising his/her right to inspect association books and accordingly.
records;;
(d) To prevent any member in good standing from participating in association Section 28. Implementing Rules and Regulations. - The HLURB shall formulate and
meetings, elections and referenda;; promulgate, in consultation with concerned sectors, rules and regulations necessary to
implement the provisions of this Act within SIX (6) months of its effectivity.
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No rule or regulation shall be issued which tends to undermine the organizational and in determining whether the dispute involves corporate matters as to consider
territorial integrity of any association. them as intra-corporate controversies.

Section 29. Effectivity. - This Act shall take effect fifteen (15) days following Its
publication ill the Official Gazette or III at least two (2) national newspapers of general
circulation. Matling Industrial &Comml Corp. v. Coros (Oct 13, 2010)
Central to the issue is Section 25 of the Corporation Code, which states that “immediately
4) Cooperative Devt. Authority after their election, the directors of a corporation must formally organize by the election of
Medical Plaza v. Cullen (11/11/2013) a president, a treasurer, a secretary, and such other officers as may be provided for in the
The two tests are: (a) the relationship test and (b) the nature of the controversy by-laws.”
test. An intra-corporate controversy is one which pertains to any of the following
relationships: (1)between the corporation, partnership or association and the The tribunal stated that for a position to be considered a corporate office, it is essential
public;; (2) between the corporation, partnership or association and the State that it is one of those expressly mentioned in the Corporation Code or in the company’s
insofar as its franchise, permit or license to operate is concerned;; (3) between by-laws. 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.”
the corporation, partnership or association and its stockholders, partners,

members or officers;; and (4) among the stockholders, partners or The company’s argument that its by-laws made a valid delegation of the board’s
associates themselves. Thus, under the relationship test, the existence of any of appointing power to the president was rejected by the tribunal. It pointed out that the
the above intra-corporate relations makes the case intra-corporate. Under the delegation is invalid because the law requires the board itself to elect the corporate
nature of the controversy test, "the controversy must not only be rooted officers. That power is “exclusively vested in the board of directors and could not be
in the existence of an intra-corporate relationship, but must as well pertain to delegated to subordinate officers or agents.” Moreover, the tribunal explained, the
the enforcement of the parties’ correlative rights and obligations under the appointment authority granted to the president was limited to the creation of non-corporate
Corporation Code and the internal and intra-corporate regulatory rules of the offices to be occupied by ordinary employees. Their appointment is incidental to the
corporation." In other words, jurisdiction should be determined by considering president’s duty as executive to assist him in running the company.

both the relationship of the parties as well as the nature of the question involved
Strategic Alliance v. Star Infrastructure (11/17/2010)

Real v. SanguPhils. (1/19/ 2011) In addition to being conferred by law, it bears emphasizing that the jurisdiction of a court
To determine whether a case involves an intra-corporate controversy, and is to or tribunal over the case is determined by the allegations in the complaint and the
be heard and decided by the branches of the RTC specifically designated by the character of the relief sought, irrespective of whether or not the plaintiff is entitled to
Court to try and decide such cases, two elements must concur: (a) the status or recover all or some of the claims asserted therein. Moreover, pursuant to Section 5.2 of
relationship of the parties, and (2) the nature of the question that is the subject Republic Act No. 8799, otherwise known as the Securities Regulation Code, the
of their controversy. jurisdiction of the SEC over all cases enumerated under Section 5 of Presidential Decree
No. 902-A has been transferred to RTCs designated by this Court as SCCs pursuant to
The first element requires that the controversy must arise out of intra-corporate A.M. No. 00-11-03-SC promulgated on 21 November 2000.

or partnership relations between any or all of the parties and the corporation x x
It should be noted that the SCCs are still considered courts of general jurisdiction. Section
. The second element requires that the dispute among the parties be intrinsically 5.2 of R.A. No. 8799 directs merely the Supreme Court's designation of RTC branches
connected with the regulation of the corporation. If the nature of the controversy that shall exercise jurisdiction over intra-corporate disputes. Nothing in the language of
involves matters that are purely civil in character, necessarily, the case does not the law suggests the diminution of jurisdiction of those RTCs to be designated as SCCs.
involve an intra-corporate controversy. The assignment of intra-corporate disputes to SCCs is only for the purpose of streamlining
the workload of the RTCs so that certain branches thereof like the SCCs can focus only
Guided by this recent jurisprudence, we thus find no merit in respondents’ on a particular subject matter.
contention that the fact alone that petitioner is a stockholder and director of
Respondent Corporation automatically classifies this case as an intra-corporate The RTC exercising jurisdiction over an intra-corporate dispute can be likened to an RTC
exercising its probate jurisdiction or sitting as a special agrarian court. The designation of
controversy. To reiterate, not all conflicts between the stockholders and the
the SCCs as such has not in any way limited their jurisdiction to hear and decide cases of
corporation are classified as intra-corporate. There are other factors to consider all nature, whether civil, criminal or special proceedings.

109

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CORPORATION CODE – FINALS REVIEWER (ATTY. M.I.

The board of directors or trustees of each corporation, party to the merger or

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