CORPORATION LAW - Can do things as the law asks or allows it to do
- If it does anything beyond, it shall be considered as
 Corporation is one of the types of business organizations.
It is also the most important in economic development.
INTRODUCTION
 Sole proprietorship
- One man form of business entity, personally answers all
liabilities, but enjoys all the profits with the exclusion of
others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether they be natural or
juridical
- does not entail continuity because after the undertaking is
completed it is already the end
- particular partnership and joint venture would be similar,
but there is already a decision of the Supreme Court
declaring them as different
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a
domestic corporation, it must be registered. Generally
they do not need to be registered.
 Corporations
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are exceptions
allowed by the SEC: the 3 exceptions must go hand in
hand
1. The articles of incorporation expressly authorized the
corporation to enter into contracts of partnership;
2. The agreement or articles of partnership must provide
that all the partners will manage the partnership; and
3. The articles of partnership must stipulate that all the
partners are and shall be jointly and severally liable for all
obligations of the partnership.
DEFINITION AND ATTRIBUTES
 4 attributes of a corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly authorized by
law or incident to its existence.
 Doctrine of limited capacity
- Only such powers as are expressly granted to it by law
and by its articles of incorporation including others which
are incidental to such conferred powers, those reasonably
necessary to accomplish its purpose and those which may
be incidental to its existence
ULTRA VIRES
 General rule: Moral damages cannot be granted to
corporations
 Exception: Filipinas Broadcasting Network Inc. vs. Ago Med
- In cases of slander, libel and other forms of defamation
(should not qualify because the code does not qualify
whether natural or juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be recovered in
the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28,
29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or
abused, referred to in No. 3 of this article, may also
recover moral damages.
The spouse, descendants, ascendants, and brothers and
sisters may bring the action mentioned in No. 9 of this
article, in the order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore protected by the due
process clause and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining what provisions of
the code or the law may be applicable
Section 3. Classes of corporations. -
Corporations formed or organized under this Code may be
 stock or non-stock corporations. Corporations which have
capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares
held are stock corporations. All other corporations are
non-stock corporations. (3a)
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no public offering
 Open corporation

 Non-stock- title 10 - openly admit investors

- example: stock exchange
 Stock- section 51
 Domestic/ Foreign
 Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law creating
 Test
them
- Incorporation test
Section 4. Corporations created by special laws - If incorporated under the laws of the Philippines it is a
or charters. - Corporations created by special laws or domestic corporation
charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to ME Gray vs. CA
them, supplemented by the provisions of this Code,
insofar as they are applicable. (n)
- Parent or Holding/ subsidiaries and affiliates
- Affiliates- no majority vote
 Section 3 SMC 12%

- The two requisites must always concur

1. That they have a capital stock divided into shares; and, HERSHEY CBP CBPl 12%
2. That they are authorized to distribute dividends or
12%
allotments as surplus profits to its stockholders on the
basis of the shares held by each of them. Affiliate is subject to common control by the 12 % owners
 De jure
 Section 4
- cannot be attached by the state even in a quo warranto
- Created by a special law, they have their own character proceeding
- They are not immune from suit unless provided by the law
of their creation  De facto
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or independent - exists by virtue of colorable compliance
from that of the other - Attached directly only by the state in a quo warranto
proceeding
 Close corporation
 Corporation by estoppel
- There is no exemption it is absolute
- So defectively formed, but still considered corporation, but
 Public corporation only in relation to those who cannot deny their existence
section 20 and 21
- Political or governmental purposes
- Those formed or organized for the government or a portion FORMATION AND ORGANIZATION
of the State or any of its political subdivision and which 
have for their purpose the general good and welfare  3 stages
1. Creation
 Private Corporation 2. Re-organization or quasi-reorganization
3.
- Immediate benefit, aim or advantage of private individuals 4. Dissolution/winding-up
- Those formed for some private purpose, benefit, aim or 
end  Purpose clause
- Distinction: public for governmental purpose - Defining the scope of authority of the corporate enterprise
pr undertaking. Both confirmed and limited
 Corporation Sole

 4 limitations of purpose clause
- Exemption to the rule because it is composed only of one
1. Lawful
person
2. Specific or stated concisely
- An incorporator may also be a juridical person
3. More than one, the primary and secondary must be
specified
 Close corporation
4. Lawfully combined
- There is exclusivity of shares of stock
- Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued less
than par
 A corporation commences only upon issuance of the
certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a projected
corporation
 Metro Manila- paid up capital requirement is 10 M
 Non- stock- mere mention of the operating capital
 Mention the authorized capital
 Restrictions
- Mandatory in close
- Not mandatory in ordinary
 Non-stock
- If value is not more than 100,000
 A corporation cannot use any other name unless it has
been amended
 Section 19
- If confusingly similar it will not be allowed to be registered
- Verification slip from the records officer
Section 19. Commencement of corporate
existence. - A private corporation formed or organized
under this Code commences to have corporate existence
and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues
a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner
dissolved in accordance with law. (n)
- Words corporation or inc. either in full or abbreviated
form must be included
Section 18. Corporate name. - No corporate
name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is approved,
the Commission shall issue an amended certificate of
incorporation under the amended name. (n)
 Doctrine of secondary meaning
- A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an article
in the market, because of geographically or otherwise
descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his
article that, in that trade and to that branch of the
purchasing public, the word or phrase has become to
mean that the article was his product.
 Section 18
- Lyceum of the Philippines case, the additional geographical
name does not make it confusingly similar
- actual confusion is not necessary- Philips case “it is
enough that there is probable confusion”
 2 requisites must be proven
- that the complainant corporation acquired a prior right
over the use of such corporate name
- identical, deceptively or confusingly, patently deceptive
 principal office
- statement of principal office is required
- city and municipality not only province must be specified
- principal office NOT operations office
- necessary because it will establish the residence of
corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries of
the city where the principal office
- non-stock may be held anywhere in the Philippines, if
provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in the
register of deeds where the principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
 term of existence
- corporate term required
- determining what point in time the juridical personality
will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of liquidation
- Dissolution- it is automatic
 When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
 May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it has no
vested politic, exist only for a period of 3 years only for
liquidation and for that purpose only
 Article 5 How many incorporators should there be?
- 5-15
 May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and corporation primarily
organized to hold equities in rural banks
 How about minors?
- NO, because they must be of legal age
 May a corporation organized by incorporators consisting
solely of foreigners
- Yes, there is no nationality requirement only residence, as
long as majority are residents of the Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles as originally
forming the corporation and who are signatories of the
articles of incorporation.
- Must be signatories to be incorporators
Section 5. Corporators and incorporators,
stockholders and members. - Corporators are those who
compose a corporation, whether as stockholders or as
members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as
originally forming and composing the corporation and who
are signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-stock
corporation are called members. (4a)
 Define corporators <sec.5>
- All persons who compose the corporation at any given
time and need not be among those who execute the
articles of incorporation at the start of its formation and
organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-stock
corporation are called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a corporation from being
a stockholder
 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to Filipinos
 An incorporator maybe a corporator as long as he is a
stockholder
 section 6
Section 6. Classification of shares. - The shares
of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series
of shares may have such rights, privileges or restrictions
as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no
par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as
may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated
par value. The board of directors, where authorized in the
articles of incorporation, may fix the terms and conditions
of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation
or to its creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be
treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for
non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
 8. Dissolution of the corporation. - The disqualifications provided for is absolute and may not
be done away with. Corporate by-laws may, however,
Except as provided in the immediately preceding provide for additional qualifications and disqualifications.
paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to
Section 27. Disqualification of directors, trustees
refer only to stocks with voting rights. (5a)
or officers. - No person convicted by final judgment of an
offense punishable by imprisonment for a period
 How many directors should there be? exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of his
- General rule: Not less than 5 not more than 15 election or appointment, shall qualify as a director,
- Exceptions: trustee or officer of any corporation. (n)
1. Educational corporations registered as non stock
corporation whose number of trustees, though not less  Section 27 and 23 minimum disqualifications and
than five and not more than [15] should be divisible by qualifications
five [5], meaning they must have either five, ten, or fifteen
trustees and no other; Lee vs. CA
2. In close corporations where all the stockholders are
considered as members of the board of directors thereby - By laws may provide for additional
effectively allowing twenty members in the board.
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
3. The by-laws of a corporation may provide for additional
qualifications and disqualifications of its members of the
Capital structure
board of directors or trustees. However it may not do away
with the minimum disqualifications lay down by the Code.
Foundation- minimum paid-up capital 3M
 Qualifications of the governing board
Authorized capital 1 M No. of shares 1M
shares par value 1.00
- Requires mere residency <sec. 23>
Amount of shares subscribed
Section 23. The board of directors or trustees. -
Unless otherwise provided in this Code, the corporate 50 K A
powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such
50 K B
corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of C 250K
the corporation, who shall hold office for one (1) year until
their successors are elected and qualified. (28a) D

Every director must own at least one (1) share of E

the capital stock of the corporation of which he is a
director, which share shall stand in his name on the PAID UP =62,500
books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of Corporation cannot exceed more than 1 M it is the
the corporation of which he is a director shall thereby maximum amount it cannot issue more unless amended
cease to be a director. Trustees of non-stock corporations
must be members thereof. A majority of the directors or Maximum shares it can issue is 1M shares unless
trustees of all corporations organized under this Code
amended
must be residents of the Philippines.

 How much shares should be subscribed?

 May a domestic corporation have a governing board
consisting solely of foreigners? - Must be at least 25% of the authorized capital stock

- YES, section 23 majority of them must be residents of the
Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number shall
only be in proportion to their equity or participation in the
capital stock of the corporation.
 Disqualifications <sec.27>
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum 25% total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. - In the
absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
 least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding
year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by the
code?
- If there is minimum paid-up logically there should also be
a minimum capital =5000
 Minimum paid-up capital for a financing company metro
manila 10 M if located in MM
 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges of the
stockholders;
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers and
stockholders.
- As a management control device.
- To comply with statutory requirements particularly those
which provide for certain limitations on foreign ownership
and shares like overseas employment agencies requiring
to own at least 75% of the shares of stock thereof.
- To better insure return on investment which can be
affected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof,
preference as to dividends and/or distribution of assets in
case of liquidation; and,
- For flexibility in price, particularly, no par shares may be
issued or sold from time to time at different price
depending on the net worth of the company since they do
not purport to represent an actual of fixed value.
 Section 6
- Each shall be equal in all respects to every other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding
stocks?
- Section 137
Section 137. Outstanding capital stock defined. -
The term "outstanding capital stock", as used in this
Code, means the total shares of stock issued under
binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except
treasury shares. (n)
- Voting and dividend rights, it refers to the outstanding
capital stocks
- Only outstanding stocks are allowed to vote and receive
dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and dividend
rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets upon
dissolution or
both
- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent
with the Code. This is so because Section 6 of the said law
allows a stock corporation to issue preferred shares
subject only to the limitations imposed therein which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise,
each share shall be, in all respect, equal to every other
share.
 Participating
- Must be stated because the presumption is that it is
participating
 Cumulative
- Irrespective of whether or not they where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends rights for
the previous years? May they be denied dividend rights
because they are non holders of non-cumulative? NOTE:
YOU CANNOT COMPEL THE CORPORATION TO
DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID
UP CAPITAL SEC. 43
 Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs
approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve for
probable contingencies. (n)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
 Compare cumulative share from non-cumulative, earned
cumulative or dividend credit type
- Cumulative share –whether or not earned
- Non-cumulative earned cumulative or dividend credit
type- only if earned
 Par
- stated par value; shall not be issued less than par
 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
 Voting
- entitled to vote at any motion brought up in writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of the right to vote?
- Preferred and redeemable shares
 Is it correct to state that common shares can never be
denied the right to vote?
- Only preferred and redeemable shares are denied unless
provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI
YUNG FOUNDER’S SHARES MERON SILANG EXCLUSIVE
RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG
BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA
SAKOP NG COMMON SHARE RIGHTS
- Example: founders shares- may be given certain rights
and privileges
- Even common shares may be denied the right to vote of
founders’ shares issued <sec.7>
Section 7. Founders' shares. - Founders' shares
classified as such in the articles of incorporation may be
given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five
(5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the
Securities and Exchange Commission. (n)
 Do you include non-voting shares in passing a valid
corporate act?
- Even non-voting shares are entitled to vote under section
6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its own shares if it
has unrestricted retained earnings
 Exception: redeemable shares may be reacquired
irrespective of retained earnings
 Treasury shares
- They are treasury while in the treasury account of the
corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the right to vote?
- Once reissued they shall become outstanding stocks again
and purchasers shall be entitled to all the rights and
privileges as the other holders have
 Section 57 treasury shares have no voting and dividend
rights. Why not?
 Section 57. Voting right for treasury shares. -
Treasury shares shall have no voting right as long as such
shares remain in the Treasury. (n)
- Answer: commissioner vs. manning page 62 first par.
“Although authorities may differ on the exact
legal and accounting status of so-called treasury shares,
they are more or less in agreement that treasury shares
are stocks issued and fully paid for and reacquired by the
corporation either by purchase, donation, forfeiture or
other means. Treasury shares are therefore issued shares
but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury
share, not having been retired by the corporation re-
acquiring it, may be re-issued or sold again, such shares,
as long as it is held by the corporation as a treasury
share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself,
nor in meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will
be able to perpetrate their control of the corporation,
though it still represents a paid for interest in the property
of the corporation. The foregoing essential features of a
treasury stocks are lacking in the questioned shares.
In this case, and under the terms of the trust
agreement, the shares of stock of Reese participated in
dividends which the trustee received and the said shares
were voted upon by the trustee in all corporation
meetings. They were not, therefore, treasury shares.”
 When the law speaks of outstanding rights it does not
include treasury shares
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks again
- The corporation may cancel them; in effect there will be a
reduction in the outstanding capital stocks
- The code does not require ordinary corporations to provide
for restrictions, but it does not likewise prohibit
restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of
incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily required in
close corporations
- If it does not provide restrictions it is not a close
corporation
- Specified persons- close corporations
- If not one of those specified you are not included because
there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles of
incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of incorporation
 Section 23-27 minimum qualifications, but there may be
additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission
may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in compliance with
the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time
within which to correct or modify the objectionable
portions of the articles or amendment. The following are
grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
4. That the percentage of ownership of the capital stock to
be owned by citizens of the Philippines has not been
complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to
articles of incorporation of banks, banking and quasi-
banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance
companies, public utilities, educational institutions, and
other corporations governed by special laws shall be
accepted or approved by the Commission unless
accompanied by a favorable recommendation of the
appropriate government agency to the effect that such
articles or amendment is in accordance with law. (n)
- But the grounds in section 17 are not exclusive
 When will the corporation commence to exist?
- Section 19 - Commence to exist upon issuance by the CONCERNED
government corporation or agency
Section 19. Commencement of corporate
existence. - A private corporation formed or organized - Prior there to it has no being
under this Code commences to have corporate existence
and juridical personality and is deemed incorporated from - The transfer of the property was not valid, it likewise did
the date the Securities and Exchange Commission issues not have the right to transfer
a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and  De jure
their successors shall constitute a body politic and
corporate under the name stated in the articles of
- Strict or substantial compliance
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner
dissolved in accordance with law. (n)  De facto

- 4 requisites must go hand in hand take out anyone of

 A corporation de jure can come into existence only upon
them there can be no de facto corporation
the issuance of the certificate of registration by the SEC?
TRUE OR FALSE?
1. There is a valid statute under which the corporation could
have been created as a de jure corporation.
- TRUE
2. An attempt, in good faith, to form a corporation according
- EXCEPTION: CORPORATION SOLE <sec. 112>
to the requirements of law, which goes far enough to
amount to a “colorable compliance” with the law;
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must be 3. A user of corporate powers, the transaction of business in
verified, before filing, by affidavit or affirmation of the chief
some way as if it were a corporation; and,
archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied by a copy of
the commission, certificate of election or letter of 4. Good faith in claiming to be and doing business as a
appointment of such chief archbishop, bishop, priest, corporation.
minister, rabbi or presiding elder, duly certified to be
correct by any notary public.  Are the rights and obligations between officers and
directors of a de jure and de facto the same?
From and after the filing with the Securities and
Exchange Commission of the said articles of - YES. Governed by the same law, rules and regulations
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the  Only important in determining, is for the purpose of
preceding paragraph, such chief archbishop, bishop, applying the rules with regards to the direct and collateral
priest, minister, rabbi or presiding elder shall become a
attack
corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief  The existence of a de jure cannot be questioned even by
archbishop, bishop, priest, minister, rabbi or presiding the State, either directly or indirectly
elder shall be held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit of his  Existence of a de facto can be questioned only by the
religious denomination, sect or church, including State directly in a quo warranto proceeding only
hospitals, schools, colleges, orphan asylums, parsonages
and cemeteries thereof. (n)
Municipality of Malabang vs. Benito

- CORPORATION SOLE- upon filing of the verified articles of
incorporation, once filed it is vested with a judicial
capacity
 General rule section 19
- Vested with judicial capacity upon issuance of the
certificate by the SEC
- What is the missing link so as to consider it a de facto? A
law, because the executive order is unconditional
- An unconditional act affords no rights, creates no office
- Legal contemplation it was never passed at all
- It can therefore be questioned by any person

o However it is not accurate according to atty. Ladia  If the certificate of registration has not been issued, may a
because there are those that can issue for example corporation de facto exist?
cooperatives- BUREAU OF COOPERATIVES which
register, home insurance guaranty corporation- HOME - NO!
OWNERS
- Number 4 requirement, good faith in claiming to be and
Cagayan Fishing vs. Sandika doing business as a corporation

- Corporations are created by law Hall vs. Piccio

- Missing link is good faith
- The certificate was not yet issued by the SEC, the
members knew and therefore they were not acting in good
faith, therefore anybody can question its existence
 Corporation by estoppel
- So defectively formed so that they are not to be considered
a de jure or de facto
- General partners- liable even beyond his promise even his
personal properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3rd persons involved and the problem
arises between there members, therefore they themselves
know that there is no corporation by estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non
corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of the education
act
- It cannot immune itself by virtue of its non compliance
with the law
 Assuming there was no law?
- YES, it may still be sued as a school for the past 32 years
the school represented itself as possessed of juridical
personality
 General rule: a 3rd party transacting with a non existent
corporation shall be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a person who has dealt
with a non incorporated corporation shall be stopped to
deny from actions in which it had benefited
- Exemptions: when there is fraud the general rule shall not
apply
Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a
corporation lacking personality
- Doctrine is not applicable where fraud takes part in the
transaction
 Another exemption
International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from a
contract where he is benefited
- In this case petitioner is not trying to escape liability, but
rather the one claiming from the contract
 Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to our courts
unless they attain a license to engage in business in the
Philippines but applying corporation by estoppels, the
court allowed
existing
 Municipality of Malabang case
- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no rights, it
imposes no duties, it affords no protections, it crates o
office, it is in legal contemplation, as inoperative as
though it had never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves there must be
a 3rd party
- Cannot escape when benefited
- General rule: you deal with a corporation, as to estop it
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those members, 2. 3rd
party will not be estopped if he is not trying to escape
liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the corporation failed to
commence transaction?
- Automatic
 Operated but becomes subsequently inoperative for 5
years only a ground for suspension, proper notice and
hearing
 Commencement
- Example realty company
CORPORATE CHARTER AND ITS AMENDMENTS
 What do you understand by the word charter? Is it the
same as articles of incorporation?
- Corporate charter is broader
 Franchise
- Primary power granted by the state to be and act as a
corporation
- Secondary franchise is the right or privilege that the
corporation may exercise
 You cannot issue investment contracts without a
secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not
exist until issued with a certificate of registration or
incorporation
 Corporate entity
- Corporation exist separately and independently from the
stockholders
- Stockholders cannot bring an action, to bring back the
properties of a corporation
- Corporation has no interest in the individual properties of
its members
Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the recovery of the
properties of its members
Caram vs. CA
- Stockholders cannot be held liable for the legitimate
obligations of the corporation, they exist separately and
independently from one another
Cruz vs. Dalisay
- Final judgment against a corporation cannot be enforced
against stockholders
Rustan Pulp vs. CA
- Corporation exist separately and independently
- Corporation are juridical entities, they exist only in legal
contemplation, can act only through its authorized
representatives
Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the corporation
Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be enforced
against stockholders, etc., even if stockholders, etc.
happens to own a substantial interest in the corporation,
mere ownership does not disregard the corporate entity
theory
 Corporate entity for legal or legitimate purposes only
 Two or more corporations, one of them will be treated as a
mere alter-ego
 You cannot pierce the veil of corporate fiction when there
are no facts attendant in the case
 Corporate Entity Theory
- The corporation is possessed with a personality separate
and distinct from the individual stockholders or members
and is not affected by the personal rights, obligations or
transactions of the latter
 Instrumentality rule
- Where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may be
disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the shares of
stock of a corporation is not, in itself, insufficient ground
for disregarding the separate corporate personality. And
for the separate personality of the corporation to be
disregarded, the wrong doing must be clearly and
convincingly established
- Fraud must be proven by clear and convincingly evidence
amounting to more than preponderance. It cannot be
justified by speculation and can never be presumed. And
only if it sought to hold the stockholders liable directly for
corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is one and the same
Marvel bldg. vs. David
- There must be facts before the court will be justified in
piercing the veil of corporate fiction
- Corporation was a mere extension of the personality of the
person
Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by the
court here?
- Subscribed capital where all advanced by Yutivo, the
board where the same as Yutivo
Commissioner of Internal Revenue vs. Norton and
Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that it has a
same corporate entity
La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family, workers
were made interchangeably
Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their official capacity)
Tesco vs. WCC
- The two corporations where located in the same office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality rule?
“where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may be
disregarded.”
- Has no separate mind of its own. What is the degree of
control?
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy
and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its
own.
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiff’s legal rights; and,
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
- The absence of one of the elements prevents “piercing the
corporate veil.” In applying the “instrumentality” or “alter
ego” doctrine, the courts are concerned with reality and
not form, with how the corporation operated and the
individual defendant’s relationship to that operation.
 There must facts and circumstances before warrant
piercing the veil of corporate fiction
 The control necessary does not mean stock ownership
MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all of the capital
stock of a corporation does not necessary mean that it is a
mere business conduit of the stockholder, that conclusion
is amply justified where it is shown, as in the case before
us, that the operations of the corporation were so merged
with the stockholders as to be practically
indistinguishable from them. To hold the latter liable for
the corporation’s obligations is not to ignore the
corporation’s separate entity, but merely to apple the
established principle that such entity cannot be invoked
or used for purposes that could not have been intended by
the law that created that separate personality.”
Tan boon bee vs. Jarencio
- Why would a drug company need a printing machine
- The property must be in pursuance of a company
business
Cease vs. CA
- Alter-ego or the extension of the person of forest ware
does the court pierced the veil of corporate fiction
- As to not deprive the holders of their successional rights
- Mere ownership of all or substantially all is not a
justification of piercing the veil of corporate fiction
 Fraud must be proven by clear and convincing evidence
cannot presume or speculate, there must be facts and
circumstances
 Fraud must be clear and convincing evidence more than
preponderance
Remo Jr. vs. IAC
- The resolution was not entered to defraud anyone
Del Rosario vs. National Labor Commission
- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
Indophil Textile Mill vs. CALICA
 - How do you distinguish this ruling to La Campana, having
the same issues:
- La campana, one payroll, employees were made
interchangeable. Acrylic had its own standards
PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested party
- Assets and machineries
 Amendment of the articles of incorporation
- Express power granted to a corporation
 Section 16
- Appraisal right
- Section 81 to object on certain acts and transactions
Section 81. Instances of appraisal right. - Any
stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation
has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code;
and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
Are non-voting shares included in amending the articles of
incorporation
1 100/s XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would be the
2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the SEC
Section 37. Power to extend or shorten corporate
term. - A private corporation may extend or shorten its
term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice
of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books
of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
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
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which
the proposed increase or diminution of the capital stock or
the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder
at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been  The vote must be cast at the meeting called for that
complied with; purpose

(2) The amount of the increase or diminution of the capital  Written assent would not suffice
stock;
 When do amendments become valid and effective?
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof - Only upon the approval of the SEC TRUE OR FALSE?
actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of - FALSE because it can be valid upon the date of filing if
capital stock or number of no-par stock subscribed by not acted upon within 6 months without fault attributable
each, and the amount paid by each on his subscription in to the corporation
cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-
 Why is it retroactive?
holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
 What provision may be amended, altered or repealed

(4) Any bonded indebtedness to be incurred, created or

 Can you change name, address for example she married
increased;
or changed address?

(5) The actual indebtedness of the corporation on the day
of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or
the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities
and Exchange Commission.
- NO. you cannot change that
 Fait accompli, are beyond the powers or authority of the
corporation to change, alter or modify. These would
include the following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first elected by the
subscribers or members to act as such until his successor
has been duly elected and qualified,

One of the duplicate certificates shall be kept on - The number of shares and amount originally subscribed
file in the office of the corporation and the other shall be and paid out of the original authorized capital stock of the
filed with the Securities and Exchange Commission and
corporation,
attached to the original articles of incorporation. From
and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its - The date and place of execution of the articles of
certificate of filing, the capital stock shall stand increased incorporation,
or decreased and the incurring, creating or increasing of
any bonded indebtedness authorized, as the certificate of - The signatories and acknowledgment thereof.
filing may declare: Provided, That the Securities and
Exchange Commission shall not accept for filing any - All other provisions or matters stated or contained in the
certificate of increase of capital stock unless accompanied articles are subject to amendment.
by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent  Founder’s or signatories hindi pwede palitan
of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount  Names, nationalities- you cannot
subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the  Capital- right granted by law to all corporation
corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided,  Paid up capital- NO
further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice
 Restriction and transfer of shares in ordinary stock
the rights of corporate creditors.
corporations

Non-stock corporations may incur or create
bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of
at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered
with the Securities and Exchange Commission, which
shall have the authority to determine the sufficiency of the
terms thereof. (17a)
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close corporation
Section 96. Definition and applicability of Title. -
A close corporation, within the meaning of this Code, is
one whose articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than
 a specified number of persons, not exceeding twenty (20);
(2) all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its
stock of any class. Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation when
at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not
a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close
corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be
vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern
close corporations: Provided, That the provisions of other
Titles of this Code shall apply suppletorily except insofar
as this Title otherwise provides.
 Transfer clause, executor clause, acknowledgment,
treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation or by merely
complying with the law is general amendment
- It does not change its personality. It is the same person in
a different name. the charter is the same
 Amendment of a corporate term
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for earlier
extension as may be determined by the SEC
 Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is dissolved
automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension whose term
has already expired
- All of them involved are institutions of learning, it was the
case in order to avoid confusion that would arise later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of directors or trustees. -
Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such
corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year until
their successors are elected and qualified. (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 corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of
the corporation of which he is a director shall thereby
cease to be a director. Trustees of non-stock corporations
must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code
must be residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn over the
management to the governing board
- But unless the law provides the power may be delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they acted within the
5 classification page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
- Why did the court rule that actions of Fernandez bound
the corporation when he is not even a board of director?
“if a man is found acting for a corporation with
the external indicia of authority, any person not having
notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had
permitted the agent to exercise that authority and thereby
held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained
the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual
authority may never have been granted.”
- Contracts must be made by the director and not the
stockholders
- Actions of the stockholders in such matters is only
advisory and not in any way binding in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their
approval or vote is necessary to prove a valid corporate act
 Qualifications:
- No citizenship requirement, at least majority must be
residents
- Can have a governing board consisting solely of foreigners
- But we have to take into consideration partly nationalized
industries and other laws which prohibits or limits foreign
ownership
- Anti-dummy act
- Educational non-stock- term of the governing board can
be 5 years
 May this term exceed one year?
- Yes, they may serve in a hold over capacity until their
successors have been duly elected and qualified

- Utilization development of natural resources 60% must be
owned by Filipino citizens, therefore they only own 40%---
10 members they can only have 4 seats, but not entirely
correct because the law may provide otherwise;
educational institutions restricted to Filipinos, but there
are exceptions when created by religious and charitable
institutions.
- By-laws may provide additional qualifications and
disqualifications
Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected from
among themselves
- Must be duly elected and qualified
How are the directors elected?
1-100T/S

- To qualify as a director he must own at least 1 share 2-100T/S

 Should the stockholder be the equitable or beneficial 3-100T/S

owner in order to qualify as a director?
to 10=1M/S
- NO, it is not necessary, as long as you are listed in the
books as owner of one share  Do you include the vote of 1 & 2 to have a quorum to have
a valid meeting?
Lee vs. CA
- NO, quorum requirements is 401,000
- As long as you are listed in the books as owner of one
share Quorum requirement is 501k

- Under the old law he must be the beneficial owner and Holders of non-voting shares are only entitled to vote in
legal owner thereof but in the new law it is not required as last par. Of section 6
long as it stands in his name he is qualifies
1-200k
1 A-100t/S B (own in the trust of X) is B qualified
2-200k
to be a director?

3-200k
2

4-100k
3-10

5-100k
2– transferring there voting rights in favor of VT

6-100k
Other rights will accrue in favor of them, but not the
voting rights
7-50k
voting rights must be recorder in the books of the
8-40k
corporation that it is transferred
9-5k
PNB-IFL- wholly owned subsidiary of PNB
10-5k
PNB will assign to PNB-IFL nominal shares and PNB-IFL
now will be able to be nominated
=1MS
 Gen. Rule:
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-
10, tumakbo and ninominate nila yung sarili nila and cast
- Term of one year who will serve as such until there
all their shares on themselves
successors are elected and qualified
 Who wins? Or who gets elected?
 Exception:
- No vote requirement, the one who gets the most number
- Non-stock corporation can serve for a term of 3 years
of votes gets elected, section24.
 What is cumulative voting? officers which shall require the vote of a majority of all the
members of the board.
- Process of multiplying the number of shares to the
number of director to be elected Directors or trustees cannot attend or vote by
proxy at board meetings. (33a)
- Matter of right granted to stockholders in a stock
corporation  Is the president required to be a stockholder. YES

1 to 5 has 200k/s and members of the same family-  The chairman may be another person
majority 800k they have 4M votes they are guaranteed 4
seats  The president may also be another person

6 to 10 are not related- 1 seat 1M votes  Prohibited is president to be secretary or treasurer at the
same time
 Cumulative to allow the minority to have a rightful
representation in the board  Board of director must sit and act as a body to arrive at a
corporate act
 Is it allowed in a non-stock corporation?
 What would constitute a quorum if 5 then 3 must be
- Not generally available present

- Section 89 unless the articles or by-laws allow cumulative  May the vote of 2 members past a 5 man governing board
voting pass a valid corporate act?

Section 89. Right to vote. - The right of the - YES. Voting requirement is majority of directors present at
members of any class or classes to vote may be limited, which there where a quorum
broadened or denied to the extent specified in the articles
of incorporation or the by-laws. Unless so limited, 1 1 and 2 present=valid voting
broadened or denied, each member, regardless of class, requirement
shall be entitled to one vote.
2 1 and 2 voted yes
Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by proxy 3 3 voted no
in accordance with the provisions of this Code. (n)
4
Voting by mail or other similar means by
members of non-stock corporations may be authorized by 5
the by-laws of non-stock corporations with the approval
of, and under such conditions which may be prescribed  Is it absolute?
by, the Securities and Exchange Commission.
- NO, except in the election because it requires the majority
of all the members of the board

 Other corporate officers other than the governing board - If by-laws or articles provide a higher voting requirement
section 25
 Artificial beings must act through its members and act as
Section 25. Corporate officers, quorum. - a body to have a valid corporate act
Immediately after their election, the directors of a
corporation must formally organize by the election of a  Exception:
president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident - Delegation
and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more
- Expressly conferred
positions may be held concurrently by the same person,
except that no one shall act as president and secretary or
as president and treasurer at the same time. - Where the officer or agent is clothed with actual or
apparent authority
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by law - Otherwise it will not bind the corporation
and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater  Yao ka sin trading case “already asked in the bar”
majority, a majority of the number of directors or trustees
as fixed in the articles of incorporation shall constitute a - Only bind the corporation to the extent of authority
quorum for the transaction of corporate business, and confined to him or virtue of customs, usage and policy
every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum
- Must pass first the controller and counsel
shall be valid as a corporate act, except for the election of
 What if the notice requirement is not complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it should
have been with force and effect, but according to the SC, it
may be ratified expressly if there is a subsequent meeting
called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation
- There was implied ratification or she was estopped
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- Neumark as president and also stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the power to hire but the SC
said the contract must be reasonable
- The contract here is so onerous that it would throw the
corporation into insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding effect of the telegram
- Only 15 months later that the corporation said there was
a mistake
- The silence coupled with the unconditional acceptance of
the other subsequent remittances is binding to the
corporation
Board of liquidators vs. Kalaw
“Settled jurisprudence has it that where similar
acts have been approved by the directors as a matter of
general practice, custom and policy, the general manager
may bind the company without formal authorization of the
board of directors. In varying language, existence of such
authority is established, by proof of the course of
business, the usages and practices of the company and by
the knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.
So also, “xx authority to act for and bind a corporation
may be presumed from acts of recognition in other
instances where the power was in fact exercised.” “xx
Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent
the corporation may be implied from the manner in which
he has been permitted by the directors to manage its
business.”
In the case at bar, the practice of the corporation
has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in
NACOCO’s behalf without prior board approval. If the by-
laws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But
that Board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior
approval.
- Kalaw signed alone and said contracts were submitted to
the board of directors after its consummation and not
before
Buenaseda vs. Bowen
- Express ratification is made through a formal board
action
- Implied ratification is through: silence or acquiescence,
acceptance benefits and lastly recognition or adoption
 An unauthorized act may nevertheless be binding either
by express or implied by estoppels
 By virtue of silence the board had impliedly accepted the
act
 By recognition or adoption
 By virtue of payment of obligations arising therefore-
Lopez realty
 May directors or trustees be disqualified to act as such?
- YES, crime, etc. disqualifications in book
- Possess or dispossess any of the qualifications or
disqualifications , cease to hold at least one share
 May directors be ousted from office?
- At least 2/3 of members representing outstanding capital
stock. Again notice requirement must be complied with
1-200 1-5 same
family
2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not
related
7-50
8-40
9-5
 10-5 outstanding before income tax of the corporation during the preceding
director year. (n)

 Meetings called by the president or the secretary ordered - Generally not entitled to receive compensation because
by the president they render it gratuitously

 It depends if the removal is without cause they cannot do - Unless the by-laws allows
so because removal without cause shall not deprive the
minority stockholders or members of the right of - Stockholders may also grant pursuant to a majority vote
representative
- Must not exceed net income of 10% tax of the preceding
 If with cause they can even if it will prejudice the rights of year
the minority, provided of course additional requirements
by-laws and articles of incorporation - Acting in special capacity

 Who will fill up the vacancy created due to the ouster of a - In, sum directors may receive compensation when
member of the board of directors <section 29>
1. there is a provision in the by-laws to that effect
Section 29. Vacancies in the office of director or
trustee. - Any vacancy occurring in the board of directors 2. When the stockholders, by a majority vote of the
or trustees other than by removal by the stockholders or outstanding capital stock grant the same; and,
members or by expiration of term, may be filled by the
vote of at least a majority of the remaining directors or 3. If the director renders extra-ordinary or unsual service
trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular Central cooperative exchange vs. Tibe
or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only or
- By-laws may allow, stockholders may also allow such
the unexpired term of his predecessor in office.
 What do you understand by the phrase “as such
Any directorship or trusteeship to be filled by directors”
reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular or
Western institute vs. Salas
at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing
the increase of directors or trustees if so stated in the - Compensation was granted without by-laws authority
notice of the meeting. (n)
- Prohibition is not a sweeping rule
 Other than by removal or expiration of term they do not
- Members of the board may receive when they receive in a
have the power
special capacity
 When will the vacancies be filled up?
- Mere act of the board will suffice
 Is notice required, to fill up vacancies due to removal?
 Is the 10% ceiling applicable to other officers?
 What if the vacancy is due to an increase, can it be filled
up in the same meeting where in the number is - NO. the phrase “as such director” was used twice
<Section 30>
increased?

 Election due to removal-in the same meeting notice is not - The SC ruled that the 10% ceiling will not likewise apply if
required they acted in a capacity other than “as such directors”

 Election due to increase in number- it must be so stated Government vs. El Hogar

in the meeting
- Judicial intervention is not proper
 Section 30
- The appropriates remedy is to those who can make or
unmake the by-laws
Section 30. Compensation of directors. - In the
absence of any provision in the by-laws fixing their  Liability of corporate officers
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such - Obligations incurred by those acting for and in behalf of
compensation other than per diems may be granted to the corporations are not there’s BUT there are exceptions
directors by the vote of the stockholders representing at even if they are acting for and in behalf of the corporation
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall Tramat vs. CA
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income - General rule was applied in the case
- Ong acted as officers and acted within the scope of his
authority
- Court laid down 4 instances when even if acting within
the scope of his authority he is held solidarily liable
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable
with the corporation;
4. He is made, by a specific provision of law, to personally
answer for his corporate action.
- Watered stocks- issued, fully paid up when in fact they
have not been fully paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be used as a defense to
escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the persons
who signed the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and officers are solidarily
liable with the corporation for the termination of
employment of corporate employee done with malice and
bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left solely to the
honest decision of the board of directors and the courts
are without authority to substitute its judgment as
against the former. The directors are the business
managers of the corporation and as long as they act in
good faith, its actuations are not subject to judicial
review. Montelibano vs. Bacolod Murcia Milling
C Z owns property and is going abroad never to Return, he
- questions of policy and management are left solely to the
board of directors
- BOD, business manager of the corporation and as long as
they act in good faith, its actuations are not subject to
judicial review
- They are not insurer of the property of the company, they
were guarantors that the enterprise undertaken by the
corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest error
of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when corporate officers may
violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the position of a
fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and with
the facilities of the corporation. He cannot appropriate to
himself a business opportunity which in fairness should
belong to the corporation.
 Last paragraph of section 31 and the provision of section
34 make reference to recovery of “forbidden profits”
 Distinction between section 31 and 34 relative to the
ratification by the stockholders
- The second paragraph of section 31 which makes a
director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the corporation
in respect to any matter reposed in him in confidence as
to which equity imposes a disability upon him to deal in
his own behalf is not subject to ratification by the
stockholders. Whereas, in section 34 if a director acquires
for himself a business opportunity which should belong to
the corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owning ore
representing at least 2/3 of the outstanding capital stock.
- If reposed in him in confidence, not subject to ratification
- If the acquisition is merely that of a business opportunity
which has not been reposed in him in confidence, the
same may be subject to ratification by the stockholders.
Director x co.
A-REALTY
B
wants to sell for 25M the fair market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and
later he sells it for 30M making 4M profit, one of the
 stockholders learned and complains that he should
submit the profits. E said that he will move for ratification
of his actuation. Can it be ratified?
- It can be ratified he merely acquired a business owning to
the corporation
- It would be different if it was entrusted in his confidence
Another scenario:
Had A not attended the meeting he would not have
known of the sale it is then a matter reposed in him in
confidence
 A corporation cannot reaquire its share if it has no
restricted unretained earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not invalidated
 Self-dealing director and interlocking director
 What is a self-dealing director?
- Director of a corporation dealing or transacting business
with his corporation
 Are the contracts and dealing of a self0dealing director
valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid per se.
- YES. If all the 4 conditions are present they will be valid
per se
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
 When do they become voidable?
- When any of the two requisites are absent it is voidable,
but subject to ratification by 2/3 of the outstanding
capital stock or 2/3 of the member
 Requisites for ratification (subject to ratification by the
stockholders holding or representing at least 2/3 of the
outstanding capital stock or 2/3 of the members.)
- it must be at a meeting called for the purpose
- full disclosure of the adverse interest of the director
concerned must be made
- the contract is fair and reasonable under the
circumstances
 Problem if self-dealing director involved owns all or
substantially all of the shares of stock of the corporation
thereby making it easily possible to have the contract
ratified
- last sentence of section 32 should be made to apply by
determining the reasonableness and fairness of the
contract
Section 32. Dealings of directors, trustees or
officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set forth in
the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
(n)
Prime white cement vs. IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage
- as a director he should have acted in a manner as not to
unduly prejudice the corporation
- he cannot be allowed to enrich himself
 May corporate directors purchase the corporate property?
Mead vs. Mccullogh
- interlocking director- a director of one corporation who - Wrong done against his person as a stockholder
deals and transacts business with another corporation
who is himself a director  Class suit

A- director of X company also a director of Y corporation - Filed by a stockholder in representation of other

stockholders
B-
- A wrong or redress done, a derivative suit in nature
C-
 Intra-corporate remedies
D-
- Demand to the BOD to institute such action
E-
- Negated by the BOD
 Both companies enter into a contract and A sits, is the
contract valid? - The one who instituted must be a stockholder at the date
when the act was done, must have been a stockholder by
- Yes on the ground of fraud or if it is unfair that time

- May be subject to the provision of section 32  Demand will not be required if the majority of the BOD
are the one’s guilty of the wrong charged
- Section 32 contract may become voidable, hence it may
also be ratified  The corporation must be made a party in the case
whatever side will not matter because under Philippine
X Co. law misjoinder is not a ground for dismissal
Y Co.
 Non-joinder is a ground for dismissal
A owe 20%
A owe 20%  Any benefit should inure to the corporation

Is it generally valid or voidable? VALID  Stockholder bringing the action is entitled to

reimbursement such as attorney’s fee ONLY IF the case is
25% SUCCESSFUL to avoid harassment suit to their
25% VALID management

15% Pascual vs. Orozco

25% VOIDABLE SUBJECT TO section 32
- By virtue of the fact that he is a stockholder, may
More than 20 substantial maintain a derivative suit

 BOD mismanages corporate officers. Who may file a suit? - Depend on how, when and what reason

- General rule: BOD which can institute a case because it
has all the powers. To allow stockholders to file would
violate the doctrine of corporate entity and may result to
multiplicity of suits
- Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
 Derivative suit
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be a
stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902

- An action based on injury to the corporation-to enforce a  Derivative suit

corporate right- wherein the corporation itself is joined as
a necessary party, and recovery is in favor of and for the - By a stockholder to address a wrong done against the
corporation. corporation and the stockholder indirectly

- Remedy granted by law to stockholders to institute a case
to remedy a wrong done directly to the corporation and
indirectly to the stockholders, if the board refuses to do
so. Otherwise if not they would be left without any
recourse
- Essential requisite must have been a stockholder from the
time the act complained of took place
- Cannot institute an action from the years he was still not
a stockholder

 Available suits Everett vs. Asia Banking

 individual or personal
- Stockholders cannot ordinarily commence suit in equity
and such is in the hands of its BOD however there are
exceptions when the BOD will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from criminal
prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must be
stated in the complaint that it is being instituted as a
derivative suit and for and in behalf of the corporation
- Granting arguendo, that this is a derivative suit, the same
is still outrightly dismissible for having been wrongfully
filed in the regular court devoid of any jurisdiction to
entertain the complaint. The case should have been filed
with the SEC which exercises original and exclusive
jurisdiction over derivative suits, they being intra-
corporate disputes, per Section 5 (b) of P.D. 902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was useless
Chase vs. Buencamino
- Argument that he should be in estoppels since he filed in
the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to step
in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a wrong
done
- Fraud in the conduct of corporate affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the corporation,
but rather they where vindicating damage against him
- Violation of their rights as individuals, hence derivative
suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation, but rather
his individual benefit
 From the cases above cited, these are the requirements
and the procedures that must be followed in order that a
derivative suit may prosper
1. That the party bringing the suit should be a stockholder
as of the time the act or transaction complained of took
place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if
such act or transaction continues and is injurious to the
stockholder or affect him specifically in some other way.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or vindication
of his own right, or the redress of a wrong done against
him, individually, but in behalf and for the benefit of the
corporation.
2. He has tried to exhaust intra-corporate remedies, he has
made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
heed his plea. Demand, however, is not required if the
company is under the complete control of the directors
who are the very ones to be sued (or where it becomes
obvious that a demand upon them would have been futile
and useless) since the law does not require a litigant to
perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders
similarly situated, otherwise, the case is dismissible. This
is because the cause of action actually devolves on the
corporation and not to a particular stockholder.
4. The corporation should be made a party, either as party-
plaintiff or defendant, in order to make the court’s
judgment binding upon it, and thus, bar future litigation
of the same issues. On what side the corporation appears
loses importance when it is considered that it lay within
the power of the court to direct the making of amendment
of the pleading, by adding or dropping parties, as may be
required in the interest of justice. Misjoinder of parties is
not a ground to dismiss action; and,
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances, derivative
suit is instituted for and in behalf of the corporation and
not for the protection or vindication of a right or rights of
a particular stockholder, otherwise, the aggrieved
stockholder should institute, instead, an individual or
personal suit to vindicate his personal or individual right.
Or, for that matter, representative or class suit for all
other stockholders whose rights are similarly situated,
injured or violated, personally or individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and constituted?
- Section 35
Section 35. Executive committee. - The by-laws
of a corporation may create an executive committee,
composed of not less than three members of the board, to
be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal of by-
laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
- Said committee may act and bind the corporation by the
majority vote of all its members except with respect to
those matters provided for in sec. 35 these are:
1. Approval of any action for which shareholders’ approval is
also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of new
by-laws;
4. Amendment or repeal of any resolution of the board which
by its express terms is not so amenable or repealable;
and,
5. Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to have a
valid transaction
 May a non-member of the board of directors be a member
of the executive committee?
- NO, all of them must be members of the board of directors
- BOD cannot act by proxy it would be abdication of powers
 Purpose clauses necessary because it confers and also
limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified into three classes
namely:
1. Those expressly granted or authorized by law inclusive of
the corporate charter or articles of incorporation;
2. Those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW
Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power
and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of
time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance
with this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful
business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation. (13a)
Section 37. Power to extend or shorten corporate
term. - A private corporation may extend or shorten its
term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice
of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books
of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
 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
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which
the proposed increase or diminution of the capital stock or
the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder
at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of
the directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the capital
stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-
holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day
of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities
and Exchange Commission.
One of the duplicate certificates shall be kept on file in the
office of the corporation and the other shall be filed with
the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after
approval by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and
the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at
least twenty-five (25%) percent of the amount subscribed
has been paid either in actual cash to the corporation or
that there has been transferred to the corporation
property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That
no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for
the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have
the authority to determine the sufficiency of the terms
thereof. (17a)
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided, That
such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
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
majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of
all or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or
other instruments for the payment of money or other
property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the
vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-
stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this
Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the stockholders
or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties
under any contract relating thereto, without further action
or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of
any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual
and regular course of business of said corporation or if
the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no members
with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by
this section.
Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled
to payment for their shares under the provisions of this
Code. (a)
Section 42. Power to invest corporate funds in
another corporation or business or for any other purpose. -
Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation
or business or for any purpose other than the primary
purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two thirds
(2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their
paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is
prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be
clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such
as when there is need for special reserve for probable
contingencies. (n)
Section 44. Power to enter into management
contract. - No corporation shall conclude a management
contract with another corporation unless such contract
shall have been approved by the board of directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the
members in the case of a non-stock corporation, of both
the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the
members of the board of directors of the managing
corporation also constitute a majority of the members of
the board of directors of the managed corporation, then
the management contract must be approved by the
stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph shall
apply to any contract whereby a corporation undertakes
to manage or operate all or substantially all of the
business of another corporation, whether such contracts
are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts
or operating agreements which relate to the exploration,
development, exploitation or utilization of natural
resources may be entered into for such periods as may be
provided by the pertinent laws or regulations. (n)
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
by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so
conferred. (n)
 Section 36 - special appearance enter for that particular appearance
you are not the counsel in the case
 Where should the corporation be sued?
- would apply only if it does not involve an intra-corporate
- principal office is important because it establishes the controversy (controversy between and among the
residence of the corporation and determining service of stockholders)
summons, venue of action
- upon any of the statutory officers or officers fixed in the
- it can be sued in the city or municipality where its by-laws any secretary, any of the directors; any managers
principal office is found in the by-laws

 Principal office is also important for venue of meetings  Seal

 Non-stock corporation may provide in its by-laws that the - merely ministerial or permissive
venue of meeting be anywhere in the Philippines
 Power to amend
 Upon whom service of summons be made?
- section 16
- Section 11. Service upon domestic private juridical entity-
when the defendant is a corporation, partnership or - special 37,38,120
association organized under the laws of the Philippines
with a juridical personality, service may be made upon the  Power to adopt by-laws
president, managing partner, general manager, corporate
secretary, treasurer, or in house counsel. - section 46-48

Delta motor vs. Mangosing  Power to issue or sell stocks and to admit members

- strict compliance is necessary - stock of stockholders and provision governing non-stock

- should be served to those named in the statute  Power to acquire or alienate real or personal property

- secretary of a dep’t are not those included in the statute - is there any limitation? YES

E.B. Villarosa vs. Benito - Two specific limitation

- decision En Banc repeals all other pronouncement 1. Section 36, as lawful transactions of business of the
corporation may reasonably and necessarily require
- section 13 Rule 14 was repealed
2. Constitution and law
- the old rules was ambiguous and broad and at all time
illogical Luneta vs. A.D. Santos

 the particular revision under Section 11 of Rule 14 was - Importance of the purpose clause
explained by retired Supreme Court Justice Florenz
Regalado, thus: - Cannot have the power to acquire

“xxx the then section 13 of this Rule allowed service upon - Cannot engage in land transportation
a defendant corporation to “be made on the president,
manager, secretary, cashier, agent or any of its directors.” - Doctrine of limited capacity
The aforesaid terms were obviously ambiguous and
susceptible of broad and sometimes illogical Gov’t vs. El Hogar
interpretations, especially the word “agent” of the
- As the lawful transaction of its business may reasonably
corporation. The Filoil case, involving the litigation lawyer
represent
of the corporation who precisely appeared to challenge the
validity of service of summons but whose very appearance
Director of Lands vs. CA
for that purpose was seized upon to validate the defective
service, is an illustration of the need for this revised
- Exception to the rule in the constitution
section with limited scope and specific terminology. Thus
the absurd result in the Filoil case necessitated the
- Alienable public land
amendment permitting service only on the in-house
counsel of the corporation who is in effect an employee of - Converts the property to a private land automatically once
the corporation, as distinguished from an independent converted it can now be registered
practitioner.”
 Power to make donation
o notes: additional knowledge
- Limitation section 36 par.9
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a
means of increasing its business or promoting patronage.
Thus, paragraph 9 of section 36 expressly authorizes a
corporation to make donations. The only limitations
imposed are the following:
1. The donation must be “reasonable”;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and,
3. It shall not be in aid of political party or candidate, or for
purposes of partisan political activity.
 Power to establish pension
- Include any act to promote and improve the convenience,
welfare and benefit of the employees or offices
Republic vs. Acoje
- While as a rule an ultra-vires act is one committed outside
the object for which a corporation is created as defined by
law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or
welfare of the corporation. Thus, it has been held that
“although not expressly authorized to do so a corporation
may become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its
business,” and here it is undisputed that the
establishment local post office is a reasonable and proper
adjunct to the conduct of the business of appellant
company. Indeed, such post office is a vital improvement
in the living condition of its employees and laborers who
came to settle in its mining camp which is far removed
from the postal facilities or means of communication
accorded to people living in a city or municipality.
 Power to exercise such other powers essential or
necessary to carry out its purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs. P.S.C.
- Examined the articles of incorporation to arrive at its
decision
National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical and
necessary relation exists between the act questioned and
the corporate purpose expressed in the NPC charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Power to extend its terms
- Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital stock?
1. Increasing the par value of the existing number of shares
without increasing the number of shares;
2. Increasing the number of existing shares without
increasing the par value thereof; and,
3. Increasing the number of existing shares and at the same
time increasing the par value of the shares.
 Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business. (example:
to buy cars for the officers, purpose of acquiring other
business, expansion, other valid reasons)
 How do you decrease capital stock and why a corporation
decreases?
- Reduce or wipeout existing deficit where no creditors
would thereby be effected
- When capital is more than necessary to procreate the
business or reduction of capital surplus
- To write down the value of its fixed assets to reflect those
present and actual
o NOTE: any increase or decrease of capital stock requires
approval of government agency like SEC it can never take
place unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where no creditors
would thereby be affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus; or,
3. To write down the value of its fixed assets to reflect there
present actual value in case where there is a decline in
the value of the fixed assets of the corporation.
- Examples: Php 10M capital for grocery business, mayor
didn’t want to issue license/permit because mayor has 3
other grocery stores, only allowed sari-sari store permit,
reduce capital for sari-sari so that the money will not
sleep in bank
- Example: car rental agencies-Php 10M capital for 20
taxi’s, after some time each taxi is only 250K, nagmura
ang taxi, to reduce capital is to show actual assets
 Limitation imposed by law
- Decrease shall not in any way affect the rights of the
creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in capital stocks
has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation constitute a
fund to which the creditors have a right to look upon for
satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of
its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge to evade payment
- Thus not valid and effective
- Must not prejudice creditors which includes the
employees
 Bond
- Commonly understood as an obligation of a state, its
subdivision or a private corporation, represented by a
certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges himself to
pay a certain sum of money to another at a day named.
- There are different kinds of bond but before they may be
issued or floated by the corporation, the same must be
registered and approved by the SEC subject to the rules
and regulations that may be adopted by that agency. The
procedure and requirements set forth in section 38 is the
same as in increasing or decreasing the capital stock
except that the certificate does not have to state the
matters required in sub-section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or disposition
of shares of any class, in proportion to their respective
stockholdings, subject only to the limitations imposed
under section 39 of the Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain their
proportionate right as not to dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided, That
such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
 May it be denied? How?
- Yes, if provided by articles of incorporation or by an
amendment
- However, pre-emptive rights is unavailable to shares in
trading in stock exchange otherwise stockholders must
waive first their right before they may sell such.
 Exceptions
1. When the shares to be issued is in compliance with laws
requiring stock offerings or minimum stock ownership by
the public
2. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital
stock either
a. In exchange for property needed for corporate purpose or,
b. In payment of a previously contracted debt
- The exceptions, however will not apply to stockholders of
a close corporation by virtue of a subsequent and specific
provision of the Code which provides that the “pre-emptive
right of a stockholder in a close corporation shall extend
to all stock to be issued, including reissuance of treasury
shares, whether for money, property or personal services
or in payment of a corporate debt, unless the articles of
incorporation provide otherwise, if not entirely absolute,
in that it extends to all issuance and disposition of shares
- Such right of pre-emption may be lost by waiver of the
stockholder, expressly or impliedly by his inability or
failure to exercise it after having been notified of the
proposed issuance or disposition of shares
 When is it unavailable?
- In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must provide it first on
its articles of incorporation, that its articles does not really
deny such pre-emptive rights.
 Section 102, will not apply to close corporations
 The right of pre-emptive rights is absolute in close
corporations
“All issues or depositing shares of any class” form part of
ACS
 Certain instances when a stockholder may nevertheless
be unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of outstanding
capital stock either a) in exchange for property needed or
b) for payment of a previously contracted debt
 Pre- emptive rights of stockholders in ordinary stock
corporations may be denied
- if the shares are to be issued in compliance with laws
requiring stock offering or minimum stock ownership by
the pubic
- In exchange for property needed for corporate purposes
- In payment of previously contracted debts
 This rule, however, does not apply in a close corporation
as the pre-emptive rights of the stockholders thereof is
broadened to include all issues without exceptions unless,
of course, denied or limited by the articles of
incorporations. Section 102 provides:
1 100K
Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of stockholders in
close corporations shall extend to all stock to be2issued, 100K
including reissuance of treasury shares, whether for
money, property or personal services, or in payment of
corporate debts, unless the articles of incorporation
provide otherwise.
 Denial will not apply to a close corporation, ABSOLUTE
- section 96
 May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?
- Yes, section 102
 What type or shares are covered by pre-emptive rights?
 Does it include those originally unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise their pre-emptive
right with respect to the old unissued shares?
- Pre-emptive rights is applicable only to new issued shares
and not to the old unissued shares because it is
presumed that the original subscribers is deemed to have
taken his shares knowing that they form a definite
proportionate part of the whole number of authorized
shares
- When the shares, left unsubscribed are re-offered, he
cannot therefore claim. DILUTION OF INTEREST
 Will the acquiring purchaser be liable for debts of the
former corporation?
- Generally no, corporate entity theory because there may
be instances when purchasing corporation may be held
liable
 May a corporation acquire its own shares?
- Yes
 Is there any restriction provided for by law in reacquiring
its own shares?
- Yes, it must have been unrestricted retained earnings
appearing in the books of corporation
 A corporation can never acquire its own shares if it has no
unrestricted retained earnings
- False, exception close corporation and redeemable shares
EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M
TO
10 100K
 If 1-5 became 200K each, may 6-10 demand the exercise
their pre-emptive right?
- YES
 May 1-5 subscribe to the unsubscribed capital stock to
the exclusion of 6-10?
- If a corporation makes 2M unrestricted retained earnings,
it is the shares and not the number of persons that
matters
 May 6-10 complain for a dilution of their interest?
- YES, it’s an internationally recognized right because it
includes “all issues and disposition of shares of any class”
and all kinds of shares new or old
- If the remaining unsubscribed shares are issued, it’s an
issuance of any class
 May a corporation sell/dispose all or substantially all of
its corporate assets and liabilities?
- YES
- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4)
PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO EXERCISE
THEIR APPRAISAL RIGHT
 If a corporation sells substantially all of it assets and
properties, will the buyer assume liability?
Will it need the approval of the stockholders?
- NO, if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of
the sale or other disposition of such property and assets
be appropriated for the conduct of its remaining business
 If X is a manufacturing company, then it can sell its only
property upon approval of the stockholders because it will
render itself capable of continuing its business, BUT if the
proceeds will be used to purchase a better one for the
continuance of its business, then it does not need the
approval of the stockholders

- NO, EXCEPT  Conditions for the valid exercise of this power are the
following
1) Express or implied agreement to the purchase
1. Resolution by the majority vote of the board of
2) Where the transaction amounts to consolidation or merger directors/trustees
of the corporations
2. Authorization from the stockholders representing at least
3) When purchasing corporation is merely a continuation of 2/3 of the outstanding capital stock or 2/3 of the
the selling corporation members;

4) Where the transaction is entered into fraudulently in 3. The ratification of the stockholders or members must be
order to escape liability for such debt made at a meeting duly called for that purpose

 Legitimate purpose: for a corporation to reacquire its own 4. Prior written notice of the proposed action and of the time
shares and place of meeting must be made addressed to all
stockholders of record, either by mail or personal service;
- Limitation: it must have surplus/unrestricted retained
earnings 5. The sale of the assets shall be subject to the provisions of
existing laws on illegal combinations and monopolies
- Exception: may redeem irrespective of unrestricted
retained earnings 6. Any dissenting stockholder shall have the option to
exercise his appraisal right
1) Exercise of stockholders’ right to compel “close
corporation” to purchase his shares IDP vs. CA

2) Where corporation has sufficient assets in its books to - Consent of the members was not secured
cover its debts and liabilities exclusive of capital stock
Edward Nell Co. vs. Pacific Farms
ACS 1M
- Generally where one corporation sells or otherwise
SUBSRIBED 1M transfers all of its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor,
PAID-UP 1M except:

ASSETS 500K 1. Where the purchaser expressly or impliedly agrees to

assume such debts;
1M PROFITS
2. Where the transaction amounts to a consolidation or
- 500K LIABILITIES merger of the corporations;

____________________ 3. Where the purchasing corporation is merely a

continuation of the selling corporation;
500K RESERVES IN A CLOSE
CORPORATION IT CAN USE THIS TO REACQUIRE 4. Where the transaction is entered into fraudulently in
ISSUED STOCKS order to escape liability for such debts.

X – REALTY CORPORATION  Power to acquire own shares

 THE ONLY PROPERTY OF THE CORPORATION Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or
 BOARD OF DIRECTORS DECIDED TO SELL IT acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following
 cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled
to payment for their shares under the provisions of this
Code. (a)
 The corporation must at all times have “unrestricted
retained earnings” to exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities, a corporation
may not reacquire its shares (subject to exceptions)
- Creditors of a corporation have the right to assume that
so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is
insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest corporate funds in
another corporation or business or for any other purpose. -
Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation
or business or for any purpose other than the primary
purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two thirds
(2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)
- For any other purpose other than the primary purpose,
stockholder’s consent or approval is necessary
- Thus, if it’s for the secondary purpose, it is necessary
- If it’s in connection with the primary purpose, only board
resolution is necessary
 Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Resolution by the majority of the board of directors or
trustees;
2. Ratification by the stockholders representing at least 2/3
of the outstanding capital stock or 2/3 of the members in
case of non-stock corporations;
3. The ratification must be made at a meeting duly called for
that purpose;
4. Prior written notice of the proposed investment and the
time and place of the meeting shall be made, addressed to
each stockholder or member by mail or by personal
service, and;
5. Any dissenting stockholder shall have the option to
exercise his appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote connection between
the sugar bags and the sugar manufacture, thus
stockholder’s approval is not necessary for validity
- A private corporation, in order to accomplish its purpose
as stated in its articles of incorporation, and imposed by
the Corporation Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds, securities
and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily connected with
its primary purpose and this was ratified in a meeting
- Submission of previous action is a sound corporate
practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of shares “withdrawal
shares” provided corporation has sufficient funds to cover
its debts and liabilities
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation may,
by written petition to the Securities and Exchange
Commission, 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.
 If shares are reacquired, what happens?
- It becomes treasury shares
 Stockholder’s consent/ approval is not necessary and
mere board action is sufficient if in accordance with
primary purpose
 The logical relation of act done and primary purpose of
corporation and between the board of directors to
undertake submission of acts is a sound corporate
practice
 Dividends
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs
approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve for
probable contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared and ordered by the
Board of Directors to be paid to the stockholders.
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and chairs make
surplus profits?
- No, they do not make surplus, bonds, etc.
 Where should dividends come from?
- Stock dividends are declared as stocks coming from
corporation
 Who declares dividends to be declared? Do stockholders
have any say?
- Board of Directors, if stock approval of 2/3 outstanding
capital stock
ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus
profits of the corporation)
1-100k
2-100k
To
10-100k
1M
 Board decides to declare 1M, how much will each receive?
May the board declare stock dividend
- NO. that would be over issuance of shares, violation of
securities regulation code
- It must have a free portion
- The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders reacquired?
- No, because in property 2/3 is not required
 What is the effect of declaration of dividends with regards
to the assets of a company?
- As compared to stock dividends, the declaration of cash or
property dividends have the effect of reducing corporate
assets to the extent of dividends declared.
- Neither would stock dividends increase the proportionate
interest of the stockholders of the corporation although it
will have the effect of increasing the subscribed and paid-
up capital of the corporation. It gives the stockholders
nothing in the way of distribution of assets but merely
divides his existing shares into smaller units.
 Earnings belong to the corporation until declared or given
 Revocation
- No revocation of dividend may be has unless it has not
been officially communicated to the stockholders or is in
the form of stock dividends which is revocable at any time
prior to distribution.
 Stock dividends- no reduction, you capitalize your
restricted retained earnings, what is issued is a piece of
paper. The restricted earnings remain in the corporation
 Cash and property- reduces corporate assets
 Stock dividends increase corporate assets? No, it will only
have the effect of increasing the subscribed and paid-up
capital of the corporation
 Will there be a corresponding
proportionate interest?
- REMAINS THE SAME
- Exception: when stock dividends will result in a fractional
share
ACS-2M 1-100K 200 (10%)
AND DIVIDEND RIGHTS STILL THE SAME
increase in their  Will 1 and 2 receive full amount of dividends?
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be applied to
his delinquency plus expenses.
 Delinquency occurs, you are called to pay, but you failed
to pay. In case of stock dividend, the delinquent stock
*VOTING holder will not be entitled thereto until he has paid his
subscription in full.

SUB-1M TO  Are non-stockholders entitled to receive dividends?

10%
- No, tock dividends are civil fruits of the original
PU-1M 10-100K investment, and to the owners of the shares belong the
civil fruits.
ACS 2M
 How did the court decide dividends in the case of Neilsen
SUB 1M
- Stock dividends cannot be issued to a person who is not a
PU 1M stockholder in payment of services rendered.

1M RE - Whether cash, property or stock, only stockholders may

receive dividends. Dividends are fruits of investments.
1 100K They come from the U.R.E. or surplus profits of the
corporation.
2 100K
ACS 2M 1M U.R.E.
TO
SUB 1M JULY 24 DECLARATION
10 100K JULY 31

1M PU 1M

 May they be compelled? 1 100K 100T JULY 26-Y(NEW ONE WAS

DECLARED TO Y) JULY 30- 100K
- NO. You cannot declare if it does not come from
unrestricted retained earnings. 2

1. 1M-U.R.E. (is it true there is no way to compel?) TO TO HAVE THE TRANSFER

RECORDED
2. 2M-U.R.E.
10 100K
 May they be compelled to declare dividends
1M
- Mandatory if earned, the board may be compelled to
declare dividends  Insofar as 1 and Y who has a better right? Already
declared, but not yet paid?
- if exceeds 100% of the paid-up capital the boards may be
compelled - Right to receive vest upon declaration. Who ever owns at
the time of declaration owns the dividends
ACS 2M 1M U.R.E.
- Unless there is a stipulation to the contrary
SUB 1M
 TRUST FUND DOCTRINE
PU 800K
- The power to declare it if paid-up capital is not
1-100K 50K PU
maintained or is impaired

2-100K 50K
- Trust fund must be kept intact for the protection of
creditors who have the right to rely on such subscription
TO
and the paid-up capital for the satisfaction of their claims
10-100K
 Cannot accumulate surplus unreasonably
1M
 Basis is the paid-up capital
 Entitled to dividends
 Irrespective of whether the subscription is full
 Illegally declared
- Declare dividend with the belief that it formed part of the
U.R.E., but yun pala sa capital
 Directors are not liable, unless sec31 acted in bad faith or
gross negligence in the conduct of corporate affairs
 Directors even if acting in behalf of the corporation, may
still be held solidarily liable
 Power to enter into management contract
- New provision
Section 44. Power to enter into management
contract. - No corporation shall conclude a management
contract with another corporation unless such contract
shall have been approved by the board of directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the
members in the case of a non-stock corporation, of both
the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the
members of the board of directors of the managing
corporation also constitute a majority of the members of
the board of directors of the managed corporation, then
the management contract must be approved by the
stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph
shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of
the business of another corporation, whether such
contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as
may be provided by the pertinent laws or regulations. (n)
 The requirement for a valid management contract are as
follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of the
members in case of non-stock corporation of both the
managing and the managed corporation
3. The approval of the stockholders or members must be
made at the meeting called for that purpose
4. The contract shall not be for a period longer than 5 years
for any one term, except those which relate to exploration,
development or utilization of natural resources which may
be entered into for such periods as may be provided by
pertinent laws and regulations
 Every corporate act emanates from the BOARD
 Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock corporation
would be required for the approval of a management
contract in the following instances:
1. Where the stockholders representing the same interest of
both the managing and managed corporation own or
control more than 1/3 of the total outstanding capital
stock of the managing corporation; and
2. Where a majority of the members of the board of directors
of the managing corporation also constitute a majority of
the directors of the managed corporation
3. Where the contract would constitute the management or
operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the management
of all or substantially all of the business of another
corporation the first paragraph of section 44 will apply
and not that of the second, that is, only the vote of the
stockholders holding or representing at least a majority of
the outstanding capital stock or majority of the members
in the case of non-stock corporation will be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or utilization of
natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do such acts
and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a collateral
attack
- If not illegal per se merely voidable. Can be ratified
expressly or impliedly or even stopped as equitable
grounds
- Ultra-vires acts which are not illegal per se may become
binding and enforceable either by satisfaction, estoppels
or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the provisions of PD
902-A, as amended and R.A. No. 8799 may suspend or
revoke, after proper notice and hearing, the franchise or
certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is
doing to the great damage or prejudice of the general
public
2. On the rights of the stockholders
- A stockholder may bring either an individual or derivative
suit to enjoin a threatened ultra-vires act or contract. If
the act or contract has already been performed, a
derivative suit for damages against the directors may be
filed, but their liability will depend on whether they acted
in good faith and with reasonable diligence in entering
into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal effect of a
corporate contract outside of its authorized business but
Ballatine gives the following summary of the doctrines
evolved:
a. If the contract is fully executed on both sides, the contract
is effective and the courts will no interfere to deprive
either party of what has been acquired under it
b. If the contract is executory on both sides, as a rule,
neither party can maintain an action for its non-
performance
c. Where the contract is executor on one side only, and has
been fully performed on the other, the courts differ as to
whether an action will lie on the contract against the
party who has received benefits of performance under it.
Majority of the courts, however, hold that the party who
has received benefits from the performance is estopped to
set up that the contract is ultra-vires to defeat an action
on the contract. This is more in conformity with the
doctrine that no person shall be allowed to enrich himself
at the expense of another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal with any of its
money
- “deal” broad enough to cover the donation it is not then
ultra-vires
- Not illegal per se hence (law of agency) excess powers are
subject to ratification
- Ratified by passing the resolution in question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied powers
as to make them more attractable
- Not ultra-vires in pursuance of its legitimate business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profits and
distribute profits to its shareholders
- Ultra-vires because Japanese war notes is a non-stock
corporation
Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN
SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a holder
for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party,
does not include nor apply to corporations which are
accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is
ultra-vires
- Corporate officers may guarantee or endorse an
accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the
stockholders rather than any director
- It may sell and it may guarantee, contract not necessarily
illegal, it will in the absence of proof to the contrary
presumed within its power. Corporations are presumed to
contract with in its powers- CARLOS CASE
- Purpose clause may be stretched to cover PLDT internet.
It may be within its business.
- May it sell computers? NO! other line of business. Its
trading!
BY-LAWS
 By-Laws
- Rule adopted by the corporation for its internal
governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or filed? Can it not
be adopted earlier?
- After incorporation- within 1 month (emanates from the
BOARD)
- Prior-more convenient (signed by the incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or members attested to by the
corporate secretary
 What happens if the corporation fails to adopt the by-laws
from the tie provided by the law? Would there be an
automatic revocation or suspension?
- Proper notice and hearing, must first be complied with
 Loyola grand villas vs. CA  Articles of incorporation

- Not the SEC, but the HIGC - May provide reasonable restriction

- Must – not always imperative - By-laws merely internal laws

- Filing of by-laws mandatory - Articles is the contract between and among the parties
and corporation
- Empowered by SEC
Gov’t vs. El Hogar
- Merely a ground, there must be proper notice and hearing
- Did the court categorically ruled here that the provision in
- Not affect the status of the corporation as a juridical the 5th cause of action is valid?
person
- Rules governing equity, considering the fact that there
- Subject the corporation to a fine, as may be issued by the was always lack of quorum
SEC
- Section 29 BOD if still constituting a quorum may fill up a
 When do by-laws become effective? vacancy other than by removal, etc.

- Until and unless the SEC gives it stamped of approval Gokongwei vs. SEC

- Suspension of any government agency. The permission - Section 48 allows a corporation to amend it by-laws
must first be secured- section 46
- Section 47 of the code, the by-laws may provide for the
 Elements of a valid by-law qualification and disqualification

1. It must not be contrary to law, public policy or morals; - It cannot be said Gokongwei has a vested rights

2. It must not be inconsistent with the articles of - Prevent directors from taking advantage of position to
incorporation; promote his individual interest to the damage of others

3. It must be general and uniform in its effect or applicable - The validity or reasonableness of a by-laws is a question
to all alike or those similarly situated; of law

4. It must not impair obligations and contracts or vested - Subject to the limitations that reasonableness of a by-law
rights; and’ is a mere matter of judgment

5. It must be reasonable. - Rule of the majority and not the tyranny of the minority

- Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
 By-laws
- None filing would not affect the status of the corporation,
Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
 May the by-laws be amended altered or appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or members
in a non-stock corporation, at a regular or special meeting
called for that purpose;
2. By the board of directors alone when delegated by 2/3 of
the outstanding capital stock or 2/3 of the members in a
non-stock corporation.

 How about 3rd persons?
- NO. unless there is actual knowledge of the same they are
not presumed to know of the provisions of the by-laws
Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- This delegated power, however, is considered revoked
whenever a majority of the outstanding capital stock or
members shall so vote at a regular or special meeting.
 If it is to be amended what is the proceeding?
- Section 48 2nd paragraph provides:

Section 48. Amendments to by-laws. - The board

- Shares of stock may transfer to whom ever he wishes
- The by-laws is contrary to law
of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital
stock, or at least a majority of the members of a non-stock
corporation, at a regular or special meeting duly called for
 the purpose, may amend or repeal any by-laws or adopt - Fixed date provided by the by-laws
new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the  What if there is no date?
members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or
- April
repeal any by-laws or adopt new by-laws: Provided, That
any power delegated to the board of directors or trustees
to amend or repeal any by-laws or adopt new by-laws  Why april?
shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding - Point in time the audited financial statement have been
capital stock or a majority of the members in non-stock prepared
corporations, shall so vote at a regular or special meeting.
 What if in the date specified in the by-laws or by the law
Whenever any amendment or new by-laws are itself the meeting was not convened, for instance lack of
adopted, such amendment or new by-laws shall be quorum or force majeure?
attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath - It may be postponed on a reasonable date
by the corporate secretary and a majority of the directors
or trustees, shall be filed with the Securities and
 Notice requirement?
Exchange Commission the same to be attached to the
original articles of incorporation and original by-laws.
- Regular- 2 weeks prior notice

The amended or new by-laws shall only be

- Special- 1 week
effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are
not inconsistent with this Code. (22a and 23a)  May the notice requirement be lessened?

- By-laws may provide a longer or a shorter duration

Baretto vs. La Previsora
 What if the notice requirement is not complied with?
- Any corporate act emanates from the board
 What happened to any act passed in a meeting when
- Directors themselves cannot amend the by-laws if they
notice requirement was not required with?
were not granted the same
- Voidable, subject to ratification
 Section 48
Board of directors vs. Tan
 The power granted is not subject to revocation T or F?
- Notice requirement is the by-laws is a mandatory
- FALSE
requirement
 If the by-laws are amended when will they become valid?
- Improperly served, any action will be invalidated at the
objection of any stockholder or member
- Upon issuance of the SEC that they are not inconsistent
 Must be held in the proper place
 What if the SEC failed to act within 10 months without
fault attributable to the corporation?
 Where should it be held?
 T or F any amendment of the by-laws will never become
- Apparent from the foregoing provision is that meetings of
valid until it gives its stamp of approval even after 1 year
stockholders must, at all times, be held in the city or
municipality where the principal office of the corporation
- TRUE. Articles of incorporation and by-laws are different
is located and, as far as practicable, in the principal office
of the corporation.
MEETINGS

 May the by-laws of a corporation provide that meetings be

 Meetings
- Meetings of stockholders
by-laws or by-law
- Meetings of director or trustees
 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
held anywhere in the Philippines?
1. Date fixed in the
- While there is no provision authorizing a stock
corporation to hold stockholders’ meetings outside of the
City of Municipality where the principal office is located,
the law allows a non-stock corporation to provide in its
by-laws any place of members’ meeting provided that
proper notice is sent to all members indicating the date,
time and place of the meeting which shall be within the
Philippines.

 When are regular meetings of the stockholders held?

 T or F the by-laws of a stock corporation may validly
provide that meetings shall be held anywhere in the
Philippines?
- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is given
 Corporation can do only such things as the law allows it
to do, DOCTRINE OF LIMITED CAPACITY
 San Miguel office located in Ortigas Center. May
stockholders meeting be held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a provision , secretary
on order of the president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder petition to
authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person, but
neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued ex parte
 Is there any exception?
- Section 28 only instance
Section 28. Removal of directors or trustees. -
Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose,
and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose
of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on
the written demand of the stockholders representing or
holding at least a majority of the outstanding capital
stock, or, if it be a non-stock corporation, on the written
demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to give the
notice, or if there is no secretary, the call for the meeting
may be addressed directly to the stockholders or members
by any stockholder or member of the corporation signing
the demand. Notice of the time and place of such meeting,
as well as of the intention to propose such removal, must
be given by publication or by written notice prescribed in
this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to
deprive minority stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code. (n)
 Cases of removal or ouster of a director
 Mandamus would be appropriate remedy if there is a
person authorized but refuses
 Quorum and voting requirement
- Majority stockholders or members constitute a quorum
 Is the presence of the majority owners of the outstanding
capital stock ABSOLUTE to have a quorum?
- NO. when the code requires a higher quorum it must also
be equivalent to the vote required
 Do you include non-voting shares in arriving at the voting
requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate par. Of
section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the by-laws or in
accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied with
and the person who called not authorized, what happens
to any resolution called?
- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and provided
it is within the power of the corporation. 3RD paragraph of
324
- If the voting requirement is met, any resolution passed in
the meeting, even if improperly held or called will be valid
if all the stockholders or members are present or duly
represented thereat. The last paragraph of section 51 is
clear on the matter when it provides:
“all proceedings had and any business transacted at any
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even
if the meeting be improperly held or called, provided all
the stockholders or members of the corporation are
present or duly represented at the meeting.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by the by-laws
 What happens if notice is not complied with?
- If the notice requirement is not complied with the meeting
is illegal and will not bind the corporation except when
subsequently ratified or in the case of a close corporation
where the act of any one director may bind the
corporation even without a meeting under the special
provision of Section 101 of the Code.
 Can notice be waived? <sec.53>
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.
Special meetings of the board of directors or
trustees may be held at any time upon the call of the
president or as provided in the by-laws.
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise. Notice of regular or
special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least
one (1) day prior to the scheduled meeting, unless
otherwise provided by the by-laws. A director or trustee
may waive this requirement, either expressly or impliedly.
(n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without notice where the
directors are all present or where they consent to the
meeting. Presence at the meeting waives the want of
notice. Moreover, it has been ruled that the meeting of the
directors without a formal call first being had, and notice
thereof given to the members, did not operate to invalidate
it or to render the proceedings which were taken at it void,
for every member of the board were present, and their
joint action had completely bound the corporation as if
the meeting has been called with due formality, and
everyone of the directors had received proper notice.
 What is the quorum and voting requirement in the
directors meeting?
- Majority of the members of the board of directors (entire
membership)
 Vote required to pass a valid corporate act?
- Majority of those present at which there is a quorum (3
present, vote of 2 sufficient)
- Exception, majority of all the members of the board in
case of election of corporate officers, unless the articles
provide for a greater quorum or voting requirement
 Should the director or trustees be physically present?
- General rule, must sit and act as a body to have a valid
corporate act
 Five man member board, a meeting was called today,
should the physical presence or warm bodies requires to
constitute a quorum?
- NO. it is not required. Teleconference or video conference
is allowed, E- commerce law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for the purpose of
electing a new set of BOD can A vote by proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent, because it may
be denied:
1. Redeemable and preferred shares, however if founders
shares are issued others may be denied the right to vote.
2. May be denied by the articles of incorporation or contracts
- When not denied they may do so in person or by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy voting is not
allowed?
- NO
 Only non-stock may be denied proxy voting (may be
broaden, limited or denied)
 Proxy voting is a matter of right granted by law
 Requirements of a valid proxy?
- Section 58
Section 58. Proxies. - Stockholders and
members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing, signed
 by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. Unless
otherwise provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5) years at
any one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with interest
 Revocation
- A proxy, like agency in general is revocable unless coupled
with an interest and revocation need not be made by
formal notice in writing. Revocation may be expressed to
the proxy holder, to the election committee, by a
subsequent proxy to another or by sale of the shares.
Thus it may be revoke orally by conduct such that
appearing and asserting the right to vote at a meeting by
the registered owner of the shares revokes a proxy
previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny proxy voting
 What is voting trust agreement?
- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a group of
identical agreements between individual stockholders and
a common trustee, whereby it is provided that for a term o
years or for a period contingent upon a certain event, or
until the agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in the
trustee, either with or without reservation to the owners
or persons designated by them the power to direct how
such control shall be issued.
- It is a devise of binding stockholders to vote as a unit and
thus assuring a desirable stability and continuity in
management in situations where it is needed.
 What is the effect of a voting trust agreement relative to
the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are separated from the
other attributes of ownership;
2. That the voting rights granted are intended to be
irrevocable for a definite period of time; and,
3. That the principal purpose of the grant of voting rights is
to acquire voting control of the corporation.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One or more
stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to
the shares for a period not exceeding five (5) years at any
time: Provided, That in the case of a voting trust
specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the
name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver
to the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect
as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the
right of inspection of all corporate books and records in
accordance with the provisions of this Code.
Any other stockholder may transfer his shares to
the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into
for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade
or used for purposes of fraud.
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificates
as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed cancelled and
new certificates of stock shall be reissued in the name of
the transferors.
The voting trustee or trustees may vote by proxy
unless the agreement provides otherwise. (36a)
 Does it need to be notarized?
- Yes, otherwise it is ineffective and unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they may transfer these
rights
 Is the right granted to a voting trust agreement absolute?
(to inspect)
- Enters into an agreement
- Pull all their shares to cast one vote
- Covered by rules governing contracts

- NO. - By pulling their votes they can decline the resolution

passed by the board
- The voting trust agreement filed with the corporation shall
be subject to examination by any stockholder of the  END OF MIDTERMS
corporation in the same manner as any other corporate
book or record. Provided, that both the transfer and the
trustee or trustees may exercise the right of inspection of
all corporate books and records in accordance with the STOCKS AND STOCKHOLDERS
provisions of this Code.
 3 modes
 Legal title is transferred to the voting trustee
1. By a contract of subscription with the corporation;
 May the voting trustee vote by proxy?
2. By purchase of treasury shares from the corporation; and,
- Yes, legal owner may vote by proxy
3. By purchase or acquisition of shares from existing
 May the proxy holder vote by proxy? stockholders.

- NO, (AGENT) an agent can have no other agent unless  Section 60 subscription
specifically allowed by the principal
- Any contract
 Stockholder executing as a proxy, is he qualified to be
voted as a director? - Whether existing or still to be formed

 Why is he qualified to act as a director if the stockholder
executes as a director?
- The beneficial owner of the shares in a voting trust is
disqualified to be a director in a voting trust whereas in a
proxy, the owner of the shares may be elected as such
since legal title thereof remains with him
- YES he remains to be the owner
 Is the stockholder executing in a voting trust agreement,
is he qualified to act as a director?
Section 60. Subscription contract. - Any contract for
the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n)
 Under the old law the 4th mode is PURCHASE
 Purchase
- Reciprocal in nature

- NO. ceases to be stockholder of record, no longer the legal - Purchaser can neither require the issuance
owner of shares
Xco. Inc.
 May the corporation enforce the voting trust agreements
executed by its stockholders? P
- NO. NIDC vs. AQUINO

Authorized capital 1M
- Not a privy to the contract

500 SUBSCRIBED
- Rights liabilities of a stockholder are there in their
individual capacity- corporate entity theory
500 UNISSUED STOCKS (AS LONG AS GALING
DITO)
 Voting trust agreements

Z wants to acquire 100K

- Normally executed in favor of banking and financial
institutions
Entered in June 50% shall be down payment remainder
December 08
- So that they can vote a certain set of directors
o he will not be considered a stockholder unless he has paid
- They will be more secured
in full
 Voting pull agreement
 August 08 property is ravaged by fire all are turned into
shares
 Is Z liable to pay the balance of his acquisitions?
- YES, no matter how the party refer to it, it is considered
subscription
- Once you subscribe, you become a stockholder which is
entitled to all the liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was declared a
delinquent share
 Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL
LIABLE TO PAY THE UNPAID PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2ndexample galling sa treasury shares hindi sa unissued
share
 NO such thing as purchase of unissued stocks
 A subscription contract can be conditional provided there
is nothing in the charter or statute prohibiting it and not
against public order, law, etc.
 Must it be in writing?
- NO, it may be oral
 5M should it be in writing to be valid and binding as a
subscription?
- NO, statutes of frauds only applies to SALES
Trillana vs. Quezon College
- Counter proposal, therefore there was a need for an
acceptance
- Facultative because it is in his own free will, it is void
 What may be used as a consideration and how much
should be the consideration?
- Section 62 provides:
Section 62. Consideration for stocks. - Stocks
shall not be issued for a consideration less than the par or
issued price thereof. Consideration for the issuance of
stock may be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event
of reclassification or conversion.
Where the consideration is other than actual
cash, or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors,
subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange
for promissory notes or future service.
The same considerations provided for in this
section, insofar as they may be applicable, may be used
for the issuance of bonds by the corporation.
The issued price of no-par value shares may be
fixed in the articles of incorporation or by the board of
directors pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly
called for the purpose. (5 and 16)
 “Amounts transferred from unrestricted retained earnings
to stated capital” what does it mean?
- Stock dividends will in effect capitalize the unrestricted
retained earnings
 After 5 years the founders shares may be converted into
common shares or other kinds of shares
 May shares of stocks be issued without consideration?
Why?
- NO, two reasons by the SC, discriminatory against other
stockholders and second unlawful, it prejudices the right
of the creditors “Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as watered stocks
 Section 65. Liability of directors for watered
stocks. - Any director or officer of a corporation consenting
to the issuance of stocks for a consideration less than its
par or issued value or for a consideration in any form
other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate
secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time of
issuance of the stock and the par or issued value of the
same. (n)
- Subscribers may be compelled to pay the value
 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid
certificate of stock?
1. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal; and the entire
value thereof (together with interest or expenses, if any)
should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certificate of stock
until the full amount of his subscription together with
interest and expenses (in case of delinquent shares) if any
is due, has been paid, a subscriber to shares of stock,
even if not yet fully paid, is entitled to exercise all the
rights of a stockholder and the corresponding liability that
attach thereunder. Thus, the Code provides:
Section 72. Rights of unpaid shares. - Holders of
subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (n)
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without a
certificate of stock
 Instances when he may not be able to exercise his rights
as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable when it may be
transferred through endorsement and delivery?
100t/s 001 10/s
Abc co.
B stole and forged the signature
C is purchaser in good faith and for value will C acquire
title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is
negotiable, even if it is endorsed in blank. Thus, while it
may be transferred by endorsement coupled with delivery
thereof, and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the transferees takes it
without prejudice to all the rights and defenses which the
true and lawful owner may have except in so far as the
principles governing estoppels may apply.
He acquired it by virtue of a forged instrument; no matter
how innocent the purchaser is because it is subject to all
the rights and defenses
 What if A endorsed it?
- He is estopped, unless there are other available defenses
 Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be valid
between the parties. Non-registration will not however,
affect the validity thereof at least in so far as the
contracting parties are concerned.
Section 63. Certificate of stock and transfer of
shares. - The capital stock of stock corporations shall be
divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary
or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact
or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the books
of the corporation. (35)
 “Until registration is accomplished, the transfer, though
valid between the parties, cannot be effective as against
 the corporation. Thus the, unrecorded transfer cannot
enjoy the status of a stockholder; he cannot vote nor be
voted for, and he will not be entitled to dividends. The
corporation will be protected when it pays dividend to the
registered owner despite a previous transfer of which it
had no knowledge. The purpose of registration therefore is
twofold: to enable the transferee to exercise all the rights
of a stockholder and to inform the corporation of any
change in shares ownership so that it can ascertain the
persons entitled to the rights and subject to the liabilities
of a stockholder.”
agency concerned if it will vest unto the transferee 40% of
the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the parties.
Monserat vs. Ceron
- Does it include mortgage?

Thus, it was also ruled by the High Court in Nautica
Canning Corp. vs. Yumul that “A transfer of shares not
recorded in the stock and transfer book of the corporation
is non-existent in so far as the corporation is concerned.”
This is so because “the corporation looks only through its
books for the purpose of determining who its stockholders
are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its stockholders
are;
2. To enable the transferee to exercise his rights a s
stockholders;
3. To afford the corporation an opportunity to object or
refuse registration of the transfer in case allowed by law;
4. To avoid fictitious and fraudulent transfers; and,
5. To protect creditors who have the right to look upon
stockholders, in case of no-payment or watered shares, for
the satisfaction of their claims.
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of the ownership
of the title to a share need be entered and noted upon the
books of the corporation in order that such transfer may
be valid, therefore, inasmuch as a chattel mortgage of the
aforesaid title is not a complete and absolute alienation of
the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not
necessary requisite to its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as against
subsequent third parties
- Register of deeds where the corporation resides and if
different in the register of deeds of owner’s domicile
 Unson vs. Dinamito

 Duty of the secretary is ministerial, hence mandamus will
lie if the secretary refuses to record the transfer, but he
cannot be compelled when the transferee’s title to the said
shares has no prima facie validity or uncertain
- All transferred not register will not have a valid force and
effect
 Right to transfer may be regulated

 May not be unreasonably restricted

 Transfer- absolute and unconditional transfer to warrant
registration in the books of the corporation in order to
 Violation of nationalization law- Central Bank
bind the latter and other third persons.
Lambert vs. Fox
 Other restrictions on the right to transfer shares would
include:
- Valid , may be reasonably regulated, restricted by
agreement of parties
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
- Reasonable agreement by the parties
2. Shares of stock against which the corporation holds any
- Reasonable as to length of time
unpaid claim shall not be transferable in the books of the
corporation; unpaid claims, refer to claims arising from
Padgett vs. Babcock
unpaid subscription and not to any indebtedness which a
stockholder may owe the corporation such as monthly - Any attempt to restrain transfer
dues;
- SC, in the absence of a valid lien upon its shares
3. Restrictions required to be indicated in the articles of
incorporation, by-laws and stock certificates of a close - Valid restrictions shares are applicable
corporation;
- Any restriction on a stockholder’s right to dispose of his
4. Restrictions imposed by special law, such as the Public shares must be construed strictly; and any attempt to
Service Act requiring the approval of the government restrain a transfer of shares is regarded as being in
 restraint of trade, in the absence of a valid lien upon its
shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable.
Subject only to such restrictions, a stockholder cannot be
controlled in or restrained from exercising his right to
transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor of
the company, or to an insolvent person, or even though a
controlling interest is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock certificate to the
transferee
 In order to be valid, must be registered in the books. If
not, will only be binding among parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner or attorney-in-
fact with delivery
Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-fact coupled
with delivery
- Endorsed not delivered
- Proper mode and manner must be complied with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor delivery without
endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring stock?
- Notarized deed
- Deed of assignment
Rural bank of Salinas vs. CA
- If denied or refused without good cause, mandamus will
lie
Tay vs. CA
- Mandamus may issue if petition has a clear legal right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right and alleged
ownership is without merit
- Did not acquire ownership by virtue of the contract of
pledge
- In a contract of pledge there must be foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
Nava vs. Peers Marketing
- A stock subscription is a subsisting liability from the time
the subscription is made
- The subscriber is as much bound to pay his subscription
as he would be to pay any other debt
- No stock certificate was issued. Without stock certificate,
which is the evidence of ownership of corporate stock, the
assignment of corporate shares is effective only between
the parties to the transaction
 Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be coupled with
delivery, exception (TAN vs. SEC)
 Stock certificate has already been issued it must be
coupled with the delivery
 After certificate of stock is issued, may it be effectively
transferred even without endorsement or delivery of the
stock certificate?
- Person sought to be a stockholder is an officer and has
custody
 Endorsement and delivery is not necessary (TAN vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
- Persons sought to be stockholder is officer and has
custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by owner or
attorney-in-fact coupled with delivery
 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other modes of transferring
shares
 Is there a time frame or fixed period as when transfer can
be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even if not recorded in
corporation books
- Right accrues only if refused
- Statute of limitations does not apply in registration of
shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the rights and
defenses as the true and lawful owner may have under the
law except insofar as such rights and defenses are subject
to the limitations imposed by the principles governing
estoppels
De los Santos vs. Republic
- Why is he, not considered as the owner of shares? When it
has been said that when endorsed by the owner it is
considered as strict certificate? Because certificate of
stocks are non-negotiable
- Although a stock-certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well settled
that the instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses
are subject to the limitations imposes by the principles
governing estoppels.
 Unauthorized issuance of stock certificates
100/s 100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form certificate,
sold to D (innocent purchaser for value), will D acquire
title?
- NO, subject to such rights and defenses as the
true and lawful owner may have
 What if C now goes to the corporation and
presents the form?
- Then the corporation shall cancel the old certificate
and issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?
- A, A cannot be deprived of his right by virtue of an
unauthorized transfer
 Corporation can compel C to deliver the new
stock certificate because he made a representation that
the certificate where good.
 Armed with the new certificate issued to C, C
delivers to D a purchaser in good faith and for value will D
acquire title?
- D will acquire title took the shares not by virtue of
a forged or unauthorized transfer, but on the reliance that
the stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew
of what happened and went to the corporation and
complains. Who will have a better title?
- the corporation may be compelled to recognize
both, A as stockholder (non-negotiable) D, reliance that
the stock certificate is valid and existing and owned by C
 Forged transfers
- If the corporation should issue a new certificate
in pursuance of a forged transfer, the corporation incurs
no liability to the person in whose favor it is issued and it
may demand its return for cancellation. The corporation
in such case has been guilty of no misrepresentation. On
the other hand, it is the duty of the purchaser to
determine that the indorsement of the owner is genuine.
However, if the new certificate issued to the purchaser
comes into the hands of a bona fide purchaser for value,
the corporation will be stopped from denying validity
thereof, since by issuing such new certificate it represents
that the person named therein is a stockholder of the
corporation. The corporation is thus forced to recognize
both the original certificate and new certificate-the
original, because the true owner could not be deprived of
his title by a forged transfer, and the new, because of its
representation that the person named therein is the owner
of shares in the corporation. But if the recognition of both
stockholders would result in an over issue of shares, then
only the original and true owner can be recognized as a
stockholder. The bona fide purchaser of the new
certificate will however have a right of damages against
the corporation. The corporation, in turn, would have a
right of action against the person who made false
representations and in whose favor it issued a new
certificate. The true owner of the shares which were
wrongfully transferred would of course have a right to
compel the corporation to issue him a certificate in lieu of
the original one which was wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation
recognize as rightful owner A or D? if both will be
recognized there will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an over
issue of shares, then only the original and true owner can
be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of
certificate of stocks
 The true and lawful owner will never be deprived
of his rights
 What happens to D?
- D will have a cause of action against the
corporation for the value of his acquisition cost inclusive
of damages, attorney’s fees and cost of suit
 D sues the corporation for the value of his
acquisition cost, inclusive of damages, attorney’s fees and
cost of suit. What may the corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the certificate of stocks is
valid, subsisting, etc.
 2nd situation, what cause of action may the
corporation have? Remedy?
- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock certificates. - No
certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is due,
has been paid. (37)
 A certificate of stock cannot be issued unless he fully paid
the amount subscribed
 Subscription to the capital stocks of the corporation are
indivisible
 Clear mandate of section 148 of the code is that the ruling
of the court in Baltazar vs. Lingayen Gulf, no longer holds
true
Section 148. Applicability to existing
corporations. - All corporations lawfully existing and doing
business in the Philippines on the date of the effectivity of
this Code and heretofore authorized, licensed or registered
by the Securities and Exchange Commission, shall be
deemed to have been authorized, licensed or registered
under the provisions of this Code, subject to the terms
and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation
is affected by the new requirements of this Code, said
corporation shall, unless otherwise herein provided, be
given a period of not more than two (2) years from the
effectivity of this Code within which to comply with the
same. (n)
 Subscription to shares of stocks are indivisible
 Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be issued a
stock certificate and in the event that the corporation
refuses to do so, the stockholder my institute a case for
mandamus with damages. Thus, it has been said that the
duty of the corporate officers to issue stock certificates to
those entitled thereto is a ministerial duty enforceable by
mandamus.
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner of
250 shares of stock; “the plaintiff’s rights consist in equity
in 500 shares and upon payment of the unpaid portion of
the subscription price he becomes entitled to the issuance
of certificate for said 500 shares in his favor.”
- No certificate of stock until the full amount has been paid.
 Watered stock
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value
thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a
consideration less than par or issued price thereof, while
section 13 states that in no case shall be paid-up capital
be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or issued
value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall be
paid at all; or
4. In the guise of stock dividends when there are no surplus
profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby hurting
its business prospects, financial capability and
responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced by
the reduction of their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of the corporate
assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their claims
 What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of
ultra-vires or illegal acts which constitute an injury to or
fraud upon the public, or which will tend to injure or
defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse or
abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the subscriber
 is liable to pay the full par or issued value thereof, to
render it valid and effective.
3. As to the consenting stockholders - They are stopped from
raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution of
their proportionate interest in the corporation, they may
compel the payment of the “water” in the stock solidarily
against the responsible and consenting directors and
officers inclusive of the holder of the watered stocks;
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock, solidarily
against the responsible directors/officers and the
stockholders concerned; and’
6. As against transferees of the watered stock – His right is
the same as that of his transferor. If, however, a certificate
of stock has been issued and duly indorsed to a bona fide
purchaser, without knowledge, actual or constructive, the
latter cannot be held liable, at least as against the
corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock
certificate is valid and subsisting. This is because a
corporation is prohibited from issuing certificates of stock
until the full value of the subscriptions have been paid
and could not, therefore, deny the validity of the stock
certificate it issued as against a purchaser in good faith.
Thus, Ballentine states that whether there is any liability
on the part of the transferee of watered stock is made to
depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had knowledge
thereof, he is subject to the same liability as his
transferor.
7.
 What is the nature of the liability of the corporate
directors consenting to the issuance of watered stocks and
the extent of their liabilities?
- to the provisions of the contract of subscription, the board
- Solidarily liable with the holder of the watered stocks to
the extent of the water from said shares of stocks
 subscriptions to the capital stock and may collect the
 Will all the directors be liable? What if you objected will
you also be liable?
- If you do not issue a written objection, you are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not interpose
their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for watered
stocks. - Any director or officer of a corporation consenting
to the issuance of stocks for a consideration less than its
par or issued value or for a consideration in any form
other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate
secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time of
issuance of the stock and the par or issued value of the
same. (n)
 ACS-100M 100M/S PAR VALUE-1.00
SUBSCRIBED-50M FAIR MARKET
VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par value
indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
 Can you question there actuations? What would be the
cause of action?
- It may be questioned.
-
- Duty of loyalty or fiduciary duty as such directors
- They cannot advance their own motives to the damage
prejudice of the corporation which they represents and
stockholders as a whole instead of it being sold outside
- 500M would have gone to the coffers of the corporation,
500M should be there for the protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung corporation,
opportunity na yun para kumita
-
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. - Subject
of directors of any stock corporation may at any time
declare due and payable to the corporation unpaid
same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage
thereof, together with the interest accrued, if any, shall be
made on the date specified in the contract of subscription
or on the date stated in the call made by the board.
Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless
a different rate of interest is provided in the by-laws,
computed from such date until full payment. If within
thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as
hereinafter provided, unless the board of directors orders
otherwise. (38)
 Remedies of the corporation to enforce payment of unpaid
subscription
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code
2. By a collection case in court as provided for in section 70
 Are subscribers of shares of stocks not fully paid, liable to
pay interest?
- General rule is they are not liable to pay interest because  Who is the winning bidder in a delinquency sale?
the code says unless requires in the by-laws
- Aside from the mandate of the law that subscribers to
- Bidder who shall “offer to pay the full amount of the
shares of stock must pay the full value of their
balance on the subscription together with accrued
subscription, they may likewise be required to pay interest
interest, cost of advertisement and expenses of sale, for
on all unpaid subscriptions if so imposed in the contract
the smallest number of shares or fraction of a share.”
or in the corporate by-laws at such rate as may be
indicated thereat or the legal rate if not so fixed. Unless so
required or provided, however, subscribers to shares of X Co. has 1M authorized capital stock
stock, not fully paid, are not liable to pay interest on their
unpaid subscriptions. The code thus provides:
500 thousand is already subscribed

Section 66. Interest on unpaid subscriptions. -

A subscribed to 100 thousand shares, 50 thousand is
Subscribers for stock shall pay to the corporation interest
already paid leaving 50 thousand unpaid
on all unpaid subscriptions from the date of subscription,
if so required by, and at the rate of interest fixed in the
by-laws. If no rate of interest is fixed in the by-laws, such The corporation is at a loss of 250 thousand, the board
rate shall be deemed to be the legal rate. (37) decides to make a call for the payment of the unpaid
subscriptions, however A could not paid, hence declared
delinquent and decides to sell his share at a public
 Until a call is made, they are not due and payable, but
auction
still subject to the provisions of the contracts
 Procedures in case of sale of delinquent stocks
55 thousand is to be paid, remaining balance plus cost
and expenses
- Section 68. Delinquency sale. - The board of directors
may, by resolution, order the sale of delinquent stock and
shall specifically state the amount due on each BIDDERS:
subscription plus all accrued interest, and the date, time
and place of the sale which shall not be less than thirty X-55K FOR 99,900 shares
(30) days nor more than sixty (60) days from the date the
stocks become delinquent.
Y-55K FOR 99,500 shares
Notice of said sale, with a copy of the resolution,
shall be sent to every delinquent stockholder either Z-55K FOR 99,000 shares (winning bidder)
personally or by registered mail. The same shall
furthermore be published once a week for two (2)  Assume there is no bidder, may the corporation bid?
consecutive weeks in a newspaper of general circulation in
the province or city where the principal office of the
corporation is located. - NO. It cannot bid because the law says, subject to the
provisions of this CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
Unless the delinquent stockholder pays to the
corporation, on or before the date specified for the sale of
the delinquent stock, the balance due on his subscription, Should there be no bidder at the public auction
plus accrued interest, costs of advertisement and who offers to pay the full amount of the balance on the
expenses of sale, or unless the board of directors subscription together with accrued interest, costs of
otherwise orders, said delinquent stock shall be sold at advertisement and expenses of sale, for the smallest
public auction to such bidder who shall offer to pay the number of shares or fraction of a share, the corporation
full amount of the balance on the subscription together may, subject to the provisions of this Code, bid for the
with accrued interest, costs of advertisement and same, and the total amount due shall be credited as paid
expenses of sale, for the smallest number of shares or in full in the books of the corporation. Title to all the
fraction of a share. The stock so purchased shall be shares of stock covered by the subscription shall be
transferred to such purchaser in the books of the vested in the corporation as treasury shares and may be
corporation and a certificate for such stock shall be issued disposed of by said corporation in accordance with the
in his favor. The remaining shares, if any, shall be provisions of this Code. (39a-46a)
credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock
covering such shares.

- There was no unrestricted retained earnings in the

Should there be no bidder at the public auction
who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the
same, and the total amount due shall be credited as paid
in full in the books of the corporation. Title to all the
shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the
provisions of this Code. (39a-46a)
example given therefore the corporation cannot bid ,
section 41, it states that:
Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be
purchased or acquired:
 1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled
to payment for their shares under the provisions of this
Code. (a)
 What if the shares of A were sold without compliance of
the requirements? May A question the sale?
- The law prescribes two conditions before an action to
recover delinquent stocks irregularly sold may be allowed.
These are:
1. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which
the same was sold, with interest from the date of the sale
at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the sale.
- The reason for such is the stability of transactions of the
shares of stock
 Suppose in the example, since there are no unrestricted
retained earnings, hence the corporation cannot bid, is
the corporation left without any recourse?
- Section 70. Court action to recover unpaid subscription. -
Nothing in this Code shall prevent the corporation from
collecting by action in a court of proper jurisdiction the
amount due on any unpaid subscription, with accrued
interest, costs and expenses. (49a)
Velasco vs. Poizat
- The subscriber is as much bound to pay the amount of
the share subscribed by him as he would be to pay any
other debt, and the right of the company to demand
payment is no less incontestable.
- Two available remedies: the first and most special remedy
given by the statute consist in permitting the corporation
to put up the unpaid stock and dispose of it for the
account of the delinquent subscriber. The other remedy is
by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the
application of the part of the 70 percent of the profit
distributable in equal parts on the payment of the shares
subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide compromise or to set
off a debt due from the corporation, a release supported
by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A
release which might originally have been held invalid may
be sustained after a considerable lapse of time
Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable only
upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will not be
demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors have
a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants would have
not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of
its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for
such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under
the conditions prescribed by the statute or the charter or
the articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscriptions
 Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there is a call made
- Prescription will not run until and unless there is demand
- Prescription should be determined from the time demand
has been made and not from the time of subscription
 If declared delinquent, what would be the effect as to the
owner of said shares?
- Section 71. Effect of delinquency. - No delinquent stock
shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a
 stockholder except the right to dividends in accordance
with the provisions of this Code, until and unless he pays
the amount due on his subscription with accrued interest,
and the costs and expenses of advertisement, if any. (50a)
- However if the shares are not delinquent, subscribers to
the capital of a corporation, though not fully paid, are
entitled to all the rights of a stockholder, according to
section 72
Section 72. Rights of unpaid shares. - Holders of
subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (n)
 May the rules governing delinquency sale apply to a non-
stock corporation? Are there unpaid shares in a non-stock
corporation?
- Rules governing stock corporations, when applicable, also
applies to a non-stock corporation
- There are delinquent shareholders also in a non-stock
corporation. Example is membership dues
 A corporation paid 50% of subscription and was later on
declared delinquent when he could not pay upon call; A is
also a director of the corporation. Will A, upon declaration
of delinquency , still be able to exercise his right as a
director?
- Yes, he loses all his right as a stockholder except his right
to receive dividends
- He remains to be a director, only qualification to be a
director is he must own at least 1 share and since it still
stands in his name pending the sale, he remains to be
and act as a director
- Even if there is sale, he may still be director because the
winning bidder may not bid or pay for all the shares or
there might be remaining shares, which would be credited
in favor of the delinquent stockholder
- Section 43 provides:
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs
approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve for
probable contingencies. (n)
 When a certificate of stock is loss or destroyed, what must
be done by the owner thereof?
- Section 73. Lost or destroyed certificates. - The following
procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in
a corporation or his legal representative shall file with the
corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was
lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the
certificate and the name of the corporation which issued
the same. He shall also submit such other information
and evidence which he may deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the place
where the corporation has its principal office, once a week
for three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has been
lost, stolen or destroyed. The notice shall state the name
of said corporation, the name of the registered owner and
the serial number of said certificate, and the number of
shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last
publication, if no contest has been presented to said
corporation regarding said certificate of stock, the right to
make such contest shall be barred and said corporation
shall cancel in its books the certificate of stock which has
been lost, stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the registered owner files a
bond or other security in lieu thereof as may be required,
effective for a period of one (1) year, for such amount and
in such form and with such sureties as may be
satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the
one (1) year period provided herein: Provided, That if a
contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence
on the part of the corporation and its officers, no action
may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.
(R.A. 201a)
- The rationale of the above-quoted law is to avoid
duplication of certificates of stock and the avoidance of
fictitious and fraudulent transfers.
 When will the replacement certificate be issued?
- The code provides that:
after the expiration of one (1) year from the
date of the last publication, if no contest has been
presented to said corporation regarding said certificate of
stock, the right to make such contest shall be barred and
said corporation shall cancel in its books the certificate of
 stock which has been lost, stolen or destroyed and issue  Rights and liabilities of stockholders
in lieu thereof new certificate of stock,
- RIGHTS
 Could it be issued earlier than 1 year?
1. Participation in the management of the corporate affairs
- Yes it can be, the code states that: by exercising their right to vote and be voted upon either
personally or by proxy as provided for under sections 50
and 58 of the code;
unless the registered owner files a bond or other
2. To enter into a voting trust agreement subject to the
security in lieu thereof as may be required, effective for a
procedure, requirements and limitations imposed under
period of one (1) year, for such amount and in such form
section 50;
and with such sureties as may be satisfactory to the
3. To receive dividends and to compel their declaration if
board of directors, in which case a new certificate may
warranted under section 43;
be issued even before the expiration of the one (1)
4. To transfer shares of stock subject only to reasonable
year period provided herein: Provided, That if a contest
restrictions such as options and preferences as may be
has been presented to said corporation or if an action is
allowed by law inclusive of the right of the transferee to
pending in court regarding the ownership of said
compel the registration of the transfer in the books of the
certificate of stock which has been lost, stolen or
corporation as provided for in section 63;
destroyed, the issuance of the new certificate of stock in
5. To be issued a certificate of stock for fully paid-up shares
lieu thereof shall be suspended until the final decision by
in accordance with 64;
the court regarding the ownership of said certificate of
6. To exercise pre-emptive rights as provided for in section
stock which has been lost, stolen or destroyed.
39;
7. To exercise their appraisal right in accordance with the
 May corporate officers be held liable for the unauthorized provision of section 81 and in those instance allowed by
issuance? law such as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency
- YES, the code provides that:
as may be allowed under section 69;
10. To inspect the books of the corporation subject only to the
Except in case of fraud, bad faith, or negligence limitations imposed by section 73;
on the part of the corporation and its officers, no action 11. To be furnished by the most recent financial statement of
may be brought against any corporation which shall have the corporation as by section 75;
issued certificate of stock in lieu of those lost, stolen or 12. To be issued a new stock certificate in lieu of the lost or
destroyed pursuant to the procedure above-described. destroyed one subject to the procedure laid down in
(R.A. 201a) section 73;
13. To have the corporation dissolved under section 118 to
121, and section 105 in a close corporation;
 Assuming the last paragraph is not there; would it be not
14. To participate in the distribution of the assets of the
the same, that they should be held liable due to fraud,
corporation upon dissolution under section 122;
bad faith or negligence?
15. In the case of a close corporation, to petition the SEC to
arbitrate in the event of a deadlock as allowed under
- YES. Section 31 provides that: section 104; and,
16. Also in the case of a close corporation, to withdraw
therefrom, for my reason, and compel the corporation to
Section 31. Liability of directors, trustees or
purchase his shares as provided for under section 105.
officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting there from
suffered by the corporation, its stockholders or members
and other persons.

When a director, trustee or officer attempts to

acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which
has been reposed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and
must account for the profits which otherwise would have
accrued to the corporation. (n)

 Certificate of stock was lost, the owner transfers his

shares by way of a notarized deed will it be valid?

- He cannot do so, if a certificate of stock is issued by a

corporation, a mere notarized deed will not suffice
- Deed of assignment was not sufficient since there was no
endorsement (Rural Bank of Lipa vs. CA)
- LIABILITIES Stock corporations must also keep a book to be
known as the "stock and transfer book", in which must be
kept a record of all stocks in the names of the
1. To pay to the corporation the balance of his unpaid
stockholders alphabetically arranged; the installments
subscriptions subject to the provision of section 67 to 70;
paid and unpaid on all stock for which subscription has
2. To pay interest on his unpaid subscription if required by
been made, and the date of payment of any installment; a
the by-laws or by the contract of subscription in
statement of every alienation, sale or transfer of stock
accordance with section 66;
made, the date thereof, and by and to whom made; and
3. To answer to the creditors for the unpaid portion of his
such other entries as the by-laws may prescribe. The
subscription under the TRUST FUND DOCTRINE;
stock and transfer book shall be kept in the principal
4. To answer the “water” in his stocks as provided for in
office of the corporation or in the office of its stock
section 65;
transfer agent and shall be open for inspection by any
5. To be liable, as general partners, for all debts, liabilities
director or stockholder of the corporation at reasonable
and damages of a determinable corporation as envisioned
hours on business days.
under section 21 (corporation by estoppel); and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates in No stock transfer agent or one engaged
the management of the corporate affairs. principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed to
operate in the Philippines unless he secures a license
CORPORATE BOOKS AND RECORDS
from the Securities and Exchange Commission and pays a
fee as may be fixed by the Commission, which shall be
 What are these books and records that are required to be renewable annually: Provided, That a stock corporation is
kept? not precluded from performing or making transfer of its
own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a
- Section 74. Books to be kept; stock transfer agent. -
license fee herein provided, shall be applicable. (51a and
Every corporation shall keep and carefully preserve at
32a; P.B. No. 268.)
its principal office a record of all business
transactions and minutes of all meetings of
stockholders or members, or of the board of directors  To summarize:
or trustees, in which shall be set forth in detail the
time and place of holding the meeting, how
1. Records of all business transactions which include,
authorized, the notice given, whether the meeting was
among others, journals, ledger, contracts, vouchers and
regular or special, if special its object, those present
receipts, financial statements and other books of
and absent, and every act done or ordered done at the
accounts, income tax returns, and voting trust
meeting. Upon the demand of any director, trustee,
agreements which must be kept and carefully preserved at
stockholder or member, the time when any director,
its principal office;
trustee, stockholder or member entered or left the
2. Minutes of all meetings of stockholders or members and of
meeting must be noted in the minutes; and on a
the directors or trustees setting forth in detail the date,
similar demand, the yeas and nays must be taken on
time, and place of meeting, how authorized, the notice
any motion or proposition, and a record thereof
given whether the same be regular or special, and if
carefully made. The protest of any director, trustee,
special, the purpose thereof shall be specified, those
stockholder or member on any action or proposed
present and absent, and every act done or ordered done
action must be recorded in full on his demand.
there at which ,must likewise be kept at the principal
office of the corporation; and,
The records of all business transactions of the 3. Stock and transfer book showing the names of the
corporation and the minutes of any meetings shall be stockholders, the amount paid or unpaid on all stocks for
open to inspection by any director, trustee, stockholder or which subscription has been made, a statement of every
member of the corporation at reasonable hours on alienation, sale or transfer of stock made, if any the date
business days and he may demand, in writing, for a copy thereof, and by whom and to whom made which must also
of excerpts from said records or minutes, at his expense. be kept at the principal office of the corporation or in the
office of its stock transfer agent.
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or These corporate books and records, inclusive of all
member of the corporation to examine and copy excerpts business transactions and minutes of meetings, are
from its records or minutes, in accordance with the subject to inspection by any of the directors, trustees,
provisions of this Code, shall be liable to such director, stockholders or members of the corporation at reasonable
trustee, stockholder or member for damages, and in hours on business days and a copy of excerpts of said
addition, shall be guilty of an offense which shall be records may be demanded. In fact, in so far as financial
punishable under Section 144 of this Code: Provided, That statement is concerned, the Code clearly provides:
if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under
Section 75. Right to financial statements. -
this section for such action shall be imposed upon the
Within ten (10) days from receipt of a written request of
directors or trustees who voted for such refusal: and
any stockholder or member, the corporation shall furnish
Provided, further, That it shall be a defense to any action
to him its most recent financial statement, which shall
under this section that the person demanding to examine
include a balance sheet as of the end of the last taxable
and copy excerpts from the corporation's records and
year and a profit or loss statement for said taxable year,
minutes has improperly used any information secured
showing in reasonable detail its assets and liabilities and
through any prior examination of the records or minutes
the result of its operations.
of such corporation or of any other corporation, or was
not acting in good faith or for a legitimate purpose in
making his demand. At the regular meeting of stockholders or members, the
board of directors or trustees shall present to such
 stockholders or members a financial report of the
operations of the corporation for the preceding year,
which shall include financial statements, duly signed and
certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less
than P50,000.00, the financial statements may be
certified under oath by the treasurer or any responsible
officer of the corporation. (n)
 May books and records be examined? Who may examine?
Can they copy them? In whose expense?
- Yes, according to the code:
“The records of all business transactions of
the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense. “
 Is there any defense available that could be raised? By the
corporate officers to justify the refusal?
- Yes, the code provides that:
“and Provided, further, That it shall be a defense
to any action under this section that the person
demanding to examine and copy excerpts from the
corporation's records and minutes has improperly
used any information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in
making his demand.”
 What is the stock and transfer? Where should stock and
transfer be kept? Can it be kept elsewhere?
“Stock corporations must also keep a book to be
known as the "stock and transfer book", in which must
be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription
has been made, and the date of payment of any
installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be kept
in the principal office of the corporation or in the
office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business days. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the minutes or by the
hours
- Non-stock corporation- stock and transfer books
- Club share- membership
 Are stockholders entitled to financial statements?
- Yes, they are entitled to a copy, the code provides that:
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request of
any stockholder or member, the corporation shall furnish
to him its most recent financial statement, which shall
include a balance sheet as of the end of the last taxable
year and a profit or loss statement for said taxable year,
showing in reasonable detail its assets and liabilities and
the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees shall present
to such stockholders or members a financial report of the
operations of the corporation for the preceding year,
which shall include financial statements, duly signed and
certified by an independent certified public accountant.
However, if the paid-up capital of the corporation
is less than P50,000.00, the financial statements may be
certified under oath by the treasurer or any responsible
officer of the corporation. (n)
- Audited financial statement filed in the SEC, 120 days
from the end of the final year, or must be filed on or
before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with increasing
and decreasing
- If not “kulong” violation of securities and regulation act
 Why is this right of inspection granted to a stockholder?
- The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper purpose
is to protect his interest as a stockholder. Thus, it has
been said that:
“The right of the shareholders to ascertain how the affairs
of his company are being conducted by its directors and
officers is founded by his beneficial interest through
ownership of shares and the necessity of self-protection.
Managers of some corporations deliberately keep the
shareholders in ignorance or under misapprehension as
to the true condition of its affairs. Business prudence
demands that the investor keep a watchful eye on the
management and the condition of the business. Those in
charge of the company may be guilty of gross
incompetence or dishonesty for years and escape liability
if the shareholders cannot inspect the records and obtain
information.”
 Is there any distinction of the right of inspection of a
stockholder and that of a director?
- Yes, as compared to a stockholder or member, the right of
a director or trustee to inspect and examine corporate
books and records is considered absolute and unqualified
and without regard to motive. This is because a director
supervises, directs and manages corporate business and
it is necessary that he be equipped with all the
information and data with regard to the affairs of the
company in order that he may manage and direct its
operations intelligently and according to his best
judgment in the interest of all the stockholders he
represents. Thus, while stockholders and members are
entitled to inspect and examine the books and records as
provided in sections 74 and 75 they may not gain access
 to highly sensitive and confidential information. In the - The law is clear, it may be exercised during reasonable
case of directors. “it is not denied” that they have such hours on any business days, the by-laws cannot deny this
access. This would include, among others, right all together
- The general right given by the statute may not be lawfully
abridged to the extent attempted in this resolution. It may
a. Marketing strategies and pricing structure;
be admitted that the officials in charge of a corporation
b. Budget for expansion and diversification;
may deny inspection when sought at unusual hours or
c. Research and development;
under other improper conditions; but neither the
d. Sources of funding, availability of personnel, proposals of
executive officers nor the board of directors have the
mergers or tie-ups with other firms
power to deprive a stockholder of the right altogether.
- The corporation, or its responsible directors and officers
 May this right be exercised, other than by the cannot unduly restrict this right of inspection and may
stockholders themselves? not arbitrarily set a few days of the year within which the
stockholder may make the inspection.
- A by-law unduly restricting the right of inspection is
- Yes, while the right is founded on stock ownership thus
undoubtedly invalid
personal in nature it may be made by the stockholder’s
agent or representative since it may be unavailing in many
instances Vegaruth vs. Isabela Sugar Co.

 What if the right of the stockholder to inspect is denied? - Directors of a corporation have the unqualified right to
What is his remedy? inspect the books and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a director or
1. Mandamus
stockholder has any absolute right to secure certified
2. Damages either against the corporation or responsible
copies of the minutes of the corporation until these
officer who refused the inspection
minutes have been written up and approved by the
3. Criminal complaint for violation of his right to inspect and
directors.
copy excerpts of all business transactions and minutes of
meeting. Section 74 provides that Any officer or agent of
the corporation who shall refuse to allow any director,  May a stockholder of a holding company inspect the books
trustees, stockholder or member of the corporation to and records of a subsidiary?
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be
- It depends
liable to such director, trustee, stockholder or member for
- The right of the stockholders to examine corporate books
damages, and in addition, shall be guilty of an offense
extends to wholly-owned subsidiary which is completely
which shall be punishable under Section 144 of this Code.
under the control and management of the parent
The latter provision imposes a penalty of a fine of not less
company where he is such a stockholder. But if the two
than P1,000 but not more than P10,000 or an
entities (subsidiary and parent) are legally being operated
imprisonment for not less than 30 days but not more than
as separate and distinct entities, there is no such right of
5 years, or both, at the discretion of the court. If the
inspection on the part of the stockholder of the parent
refusal is pursuant to a resolution or order of the board,
company.
the liability shall be imposed upon the directors or
trustees who voted for such refusal.
AYALA- HOLDING COMPANY/PARENT COMPANY
 Defense of the responsible corporate officer
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-
owned subsidiary)
1. That the person demanding has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or of any other o HOLD ATLEAST 50 +1 shares in order to be a PARENT
corporation; COMPANY
2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
 A, is a stockholder of Ayala, does he have a right to
3. The right is limited or restricted by special law or the law
inspect the records of its subsidiaries?
of it creation.

- If wholly owned pwede, but its subsidiaries are not wholly

W.G. Philpotts vs. Philippine Manufacturing Co.
owned kaya hindi pwede

- The right of inspection given to a stockholder can be

exercised either by himself or by any proper representative
or attorney-in-fact, and either with or without the
attendance of the stockholder
- The right may be regarded as personal, in the sense that
only a stockholder may enjoy it; but the inspection and
examination may be made by another. Otherwise it would
be unavailing in many instances.
o Note: Usually hires an auditor or accountant to safeguard
his interest
Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of stock of
San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such
wholly-owned subsidiary which are in respondent
corporation’s possession and control

Pardo vs. Hercules Lumber Co.  If being operated as separate and distinct corporations,
there is no such right
 Telecommunications- special franchise, it is a legislative
grant
Gonzales vs. PNB
- Provisions of the old law was unqualified, when it granted
stockholders the right to inspect
- However, whole 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
examination that the one requesting it must not have
been guilty of using improperly any information secured
through a prior examination and that the person asking
for such examination must be acting in good faith and for
a legitimate purpose in making his demand
- Admittedly, he sought to be a stockholder in order to pry
into transactions entered into by the respondent bank
even before he became a stockholder. His obvious purpose
was to arm himself with materials he can use against the
respondent bank for acts done by the latter when the
petitioner was a total stranger to the same.
- Bank was created by a special law, it has its own charter
and primarily governed by the law creating them
- The bank is only subject to the inspection of the Central
Bank and any information pertaining to the bank is
confidential and shall not be revealed to any person other
than the President of the Philippines, the Secretary of
Finance and the Board of Directors, nor shall any
information relative to the funds in its custody, its current
accounts or deposits belonging to private individuals,
corporations or other entities except by order of a Court of
Competent Jurisdiction, hence inspection sought to by the
petitioner is violative of the provisions of its charter and is
even subject to penal sanctions
 Assuming you are a stockholder of PNB, and then it was
privatized, may you already have the right to inspect?
- No, unless its charter has been altered or repealed it is
still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
MERGER AND CONSOLIDATION
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company
- Corporations are granted by the code to merge or
consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial capability
- also a method of recapitalization
o purchase and sale of corporate assets is another form of
corporate reorganization
 How do you value the assets of the merging corporation,
do you consider goodwill?
 First secure favorably recommendation of government
agency
- Section 79. Effectivity of merger or
consolidation. - The articles of merger or of consolidation,
signed and certified as herein above required, shall be
submitted to the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the
case of merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public utilities,
educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which time the
merger or consolidation shall be effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice of
the date, time and place of hearing shall be given to each
constituent corporation at least two (2) weeks before said
hearing. The Commission shall thereafter proceed as
provided in this Code. (n)
 Merger
- A union effected by absorbing one or more existing
corporations by another which survives and continues the
combined business
- It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and
merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent corporation
 Consolidation
- The uniting or amalgamation of two or more existing
corporations to form a new corporation
- In merger there is a surviving corporation, the others are
dissolved, while in consolidation, all constituent are
dissolved and a new one organized
A B
 C Associated Bank vs. CA

 Like all other corporate acts, it emanates from the board - By virtue of a specific provision in the merger agreement
- Although the subject promissory note names CBTC as the
payee, the reference to CBTC in the note shall be
1. The board of directors or trustees of each constituent
construed, under the very provision of the merger
corporations shall approve a plan of merger or
agreement, as a reference to petitioner bank, “as if such
consolidation setting forth the matters required in section
reference (was a) direct reference to the latter for all
76;
intents and purposes
2. Approval of the plan by the stockholders representing
- Section 80 par. 4 states:
2/3 of the outstanding capital stock or 2/3 of the
member in non-stock corporations of each of such
corporations at separate corporate meetings called for the The surviving or the consolidated corporation
purpose; shall thereupon and thereafter possess all the rights,
3. Prior notice of such meeting, with a copy or summary of privileges, immunities and franchises of each of the
the plan of merger or consolidation shall be given to all constituent corporations; and all property, real or
stockholders or members at least two (2) weeks prior to personal, and all receivables due on whatever account,
the scheduled meeting, either personally or registered including subscriptions to shares and other choses in
mail stating the purpose thereof; action, and all and every other interest of, or belonging to,
4. Execution of the articles of merger or consolidation by or due to each constituent corporation, shall be deemed
each constituent corporations to be signed by the transferred to and vested in such surviving or
president or vice-president and certified by the consolidated corporation without further act or deed; and
corporate secretary or assistant secretary setting
forth the matters required in section 78;
- Without further acts, meaning it is automatic
5. Submission of the articles of merger or consolidation
in quadruplicate to the SEC subject to the requirement
of section 79 that if it involve corporations under the  When do merger and consolidation become effective?
direct supervision of any other government agency or What if the SEC fails to act on it without fault attributable
governed by special laws the favorable recommendation of to the corporation involved?
the government agency concerned shall first be secured
and;
- It will never become valid until and unless the SEC gives
6. Issuance of the certificate of merger or consolidation
its stamp of approval
by the SEC at which time the merger or consolidation
- It will be up to the constituent corporation to follow it up
shall be effective. If the plan, however, is believed to be
- It will never take effect until the SEC gives its approval
contrary to law, the SEC shall set a hearing to give the
and issues the articles of merger
corporations concerned an opportunity to be heard upon
proper notice and thereafter, the Commission shall
proceed as provided in the Code. o Granted 3 years to wing up unless there is a trustee to
wing up its affairs
 Although merger and consolidation is an express power
granted to corporation, it is subject to limitations, as  Could there be liquidators and winding up with respect to
maybe proscribed by law the corporation in consolidation and merger?
 What would be the effect of merger or consolidation? <sec.
80>
- No, there is none
- No assets properties or rights to collect, they are
1. There will only be a single corporation. In case of merger, transferred
the surviving corporation or the consolidated corporation - No debts and liabilities to pay because they become the
in case of consolidation; liabilities of the surviving corporations
2. The termination of the corporate existence of the - No properties transferred because they will be the
constituent corporations, except that of the surviving properties of the surviving corporations
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated corporation
o Hardest part is the financial act, regarding how many
will possess all the rights, privileges, immunities and
shares would be issued, probability of collection and the
powers and shall be subject to all the duties and liabilities
like
of a corporation organized under the Code;
o In merger and consolidation, there is due diligence and an
4. The surviving or consolidated corporation shall possess all
economist is usually hired
the rights, privileges, immunities and franchises of the
constituent corporations, and all property and all
receivables due, including subscriptions to shares and APPRAISAL RIGHT
other choses in action, and every other interest of, or
belonging to or due to the constituent corporations shall
 Define appraisal
be deemed transferred to and vested in such surviving or
consolidated corporation without further act and deed;
and, - Right to withdraw from the corporation and demand
5. The rights of creditors or any lien on the property of the payment of the fair value of his shares after dissenting
constituent corporations shall not be impaired by the from certain corporate acts involving fundamental
merger or consolidation. changes in corporate structure <sec. 81>

 Is there a liquidation process in case of merger or  What property? When may this right be exercises?
consolidation?
- Section 81 provides:
- None, there is nothing to distribute
 Section 81. Instances of appraisal right. - Any
stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation
has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code;
and
3. In case of merger or consolidation. (n)
chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is
made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such
payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the
corporation. (n)
X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for payment of fair
value of shares. Can he make a demand of payment of
shares?

 May it be exercised by a stockholder who dissents to the
act of a business other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque
 True or False, no stockholder in a stock corporation can
ever demand if the principal office is amended, changing it
from QC to Manila
- False, a stockholder in a close corporation may for any
reason compel the close corporation that he be paid the
fair value of his shares

Can he exercise his appraisal rights in the first place? He

A objects and makes a written demand. May he exercise
hasn’t even paid his subscription in full.
his right of appraisal?

 May a stockholder who hasn’t paid his subscription in full

- It is not available in all amendments of the corporation
exercise his appraisal rights?
- It must be changing or restricting the rights of any
stockholder
- Yes, he can exercise his appraisal rights, by reconciling
the provisions of section 72, section 82 and section 86
 What if the principal office is changed from QC to TAWI-
TAWI, will it change or affect the rights of A?
Section 72. Rights of unpaid shares. - Holders of
subscribed shares not fully paid which are not delinquent
- To some it may change or restrict the rights to others it
shall have all the rights of a stockholder. (n)
may not

Section 82. How right is exercised. - The

 How is the right exercised?
appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by
- According to section 82 of the code: making a written demand on the corporation within thirty
(30) days after the date on which the vote was taken for
payment of the fair value of his shares: Provided, That
Section 82. How right is exercised. - The
failure to make the demand within such period shall be
appraisal right may be exercised by any stockholder who
deemed a waiver of the appraisal right. If the proposed
shall have voted against the proposed corporate action, by
corporate action is implemented or affected, the
making a written demand on the corporation within thirty
corporation shall pay to such stockholder, upon
(30) days after the date on which the vote was taken for
surrender of the certificate or certificates of stock
payment of the fair value of his shares: Provided, That
representing his shares, the fair value thereof as of the
failure to make the demand within such period shall be
day prior to the date on which the vote was taken,
deemed a waiver of the appraisal right. If the proposed
excluding any appreciation or depreciation in anticipation
corporate action is implemented or affected, the
of such corporate action.
corporation shall pay to such stockholder, upon surrender
of the certificate or certificates of stock representing his
shares, the fair value thereof as of the day prior to the If within a period of sixty (60) days from the date
date on which the vote was taken, excluding any the corporate action was approved by the stockholders,
appreciation or depreciation in anticipation of such the withdrawing stockholder and the corporation cannot
corporate action. agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder,
If within a period of sixty (60) days from the date
another by the corporation, and the third by the two thus
the corporate action was approved by the stockholders,
chosen. The findings of the majority of the appraisers
the withdrawing stockholder and the corporation cannot
shall be final, and their award shall be paid by the
agree on the fair value of the shares, it shall be
corporation within thirty (30) days after such award is
determined and appraised by three (3) disinterested
made: Provided, That no payment shall be made to any
persons, one of whom shall be named by the stockholder,
dissenting stockholder unless the corporation has
another by the corporation, and the third by the two thus
 unrestricted retained earnings in its books to cover such
payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the
corporation. (n)
Section 86. Notation on certificates; rights of
transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares to
the corporation for notation thereon that such shares are
dissenting shares. His failure to do so shall, at the option
of the corporation, terminate his rights under this Title.
If shares represented by the certificates bearing such
notation are transferred, and the certificates consequently
cancelled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee
shall have all the rights of a regular stockholder; and all
dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)
- Notation is not mandatory, it is even discretionary
because the code provides “at the option of the
corporation” because it never issued one for that matter
since the subscriptions are not yet fully paid
 May the corporation be compelled to pay the interest of A
300 T, 150T, 150T and 0 unrestricted retained earnings
 No stockholder may be able to compel the corporation to
pay the value of his shares if the corporation has no
unrestricted retained earnings
- False, a stockholder of a close corporation may for any
reason, provided only that the corporation has sufficient
assets to cover its debts and liabilities
o General rule: there should be unrestricted retained
earnings
o Exception: section 105 “close corporation”
 The procedure and requirements for the valid exercise of
this rights are:
1. The stockholder must have voted against the proposed
corporate action in any of the instances allowed by law for
the exercise of the right of appraisal;
2. The written demand for payment must be made by the
dissenting stockholder within thirty (30) days after the
date on which the vote was taken thereon. Failure to
make the demand within the said period shall be deemed
a waiver on the part of the stockholder concerned to
exercise his appraisal right;
3. Surrender of the certificate of stock by the dissenting
stockholder for notation in the corporate books and the
payment by the corporation of the fair market value of the
said shares as of the day prior to the date on which the
vote was taken. If the stockholder and the corporation
cannot agree on the fair market value thereof, the same
shall be determined in accordance with the provision of
paragraph 2 of section 82;
4. The fair value of the shares of the dissenting stockholder
must be paid by the corporation only if it has
“unrestricted retained earnings” in its books to cover such
payment. If the corporation has no unrestricted retained
earnings, the dissenting stockholder may not, therefore,
be able to effectively exercise his appraisal rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
 What would be the effect if the stockholder exercises his
appraisal rights? What happens to his voting and dividend
rights if he exercises his appraisal rights?
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
Section 83. Effect of demand and termination of
right. - From the time of demand for payment of the fair
value of a stockholder's shares until either the
abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights
accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the
provisions of this Code, except the right of such
stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting stockholder is
not paid the value of his shares within 30 days after
the award, his voting and dividend rights shall
immediately be restored. (n)
 How do you compare the rights of a stockholder, declared
delinquent compared to a dissenting stockholder
exercising his appraisal rights
 What if a stockholder exercising his appraisal rights is
also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is paid,
unless there is a stipulation in the by-laws
 When may the right to be paid the value of his shares
cease? Can he withdraw his right of appraisal?
- Yes, he may withdraw, but there must be consent by the
corporation as provided for by section 83 of the code:
Section 84. When right to payment ceases. - No
demand for payment under this Title may be withdrawn
unless the corporation consents thereto. If, however, such
demand for payment is withdrawn with the consent of the
corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved
by the Securities and Exchange Commission where such
approval is necessary, or if the Securities and Exchange
Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall
cease, his status as a stockholder shall thereupon be
restored, and all dividend distributions which would have
accrued on his shares shall be paid to him. (n)
 Instances when the right of a dissenting stockholder to be
paid the fair value of his shares ceases.
1. When he withdraws his demand for payment and the
corporation consents thereto;
2. When the proposed action is abandoned or rescinded by
the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certificate within ten
(10) days from demand to the corporation for notation
that such shares are dissenting shares; and,
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
 May it be granted or allowed by the by-laws?
- Yes

a. The price offered by the corporation is lower than the fair

 May the right to cumulative voting be denied in a stock
value of the shares of the dissenting stockholder as
corporation?
determined by the appraisers;
b. Where an action is filed by the dissenting stockholder to
recover such fair value and the refusal of the stockholder - No, Doctrine of Limited Capacity
to receive payment is found by the court to be justified.
 May members in a non-stock corporation vote by proxy?
- Dissenting stockholder will be liable for the cost and
expenses of appraisal when
- Yes, section 89 provides that:

a. When the price offered by the corporation is

“Unless otherwise provided in the articles of
approximately the same as the fair value ascertained by
incorporation or the by-laws, a member may vote by proxy
the appraisers;
in accordance with the provisions of this Code. (n) “
b. Where the action filed by the dissenting stockholder and
his refusal to accept payment is found by the court to be
unjustified.  May the right to vote by proxy be validly denied in a stock
corporation?
 The dissenting stockholder may also sell, transfer or
assign his shares - No, it is a matter of right in a stock corporation

Section 86. Notation on certificates; rights of  May member of a non-stock corporation cast their vote by
transferee. - Within ten (10) days after demanding text?
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares to
- Yes, subject to the approval and terms and conditions of
the corporation for notation thereon that such shares are
the SEC <sec. 89>
dissenting shares. His failure to do so shall, at the option
of the corporation, terminate his rights under this Title. If
shares represented by the certificates bearing such “Voting by mail or other similar means by
notation are transferred, and the certificates members of non-stock corporations may be authorized by
consequently cancelled, the rights of the transferor as the by-laws of non-stock corporations with the approval
a dissenting stockholder under this Title shall cease of, and under such conditions which may be prescribed
and the transferee shall have all the rights of a regular by, the Securities and Exchange Commission. “
stockholder; and all dividend distributions which
would have accrued on such shares shall be paid to
 How about in stock?
the transferee. (n)

- Voting by mail or other similar means may also be

NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where no part of its income
is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this code on
dissolution
 What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific
provisions of this Title. (n)
authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the vote
must be cast at a duly constituted meeting. The only
exception, in case of the latter, is in the matter of general
amendment of the articles of incorporation where the
written assent of the stockholder may be sufficient.
 How is the governing board constituted in a non-stock
corporation? How many members?
- It may exceed 15 in a non-stock corporation unless the
AOI or by-laws provide otherwise, as provided for by
section 92 of the code:
Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of incorporation
or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in
number as may be fixed in their articles of incorporation
or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of
 their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless he is
a member of the corporation.
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
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding
year. (n)

Unless otherwise provided in the articles of

 Who elects the other officers?
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members. (n)
- Directly by the general members unless the by-laws or
articles provide otherwise. <sec.92>
 Qualifications?

“Unless otherwise provided in the articles of

1. He is a member of the association;
incorporation or the by-laws, officers of a non-stock
2. Majority thereof must be residents of the Philippines; and,
corporation may be directly elected by the members. (n) “
3. Other qualifications as may be provided for in the by-laws.

 In stock corporations who elect officers?

 Governing board in a non-stock

- Directors
- Board of Trustees, however section 138 provides that:

 The provision that stock corporations cannot validly

Section 138. Designation of governing boards. -
provide that members cannot be voted by stockholders is
The provisions of specific provisions of this Code to the
only a general rule because there is an exception section
contrary notwithstanding, non-stock or special
97 of the code states that:
corporations may, through their articles of
incorporation or their by-laws, designate their
governing boards by any name other than as board of The articles of incorporation of a close
trustees. (n) corporation may provide that the business of the
corporation shall be managed by the stockholders of
the corporation rather than by a board of directors. So
 Disqualifications
long as this provision continues in effect:

- Section 27 also applies to a non-stock corporation, same

1. No meeting of stockholders need be called to elect
holds true to the manner of removal <sec. 29 ad 30>
directors;

Section 27. Disqualification of directors, trustees

2. Unless the context clearly requires otherwise, the
or officers. - No person convicted by final judgment of an
stockholders of the corporation shall be deemed to be
offense punishable by imprisonment for a period
directors for the purpose of applying the provisions of this
exceeding six (6) years, or a violation of this Code
Code; and
committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n) 3. The stockholders of the corporation shall be subject to
all liabilities of directors.
Section 29. Vacancies in the office of director or
trustee. - Any vacancy occurring in the board of directors The articles of incorporation may likewise
or trustees other than by removal by the stockholders or provide that all officers or employees or that specified
members or by expiration of term, may be filled by the officers or employees shall be elected or appointed by
vote of at least a majority of the remaining directors or the stockholders, instead of by the board of directors.
trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular
 Nature of membership is non-transferrable and personal
or special meeting called for that purpose. A director or
in nature unless the articles of incorporation or by-laws
trustee so elected to fill a vacancy shall be elected only or
provide otherwise
the unexpired term of his predecessor in office.

Section 90. Non-transferability of membership. -

Any directorship or trusteeship to be filled by
Membership in a non-stock corporation and all rights
reason of an increase in the number of directors or
arising there from are personal and non-transferable,
trustees shall be filled only by an election at a regular or
unless the articles of incorporation or the by-laws
at a special meeting of stockholders or members duly
otherwise provide. (n)
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)  How is a membership requirement in a non-stock
corporation
Section 30. Compensation of directors. - In the
absence of any provision in the by-laws fixing their A holds a membership certificate
 B goes to the corporation and compels the corporation to
record the transfer in his name
- Membership in non-stock corporations may be acquired
by complying with the provisions of its rules prescribed in
the by-laws. This is in consonance with the express power
granted by law under section 36, paragraph 6 of the code,
authorizing them to admit members thereof and that
authority carries with it the power to prescribe rules on
membership. It has thus been stated that in the absence
of charter or statutory restrictions, non-stock corporations
may determine who shall be admitted to membership and
how they shall be admitted.
Section 36. Corporate powers and capacity. -
Every corporation incorporated under this Code has the
power and capacity:
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a
non-stock corporation;
- They can provide the manner in which to admit depending
on their own rules
 The power or authority to terminate members in non-
stock corporations is said to be inherent but strict
compliance with the manner and procedure laid down in
the by-laws must be observed, otherwise it may render the
expulsion ineffective and invalid.
Section 91. Termination of membership. -
Membership shall be terminated in the manner and for
the causes provided in the articles of incorporation or the
by-laws. Termination of membership shall have the effect
of extinguishing all rights of a member in the corporation
or in its property, unless otherwise provided in the articles
of incorporation or the by-laws. (n)
 Power is inherent and may be exercised in certain
situations:
1. When an offense is committed which, although it has no
immediate relation to a member’s duty as such, it is so
infamous as to render him unfit for society of honest men,
which is indictable at common law;
2. When the offense is a violation of his duty as member of
the corporation; and,
3. When the offense is of a mixed nature, being both against
his duty as a member of the corporation, and also
indictable at common law.
If the conduct of the member comes within any of this
cases, it is a ground for valid expulsion although it may
not be expressly made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who the members are,
cannot be inquired or intervened by the court
- The appealed decision thus contravened the establish
principle that the courts cannot strip a member of a non-
stock corporation of his membership therein without
cause.
Lions Club International vs. CA
- Courts will not generally interfere on matters involving the
internal affairs of an unincorporated association such as
election contest unless the acts complained of are
arbitrary, oppressive, fraudulent, violative of civil rights
and the like
- General rule is that the courts will not interfere with the
internal affairs of an unincorporated association so as to
settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
government of the society is fairly and honestly
administered in conformity with its by-laws and the law of
the land, and no property or civil rights are involved.
- Exceptions are the following:
a. Where law and justice so require, and the proceedings of
the association are subject to judicial review where there
is fraud, oppression, or bad faith, or where the action
complained of is capricious, arbitrary, or unjustly
discriminatory
b. To grant relief in case property or civil rights are invaded,
although it has also been held that the involvement of
property rights does not necessarily authorize judicial
intervention, in the absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the society, or the law of the
land, as by depriving the person of due process of law
d. There is lack of jurisdiction on the part of the tribunal
conducting the proceedings, where the organization
exceeds its powers, or where the proceedings are
otherwise illegal
 Corporations, stock and non-stock, may be dissolved in
accordance and pursuant to the provisions of Sections
118 to 121 of the Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If such be the case,
the assets of the corporation are to be distributed in
accordance with law and established jurisprudence.
 If a non-stock corporation is dissolved how will its
properties be distributed?
Section 94. Rules of distribution. - In case dissolution
of a non-stock corporation in accordance with the
provisions of this Code, its assets shall be applied and
distributed as follows:
1. All liabilities and obligations of the corporation shall be
paid, satisfied and discharged, or adequate provision shall
be made therefore;
2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with
such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes, but
not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with
the provisions of the articles of incorporation or the by-
laws, to the extent that the articles of incorporation or the
 by-laws, determine the distributive rights of members, or
any class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed to such
persons, societies, organizations or corporations, whether
or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter. (n)
 Non-stock corporations with 4Billion funds, may it be
distributed for and among its members?
- Section 94 number 3 provides:
3. Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar
purposes, but not held upon a condition requiring return,
transfer or conveyance by reason of the dissolution, shall
be transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
- If there is no distributive agreement then they may do so
through a plan of distribution under section 95
Section 95. Plan of distribution of assets. - A
plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by majority vote,
adopt a resolution recommending a plan of distribution
and directing the submission thereof to a vote at a regular
or special meeting of members having voting rights.
Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and
place of such meeting shall be given to each member
entitled to vote, within the time and in the manner
provided in this Code for the giving of notice of meetings
to members. Such plan of distribution shall be adopted
upon approval of at least two-thirds (2/3) of the members
having voting rights present or represented by proxy at
such meeting. (n)
CLOSE CORPORATIONS
 Section 96. Definition and applicability of Title. - A close
corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding
twenty (20); (2) all the issued stock of all classes shall
be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or
make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close
corporation within the meaning of this Code.
- Between and among themselves, they feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you cannot be
a stockholder
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not publicly
offered
- 3 qualifying conditions must be contained in the articles
of incorporation, to be considered as a close corporation, if
not, it will not be considered as such and will be governed
by the general provisions of the code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3 qualifying
provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in
management
- Combination of the corporation and partnership type of
business
 May any type of corporation, be organized as such close
corporation?
- No, the 3 qualifying conditions must be present
 What if 2/3 of the outstanding capital stock is owned by
another corporation which is also a close corporation, will
it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the voting
stocks of a close corporation is also owned by a close
corporation. It must be “voting” stocks
- Even if another corporation owns or controls 2/3 of the
voting stocks of a close corporation, the latter may still be
considered as such close corporation if the corporation
owning or controlling the shares is also a close
corporation.
“Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close
corporation within the meaning of this Code.”
 What kind of corporations cannot be a close corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
 2. For a classification of directors into one or more
classes, each of whom may be voted for and elected solely
by a particular class of stock; and
3. For a greater quorum or voting requirements in
meetings of stockholders or directors than those provided
in this Code.
 After classification what then?
- After classification, qualification and then restriction as
provided for under the 3 qualifying conditions in section
96
 Cumulative voting is restricted in close corporations if
will be elected solely by a particular class
 In a close corporation, the articles of incorporation may
provide for a greater quorum and voting requirement in
meetings of both stockholders or directors to increase the
veto power of minority stockholders, unlike in a stock
corporation wherein only directors meetings may provide
for greater quorum requirement and in stockholders
meeting which may not be altered or increased, as provide
for in section 25, following the doctrine of limited capacity
 The articles of a close corporation may likewise provide
that the business of the corporation shall be managed by
the stockholders rather than by the board of directors.
However the same must contain the continuing provisions
required in paragraph 2 of section 97, that is:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors; and;
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
 Liability of stockholders acting as directors in a close
corporation are more extensive since they are personally
liable for corporate torts unless the corporation has
obtained a reasonable adequate liability insurance, unlike
a ordinary stock corporation, wherein directors thereof are
only liable for corporate torts only if they have been
negligent or acted fraudulently in the performance of their
functions.
 Restrictions
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear in the
articles of incorporation, the by-laws and the certificate of
stocks. Otherwise, the same shall not be binding on any
purchaser thereof in good faith
 What if the stockholders do not want to exercise their
right or option to purchase may it be sold to any person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on transfer of
shares. - Restrictions on the right to transfer shares must
appear in the articles of incorporation and in the by-laws
as well as in the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof in good
faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the
option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation
fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any
third person.
o ordinary stock corporations are liable only if acted in Bad
faith, fraud or negligence in performance of duty
 What if there are already 20 stockholders and they want
to add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to admit
because it breaches the qualifying conditions
 Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or instead of
consenting they decide to amend their articles of
incorporation
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
becomes in excess of 20
o Unless all the stockholders consent they “may”
 What if the other stockholders object to register? What
will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is mutual
restitution
 How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his
shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover the
debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing stockholder,
unlike in an ordinary stockholder where there is none,
they may only do so in the exercise of appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities and
Exchange Commission, 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.
 Agreements may also be entered in a close corporation
<sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall be
managed
 Board resolution
- Ordinary stock corporations- sit and act as a body at a
duly constituted meeting, they may do so by virtue of the
E-Commerce Act through teleconference or video
conference
 Exception to the rule: other officers may be directly
appointed and hired by the stockholders
 Close corporations may validly act even without a meeting
provided the conditions are obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the by-laws
provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in
writing; or
3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
4. All the directors have express or implied knowledge of
the action in question and none of them makes prompt
objection thereto in writing.
 Pre-emptive rights in a close corporation is absolute
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 reissuance of treasury shares, whether for
money, property or personal services, or in payment of
corporate debts, unless the articles of incorporation
provide otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a close corporation,
otherwise it will not be considered as close
 In a close corporation the pre-emptive rights is broadened
to include all issues without exception unless denied or
limited by the articles of incorporation
 Section 39 is the governing provision concerning rights of
the stockholder in an ordinary stock corporation and it
may be denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues of shares
whether money, property or previously incurred
indebtedness.
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided, That
such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
 Are treasury shares covered in the exercise of pre-emptive
rights in ordinary stock corporations?
 As regards amendments
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting
requirement stated in said articles of incorporation shall
not be valid or effective unless approved by the affirmative
vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such
greater proportion of shares as may be specifically
provided in the articles of incorporation for amending,
deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
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 directors or stockholders are so divided respecting
the management of the corporation's business and affairs
that the votes required for any corporate action cannot be
obtained, with the consequence that the business and
affairs of the corporation can no longer be conducted to
the advantage of the stockholders generally, the Securities
and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
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 provision
contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) 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 corporation or its board of
directors, stockholders, officers, or other persons party to
the action; (4) requiring the purchase at their fair value of
shares of any stockholder, either by the corporation
regardless of the availability of unrestricted retained
earnings in its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the
corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial
person who is neither a stockholder nor 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 provisional director
is not a receiver of the corporation and does not have the
title and powers of a custodian or receiver. A provisional
director shall have all the rights and powers of a duly
elected director of the corporation, including the right to
notice of and to vote at meetings of directors, until such
 time as he shall be removed by order of the Commission management to them
or by all the stockholders. His compensation shall be rather than a Board of
determined by agreement between him and the Director
corporation subject to approval of the Commission, which
may fix his compensation in the absence of agreement or
in the event of disagreement between the provisional 6. Those active in Directors are liable for
director and the corporation. management are torts only if they have
personally liable for acted negligently or
corporate torts unless the fraudulently
- Powers of the SEC in intra-corporate concerns has been corporation has obtained
transferred to the proper commercial courts an adequate liability
- Prohibit, even if acting in good faith insurance
- Provisional director appointed by the court
- Requiring the purchase, irrespective of unrestricted
retained earnings 7. Directors can validly act Directors must, as a rule,
- The provision of the law above-quoted gives the SEC a even without a meeting act as a body at a duly
very wide discretion in respect to management of a close constituted meeting
corporation in the event of a deadlock. It may: 8. Agreements between Not valid and binding since
stockholders regarding the stockholders’ agreement
1. Cancel or alter any provision in the articles of operations of the business cannot limit the discretion
incorporation, by-laws or any stockholders agreement can validly be made of the Board to manage
2. Cancel, alter or enjoin any resolution or other act of the corporate affairs
corporation or its board of directors, stockholders or 9. To the extent that Ordinarily, no such
officers directors may be classified classification and no
3. Prohibit any act of the corporation or its board of into one or more classes restrictions on cumulative
directors, stockholders or officers or other persons party and to be voted solely by a voting
to the action; particular class of stock,
4. Requiring the purchase of the par value of the shares of cumulative voting may, in
any stockholders, either by the corporation regardless of effect, be restricted
availability of unrestricted earnings, or by the other
shareholders,
5. Appointment of a provisional director 10. The articles of Officers are elected by the
6. Dissolving the corporation; or incorporation may provide Board of Directors
7. Other relief as the circumstances may warrant. that all officers shall be
elected or appointed by the
stockholders
 Section 105

11. It may provide for Although the articles of

- Dishonesty is a ground for dissolution of a close greater quorum and voting incorporation or by-laws
corporation requirements in meetings may provide for greater
- Even one stockholder may petition for dissolution of stockholders and quorum and voting
directors requirements in directors’
o when there is a relief available, dissolution would not be meeting under section 25,
available in an ordinary corporation those for stockholders’
meeting cannot generally
be altered
CLOSE CORPORATION ORDINARY STOCK 12. Restriction on transfer of Valid and binding if
CORPORATION shares should be indicated indicated in the articles of
1. The number of No limitation as to number in the articles of incorporation and stock
stockholders cannot of shareholder incorporation, by-laws and certificates
exceed 20 stock certificates

2. To the extent that all Maximum number of 13. Pre-emptive rights of Pre-emptive rights may be
stockholders can be directors is 15 stockholders is broader as denied as provided for in
deemed directors, the it include all issues section 39
number of directors can without exception
effectively be more than 15

14. A stockholder may Unless he sells his shares,

3. Shares of stock are Generally no restriction on withdraw and compel the a stockholder cannot get
subject to specified transfer of shares corporation to purchase back his investment nor
restrictions his shares for any reason compel the corporation to
with the limitation only buy his shares except in
4. Shares of stock are No prohibition that the corporation has the exercise of his
prohibited from being sufficient assets to cover appraisal right
listed in the stock its liabilities exclusive of
exchange or offered for sale capital stock
to the public
15. The proper forum may Courts cannot interfere I
5. Stockholders may take Management is lodged in interfere in the the business judgment of
an active part in corporate the Board of Directors management of a close the directors/stockholders
management by vesting corporation in case of “BUSINESS JUDGMENT
deadlocks under Section RULE”
 104, even of the incorporated within ninety (90) days under the provisions
directors/stockholders are of the Corporation Code and must, perforce, comply with
acting in good faith the requirements and procedure laid down there under.
Their failure to so will not immune the educational
institution from suit as a corporation. (Chiang Kai Siek
16. Any stockholder may Dissolution may be had Case)
petition the SEC for only on the grounds - Favorable recommendation of government agency involved
corporate dissolution on provided by the provisions
grounds among others, of the Code on dissolution
provides for in section 105 and P.D. 902-A, as  Two types of educational corporations
amended
- Certificate of completion in the academic field
- Vocational and technical one’s

o Recommendation of DECS if certificate of completion in

Manuel Dulay Enterprises vs. CA the academic field

- What was the position of Manuel Dulay here? President,  How is the governing board of an educational institution
General Manager and Treasurer instituted?
- Cannot act both as president and treasurer at the same
time
- Since it is a close corporation owned by the family of - Non-stock- multiples of 5 only (example: 5,10,15)
Manuel Dulay, save and except the secretary, it should be - Stock- can be anywhere between 5 to 15
governed by Title XII
- Petitioner is classified as a close corporation and  Can they consist of 7 or 9 members?
consequently a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, - Yes, if stock
a corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed  Can they be incorporated also as non-stock?
ratified by the absent director unless the latter promptly
files his written objection with the secretary of the
corporation after having knowledge of the meeting which, - Yes
in this case, petitioner Virgilio Dulay failed to do. - B.P. 232 allows the organization of an educational
- Virgilio Dulay is a signatory witness, he knows very well institution that is stock corporation, only if they do not
about the deed of absolute sale, he is estopped issue a certificate of completion in the academic field

Naguiat vs. NLRC  Qualifications and disqualifications of the membership in

- Section 100 par. 5. To the extent that the stockholders
are actively engaged in the management or operation of
the business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall
be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability
insurance.
 Family corporations is not automatically a close
corporation the 3 qualifying conditions must be present.
SPECIAL CORPORATIONS
 2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
 What provision governs educational corporations?
Section 106. Incorporation. - Educational
corporations shall be governed by special laws and by the
general provisions of this Code. (n)
- Special laws like they Education Act of the Philippines
- These institutions of learning, once recognized by the
government as such are mandated by law to be
the board of an educational corporation
- Educational corporations are governed by special laws
and general provisions, hence if there is no provision in
the special law, you go back to section 25 and 27 of the
general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional qualifications and
disqualifications
Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident
and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person,
except that no one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by law
and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees
as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of
 officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)
Section 27. Disqualification of directors, trustees
or officers. - No person convicted by final judgment of an
offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
 Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards, shall
be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of
the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino equity
participation in all educational institutions. The control
and administration of educational institutions shall be
vested in citizens of the Philippines.
No educational institution shall be established exclusively
for aliens and no group of aliens shall comprise more than
one-third of the enrollment in any school. The provisions
of this sub section shall not apply to schools established
for foreign diplomatic personnel and their dependents
and, unless otherwise provided by law, for other foreign
temporary residents.
- Management is left solely to citizens of the Philippines
- Board of Directors manages the corporate affairs,
foreigners cannot therefore be elected in the board
- Exceptions are, mission boards and religious orders,
which may have a governing board consisting of foreigners
 Term of office of governing board in an educational
institutions
- Can serve a term of 5 years. If that be the case, 1/5 of
their number shall expire every year
 Non-stock or stock, can they serve for a 1 year term only?
- Yes, the articles of incorporation may provide that it be 1
year only
 What are these religious corporations spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor in some
particular station, who are incorporated by law in order to
give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural
persons they could not have had
 May a corporation be organized by less than 5 natural
persons?
- General rule, 5 to 15 natural persons(except cooperatives
and corporations primarily organized to hold equities in
rural banks and may rightfully become incorporators
thereof)
- Exception, corporation sole, consist of only one person
 May any person form or organize a corporation sole?
- No, not any person can form a corporation sole, section
110 provides:
Section 110. Corporation sole. - For the purpose
of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination,
sect or church, a corporation sole may be formed by the
chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect or
church. (154a)
 Is it required to file the articles of incorporation in the
SEC?
- Yes
 What should be contained in the articles of incorporation?
- Section 111 and section 112 provides for the contents and
procedures
Section 111. Articles of incorporation. - In order
to become a corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church must file with the
Securities and Exchange Commission articles of
incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and do
not forbid it;
3. That as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, he is charged with the
administration of the temporalities and the management
of the affairs, estate and properties of his religious
denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister, rabbi of
presiding elder is required to be filled, according to the
rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation
sole is to be established and located, which place must be
within the Philippines.
The articles of incorporation may include any
other provision not contrary to law for the regulation of
the affairs of the corporation. (n)
 Section 112. Submission of the articles of
incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied by a copy of
the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly certified to be
correct by any notary public.
From and after the filing with the Securities and
Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become a
corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief
archbishop, bishop, priest, minister, rabbi or presiding
elder shall be held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit of his
religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages
and cemeteries thereof. (n)
application for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of
the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the
rules, regulations and discipline of the religious
denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate
the method of acquiring, holding, selling and mortgaging
real estate and personal property, such rules, regulations
and discipline shall control, and the intervention of the
courts shall not be necessary. (159a)
 Since a corporation sole is consists only of one person,
will the registration of the property in the name of the
corporation sole vest unto the head thereof the ownership
of the property?
- No, it will not vest unto the head, the head is acting
merely as a guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land
Reg. Comm, et al.

 Is it required to indicate its terms of execution? Why not? - Act only as a guardian
- Ownership devolves upon the congregation or religious
denomination
- Not required because they are supposed to exist in
- A corporation consists of one person only and his
perpetuity
successors (who will always be one at a time, in some
- However, it does not mean that it shall continue to exist
particular station), who are incorporated by law in order
forever, it merely means that it has the capacity of
to give them some legal capacities and advantages,
continuous existence during a particular period until
particularly that of perpetuity, which in their natural
dissolved in accordance with law
persons they could not have had
- Roman Catholic Church has no nationality and that the
 When will it acquire judicial personality? How do you framers of the Constitution, as will be hereunder
compare this to other types of corporation? explained, did not have in mind the religious corporations
sole when they provided that 60 percent of the capital
thereof be owned by Filipino citizens.
- After the filing the verified articles of incorporation along
with the documents required in Section 112 with the SEC,
immediately becomes endowed with corporate personality, Director of Lands vs. CA
this serves as an exception to the rule that a corporation
acquires juridical personality only upon the issuance of a
- Alienable public land is converted into private land when
certificate of incorporation by the said government agency.
the same has been openly, continuously and exclusively
- Upon filing of verified articles of incorporation with the
in possession of the property as concept of an owner for
SEC, will not require the approval of SEC
30 years, automatically that is

 A corporation sole is possessed with the same power,

Republic of the Philippines vs. IAC
rights and privileges, to own, acquire and hold or convey
properties like any other corporation? True or False
- Determination of the character of the land should be in
mind
- False, they have the same power rights and privileges, but
- If they still form part of public domain they cannot be
when it comes to alienation and acquisition, it must
owned, but if they are converted into private land, the
possess a court order, however when there is a regulated
constitutional prohibition will not apply
method, a court order may be dispensed with <sec. 113>

 If there is vacancy who will fill up the same? What if there

Section 113. Acquisition and alienation of
is none, what must the successor do?
property. - Any corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes, and may - According to section 114:
receive bequests or gifts for such purposes. Such
corporation may sell or mortgage real property held by it
Section 114. Filling of vacancies. - The
by obtaining an order for that purpose from the Court of
successors in office of any chief archbishop, bishop,
First Instance of the province where the property is
priest, minister, rabbi or presiding elder in a corporation
situated upon proof made to the satisfaction of the court
sole shall become the corporation sole on their accession
that notice of the application for leave to sell or mortgage
to office and shall be permitted to transact business as
has been given by publication or otherwise in such
such on the filing with the Securities and Exchange
manner and for such time as said court may have
Commission of a copy of their commission, certificate of
directed, and that it is to the interest of the corporation
that leave to sell or mortgage should be granted. The
 election, or letters of appointment, duly certified by any
notary public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or
discipline of the religious denomination, sect or church
represented by the corporation sole to administer the
temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall
exercise all the powers and authority of the corporation
sole during such vacancy. (158a)
 If a corporation exists in equity may it not be dissolved?
Section 115. Dissolution. - A corporation sole
may be dissolved and its affairs settled voluntarily by
submitting to the Securities and Exchange Commission a
verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation
by the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution
by the Securities and Exchange Commission, the
corporation shall cease to carry on its operations except
for the purpose of winding up its affairs. (n)
- While section 115 of the code provides for the process and
procedure for the dissolution of a corporate sole, there is
nothing in the law itself which would prohibit it from
amending its articles of incorporation
- It is believed that authorization for the dissolution by the
particular religious denomination, sect or church, as
required in sub-paragraph 3 of section 115 would still be
necessary in the case of amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term will not apply to a religious
corporation
 May a corporation sole be dissolved by judicial decree?
- General rule: No, because a corporation sole, is by its very
nature ecclesiastical and religious (doctrine of separation
of church and state)
- Exception: police power of the state, if its purpose is being
carried out and is instead being used for illegal purpose, it
may be so dissolved
 What are religious societies?
- Under common law, a religious society is a body of
persons associated together for the purpose of
maintaining religious worship.
 Is it also required to file its articles of incorporation to the
SEC?
- No <sec. 116> “may”
 What should be contained in the articles of incorporation?
- Section 116 provides:
Section 116. Religious societies. - Any religious
society or religious order, or any diocese, synod, or district
organization of any religious denomination, sect or
church, unless forbidden by the constitution, rules,
regulations, or discipline of the religious denomination,
sect or church of which it is a part, or by competent
authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for
the administration of its temporalities or for the
management of its affairs, properties and estate by filing
with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding
elder, secretary, or clerk or other member of such
religious society or religious order, or diocese, synod, or
district organization of the religious denomination, sect or
church, setting forth the following:
1. That the religious society or religious order, or diocese,
synod, or district organization is a religious organization
of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have
given their written consent or have voted to incorporate, at
a duly convened meeting of the body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district organization
desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or
discipline of the religious denomination, sect, or church of
which it forms a part;
4. That the religious society or religious order, or diocese,
synod, or district organization desires to incorporate for
the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation
is to be established and located, which place must be
within the Philippines; and
6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the
first year or such other period as may be prescribed by
the laws of the religious society or religious order, or of
the diocese, synod, or district organization, the board of
trustees to be not less than five (5) nor more than fifteen
(15). (160a)
 Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not require to
indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into existence without
SEC approval, section 19 will thus govern, Vested with
judicial capacity upon issuance of the certificate by the
SEC
o However it is not accurate according to atty. Ladia
because there are those that can issue for example
cooperatives- BUREAU OF COOPERATIVES which
register, home insurance guaranty corporation- HOME
OWNERS
 How may religious societies be dissolved?
- Go to the general rules governing dissolution, because the
rules under special corporations do not provide for such
rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate franchise and the
termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise (voluntary
dissolution);
3. By revocation of its corporate franchise (involuntary
dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life expires, the corporation
ceases to be a body corporate for purposes of continuing
the business for which it is organized. But it shall
nevertheless be continued as a body corporate for three
years after the time when it would have be dissolved, for
the purpose of prosecuting and defending suits by or
against it and for enabling it gradually to settle and close
its affairs to dispose of and convey its property and to
divide its assets. There is no need for the institution of a
proceeding for quo warranto to determine the time and
date of the dissolution of a corporation because the period
of corporate existence is provided in the articles of
incorporation. When such period expires and without any
extension having been made pursuant to law, the
corporation is dissolved automatically insofar as the
continuation of its business is concerned.
- The rights of the lessor and the lessee over the
improvements which the latter constructed on the leased
premises are governed by Article 1678 of the Civil Code.
The provision gives the lessee the right to remove the
improvements if the lessor chooses not to pay one half of
the value thereof. However, in the case at bar the law will
not apply because the parties herein have stipulated in
the contract their own terms and conditions concerning
the improvements before the termination of the lease.
Petitioner PNB as assignee of PBM succeeded to the
obligation of the latter under the contract of lease. It could
not possess rights more than what PBM had as lessee
under the contract. Hence, petitioner was duly bound to
remove the improvements before the expiration of the
period of lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its rights and
interest over the improvements on the leased premise.
o 3 modes of dissolution, 3 modes of voluntary dissolution
and 3 modes of liquidation and winding up-
FREQUENTLY ASKED IN THE FINALS
 What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are affected;
<sec.118>
2. Voluntary dissolution where creditors are affected; <sec.
119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are affected
<sec.118>
- The formal and procedural requirements necessary are
the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member either
by registered mail or personal delivery at least thirty (30)
days prior to the meeting (scheduled by the board for the
purpose of submitting the board action to dissolve the
corporation for approval of the stockholder or members.);
3. Publication of the notice of time, place and subject of the
meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said
corporation is located or in a newspaper of general
circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting duly
called for the purpose;
5. A copy of the resolution authorizing the dissolution must
be certified by a majority of the board of directors or
trustees and countersigned by the corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
 Should this be strictly complied with?
- Yes, compliance with the requirements and formalities
prescribed above is mandatory such that failure to comply
therewith will have no effect on the legal existence of the
corporation.
 Will dissolution be effective and valid by a mere resolution
of the BOD and stockholders?
- No, a mere resolution by the stockholders or the BOD of a
corporation to dissolve the same does not affect the
dissolution but that some other steps, administrative or
judicial is necessary. (Daguhoy Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it is
only through the State which can allow the termination of
its existence; without consent of the State, it will not be
dissolved.
 Voluntary dissolution where creditors are affected
<sec.119>
- By virtue of a petition, when there are creditors affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at least
2/3 of the outstanding capital stock or at least 2/3 of the
members at a meeting duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC signed
by a majority of its board of directors or trustees or other
 officers having the management of its affairs, verified by and after proper notice and hearing on the grounds
the president or secretary or one of its directors or provided by existing laws, rules and regulations. (n)
trustees, setting forth all claims and demands against it.
3. Issuance of an order by the SEC reciting the purpose of
- Dissolution is tantamount to the imposition of death
the petition and fixing the date on or before which
penalty
objections thereto may be filed by any person, which date
- Instead of dissolving the corporation, courts normally
shall not be less than thirty days nor more than sixty days
enjoin the further commission of the questioned act
after entry of the order.
- The relief of dissolution will be awarded only where no
4. Before such date, a copy of the order must be published
other remedy is available and it will not be allowed where
once a week for three (3) consecutive weeks in a
the rights of the stockholders can be, or are, protected in
newspaper of general circulation published in the city or
some other way (Republic vs. Bisaya Land Trans. Co. Inc.)
municipality where the principal office is situated or in a
newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks  What are the grounds for involuntary dissolution?
in three (3) public places in such city or municipality.
6. Upon five (5) days’ notice, given after the date on which
- It is commenced through a verified complaint or motu
the right to file objections has expired, the SEC shall hear
proprio by the proper courts
the petition and try any issue made by the objections
- Section 6 of PD 902-A provides for the grounds for
filed.
involuntary dissolution as follows:
7. Judgment dissolving the corporation and directing of its
assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such 1. Fraud in procuring its certificate of registration;
assets and pay the debts of the corporation. 2. Serious misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage to the
general public;
o The foregoing are also mandatory requirements
3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would
 Is the appointment of a receiver mandatory? amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5)
years;
- No, it is merely permissive or discretionary on the part of
5. Failure to file by-laws within the required period;
the court. The code uses the word “may”; the law intended
6. Failure to file required reports in appropriate forms as
to let the shareholders have the control of the assets of
determined by the Commission within the prescribed
the corporation upon dissolution and winding up.
period.
- The directors may also undertake liquidation and winding
up of its corporate affairs, and sound business judgment,
on how they will wind up - Other grounds are provided for in the corporation code
itself: among them are:
 Dissolution by shortening of corporate term <sec.120>
1. Violation of any provision of the Code under section 144;
2. In case of deadlock in a close corporation as provided for
- Will be valid upon approval of the SEC, unlike general
in section 105;
amendments, which will be deemed approved if not acted
3. In a close corporation, any acts of directors, officers or
upon by the SEC within 6 months from the date of filing
those in control of the corporation which is illegal or
for a cause not attributable to the corporation.
fraudulent or dishonest or oppressive or unfairly
- Shortening of the corporate term partakes the nature of
prejudicial to the corporation or any stockholder or
an amendment of the articles of incorporation. Section 16
whenever corporate assets are being misapplied or wasted
under general amendments allows “written assent” section
under section 105.
37 mandates that the vote must be cast at a duly
constituted meeting.
- Mere dishonesty is also a ground in a close corporation
- Other grounds can be found in other special laws like the
Section 120. Dissolution by shortening corporate
Securities Regulation Code and the General Banking Act
term. - A voluntary dissolution may be effected by
as well as the Insurance Code.
amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A
copy of the amended articles of incorporation shall be Government vs. Philippine Sugar Estate
submitted to the Securities and Exchange Commission in
accordance with this Code. Upon approval of the amended
- It is necessary in order to secure judicial foreclosure of
articles of incorporation of the expiration of the shortened
respondent’s charter to show a mis-user of its franchise
term, as the case may be, the corporation shall be deemed
justifying such a forfeiture
dissolved without any further proceedings, subject to the
- Object is to protect the public, and not to redress private
provisions of this Code on liquidation. (n)
grievances, the mis-user must be such as to work or
threaten a substantial injury to the public, or such as to
o Intra-corporate- special commercial courts amount to a violation of the fundamental condition of the
contract by which the franchise was granted and thus
defeat the purpose of the grant
 Another way of dissolving a corporation is through
- Courts proceed with extreme caution which has for their
involuntary dissolution
object the forfeiture of corporate franchise, and forfeiture
will not be allowed, except under express limitation, or for
Section 121. Involuntary dissolution. - A plain abuse of power by which the corporation fails to
corporation may be dissolved by the Securities and fulfill the design and purpose of its organization. But
Exchange Commission upon filing of a verified complaint when the abuse or violation constitutes or threatens a
substantial injury to the public or such as to amount to a
 violation of the fundamental conditions of its charter, or
its conduct is characterized by obduracy or pertinacity in
contempt of law, dissolution will be granted
- Did the court dissolve the corporation? No, it did not, it
granted the corporation 6 months to cease and desist the
performance of the questioned act otherwise it will be
dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the corporation violated
the law by holding on the property beyond that provide for
by law, the second is that the corporation undertook the
management f petitioners belonging to delinquent
shareholders of the association, and lastly that the by-law
provision, which empowers the BD to cancel shares and to
return to the owners thereof the balance returning from
the liquidation
 Compare to Philippine Sugar Estate, wherein the court
ruled conditional dissolution. Why decree conditional
dissolution in one and not in the other case?
- Because in El Hogar the government was at fault, the
government wasn’t able to issue the certificate of title on
time
- When the case was instituted, El Hogar was already able
to dispose the properties in question, in Philippine Sugar
Estate it was still the holding the properties in order to
enrich itself at the expense of the taxpayers
Republic vs. Security Credit and Acceptance Corp. et al.
- The corporation here is a lending institution and not a
banking institution
- Defendant corporation violated the law because before a
corporation may engage into a banking activity it must
first obtain a secondary franchise from the Central Bank
- Defendant corporation threatens substantial injury to the
general public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed where
the rights of the stockholders can be, or are, protected in
some other way
- Misuse and misapplication of the funds and assets of the
respondent were committed particularly by the corporate
officers, where they can instead be held personally liable
- Since there is another remedy available dissolution is not
warranted
 Assuming the above stated corporation is a close
corporation, would the court decree otherwise?
- Yes, because in a close corporation, mere dishonesty is a
ground for the dissolution
- Can even be dissolved by petition of only one stockholder
on the grounds stated in the code < sec. 105>
Financing Corporation of the Philippines vs. Teodoro
- Minority stockholders may not ask for the dissolution of a
corporation in private suits and that such actions should
be brought by the Government through its legal officers,
except in cases where the intervention of the State,
for one reason or another, cannot be obtained, as
when the State is not interested because the
complaint is strictly a matter between the
stockholders and does not involve, in the opinion of
the legal officer of the Government, any of the acts or
omissions warranting quo warranto proceeding , in
which minority stockholders are entitled to have such
dissolution. It should be exercised if necessary in order
not to entirely ignore and disregard the rights of said
minority stockholders, especially when said minority
stockholders are unable to obtain redress and protection
of their rights within the corporation itself. Stockholders
should not be left without recourse
 Present set up
- Any stockholder or member of a corporation can institute
a dissolution proceeding against his own corporation
before the proper forum
- Special Commercial Courts, shall hear and decide intra-
corporate disputes
 May a corporation ask for dissolution of the corporation
when there is no prejudice to the general public?
- Yes, in a close corporation, a petition for the dissolution of
the corporation may be instituted by any one individual
shareholder on the ground, even by mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only terminates its
primary franchise to be a corporation, but generally
prevents it from further exercising other or secondary
franchises which have been conferred to its. It terminates
its power to enter into contracts or t o continue the
business as a going concern.
- Based on this general rule, the Supreme Court held that a
corporation, whose corporate life expired, cannot lawfully
pursue the business for which it was organized. It cannot
apply for a new certificate or a secondary franchise for it
is incapable of receiving a grant. Neither can it enforce a
contract executed prior its dissolution for the purpose of
continuing the business of its organization.
- In general the rights and liabilities of the corporation are
not extinguished by its dissolution.
Section 145. Amendment or repeal. - No right or
remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.
(n)
Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an
activity that was illegal
- A corporation where the corporate life has expired it
cannot lawfully pursue the business for which it was
organized.
- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply for a
new certificate or a secondary franchise for it is incapable
of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a medal
for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It was not
even a corporation de facto. And then, there is no
application subscribed by the new corporation
- And yet as stated, the new corporation has not filed any
application for certificate of public convenience in Sabang,
and has not published such application.
Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would convey the
idea clearly manifested in the limitation “but not for the
purpose of continuing the business for which it was
established,” that the 3-year period allowed by the law is
only for the purpose of winding up its affairs.
Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court applied
the constitutional provision
- Cannot be read as permitting to destroy the substantive
rights
- Such would collide with the non-impairment of contracts
clause of the constitution
- Complainants will have the right to follow the assets of the
corporation in the hands of SRA or any other agency for
that matter
 After dissolution what next?
- Liquidation and winding up should follow
 What is the definition of liquidation and winding up?
- Collection of all corporate assets, the payments of all its
debts and settlement of its obligations and the ultimate
distribution of the corporate assets, if any of it remains, to
all stockholders in accordance with their proportionate
stockholdings in the corporation or in accordance with
their respective contracts of subscription.
 Preference upon liquidation
- If there are preferred shares, the preference granted to
such should be complied with
- Preferred shares may give the holder thereof, preference
only in the dividends but also in the distribution of
corporate assets upon liquidation or termination of the
corporate existence. If such is the intent, the contract of
subscription must so indicate lest they are placed on
equal footing with common shareholders
- Preference may be participating or non-participating
 Dissolved corporations are granted a period of 3 years to
liquidate
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey its property
and to distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From
and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest
which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any
asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets
are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the 3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a corporation
and although there is no law authorizing it, neither is
there anything that prohibits the BOD from undertaking
the same
- If this method is resorted to, the board will only have a
period of 3 years to finish its task of liquidation
- Claims for or against the corporate entity not filed within
the period will become unenforceable as there exist no
corporate entity against which they can be enforced
- Actions pending for or against the corporation when the 3
year period expires, are abated since after the period, the
corporation ceases for all intents and purposes and is no
longer capable of suing or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate assets to
a trustees who will take charge of liquidation
- If this method is used, the three year period limitation
imposed by section 122 will not apply provided the
designation of the trustee is made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum on
petition or motu proprio upon the dissolution of the
corporation
- The appointment of a receiver is, however, permissive
rather than mandatory and the law tends to recognize
that in cases of voluntary dissolution there is no occasion
for the appointment of a receiver except under special
circumstances and upon proper showing
- If a receiver is appointed, the 3 year period fixed by law
within which to complete the task of liquidation will not
likewise apply because the dissolved corporation is
substituted by the receiver who may sue or be sued even
after that period
o Mere appointment of a receiver without anything more
does imply in the dissolution of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation when the 3
year period expires, are abated since after that period, the
corporation ceases for all intents and purposes and is no
longer capable of suing or being sued
- May be continued by the trustee provided done within the
3 year period
- Should the corporation, therefore, finds it difficult to
finish its liquidation, it may, at any time during the three
year period, convey all its assets and receivables to a
trustee to prosecute and defend suits by or against the
corporation begun before the expiration of said period
- The effect of the conveyance is to make the trustees the
legal owners of the property conveyed, subject to the
beneficial interest therein of creditors and stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is dissolved and
the liquidation of the assets is placed in the hands of
receiver or assignee, the period of 3 years prescribed by
law is not applicable and the assignee may institute all
actions leading to the liquidation of the corporation even
after the expiration of 3 years.
- If the corporation carries out the liquidation of its assets
through its own officers and continues and defends the
actions brought by or against it, its existence shall
terminate at the end of three years from the time of
dissolution; but if a receiver or assignee is appointed, with
or without a transfer of its properties within 3 years, the
legal interest passes to the assignee, the beneficial
interest remaining in the members, stockholders,
creditors and other interested persons and said assignee
may bring an action, prosecute that which has already
been commenced for the benefit of the corporation, or
defend the latter against any other action already
instituted or which may be instituted even outside of the
period of three years fixed for the offices of the
corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can continue
prosecuting suit even beyond the 3 year period fixed by
law because he becomes the legal owner of the rights,
assets and properties conveyed to him
Gelano vs. CA
- “Trustee” as used in the corporation statute must be
understood in its general concept which could include the
counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to
a trustee upon its dissolution is more for the protection of
its creditors and stockholders. Debtors like the petitioners
herein may not take advantage of the failure of the
corporation to transfer its assets to a trustee, assuming it
has any to transfer which petitioner has failed to show, in
the first place. To sustain petitioners’ contention would be
to allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.
- The counsel who prosecuted and defended the interest of
the corporation may be considered as a “trustee” at least
with respect to the matter in litigation only
 May a corporation that is already dissolved, transfer and
assign its assets and properties to a new corporation
which will continue the business of the dissolved one?
- Yes, provided all the stockholders gave their consent
(Chung Ka Bio vs. IAC)
Republic vs. Marsman Development Company & Chung
Ka Bio vs. IAC
- During the three year period granted to a corporation to
liquidate or wind up its affairs, the BOD is not normally
permitted to undertake any activity outside the usual
liquidation of the corporation. There is, however, nothing
to prevent the stockholders from conveying their
respective shareholdings toward the creation of a new
corporation to continue the business of the old. This is
because winding up is the sole activity of the dissolved
corporation that does not intend to incorporate a new. If it
does, however, it is not unlawful for the old board of
directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended to
be created as long as the stockholders have given their
consent (Republic vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved corporation
that does not intend to incorporate anew. If it does,
however, it is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be created
as long as the stockholders have given their consent
(Chung Ka Bio vs. IAC)
 What happens to the remaining assets and properties of
the dissolved corporation if liquidation and winding up as
provided in section 122 is not complied with, as a result of
which the 3 year period has elapsed
- If the three year extended life has expired without a
trustee or receiver having been expressly designated by
the corporation within that period, the board of directors o
trustees itself, following the rationale of the Supreme
Court’s decision in Gelano vs. CA may be permitted to do
so continue as” trustees” by legal implication to complete
the liquidation. Still in the absence of a BOD or BOT,
those having any pecuniary interest in the assets,
including not only the shareholders but likewise the
creditors of the corporation, acting for and in its behalf,
might make proper representations with the SEC, which
has primary and sufficiently broad jurisdiction in matters
of this nature, for working out a final settlement of the
corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of the Supreme Court
in the case of Clemente vs. CA is wrong, opinion is further
discussed after the Clemente Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the rights and
liabilities of such entity or those of its owners and
creditors. If the three year extended life has expired
without a trustee or receiver having been expressly
designated by the corporation within that period, the
board of directors o trustees itself, following the rationale
of the Supreme Court’s decision in Gelano vs. CA may be
permitted to do so continue as” trustees” by legal
implication to complete the liquidation. Still in the
absence of a BOD or BOT, those having any pecuniary
 interest in the assets, including not only the shareholders
but likewise the creditors of the corporation, acting for
and in its behalf, might make proper representations with
the SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a
final settlement of the corporate concerns
o the ruling is wrong according to atty. Ladia
 According to atty Ladia: What happens to a corporation
that is already dissolved, that has not been able to
appoint a trustee with in the 3 year period?
- a corporation dissolved which failed to exercise its rights
granted in section 122 after the 3 year period has elapsed,
ceases to exist for all intents and purposes, it can no
longer sue or be sued
- according to 122 of the code, the property should be
escheated, accordingly:
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey its property
and to distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From
and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest
which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall
be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
- Section 123. Definition and rights of foreign corporations.
- For the purposes of this Code, a foreign corporation is
one formed, organized or existing under any laws other
than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its
own country or state. It shall have the right to transact
business in the Philippines after it shall have obtained a
license to transact business in this country in accordance
with this Code and a certificate of authority from the
appropriate government agency. (n)
 What if the law of the state of the foreign corporation does
not allow Filipino citizens to do business in their country?
- The phrase “and whose laws allow Filipino citizens and
corporations to do business in its own country or state” is
not, however, an accurate inclusion in the definition as ay
corporation registered or organized under the laws of
another state is necessarily a foreign corporation whether
or not the state of its incorporation allow Filipino citizens
or corporations to do business in that forum.
- The said phrase was inserted by the framers of the law
only as a condition precedent to the grant of a license of a
foreign corporation to do business in the Philippines.
 Composed of 100% Americans; organized under the laws
other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation irrespective of
the nationality
- Exception: control test would apply in determining the
corporate nationality, i.e., the citizenship of the controlling
stockholders determines the nationality of the corporation
 If a foreign corporation wants to transact business in the
Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a license. - A foreign
corporation applying for a license to transact business in
the Philippines shall submit to the Securities and
Exchange Commission a copy of its articles of
incorporation and by-laws, certified in accordance with
law, and their translation to an official language of the
Philippines, if necessary. The application shall be under
oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or state
of incorporation;
3. The name and address of its resident agent authorized
to accept summons and process in all legal proceedings
and, pending the establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are
those specifically stated in the certificate of authority
issued by the appropriate government agency;
 6. The names and addresses of the present directors and
officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of
shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or
appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact business in
the Philippines, and to determine and assess the fees
payable.
Attached to the application for license shall be a
duly executed certificate under oath by the authorized
official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or state of
the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing
corporation in good standing. If such certificate is in a
foreign language, a translation thereof in English under
oath of the translator shall be attached thereto.
The application for a license to transact business
in the Philippines shall likewise be accompanied by a
statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction
of the Securities and Exchange Commission and other
governmental agency in the proper cases that the
applicant is solvent and in sound financial condition, and
setting forth the assets and liabilities of the corporation as
of the date not exceeding one (1) year immediately prior to
the filing of the application.
Foreign banking, financial and insurance
corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no
application for license to transact business in the
Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from
the appropriate government agency, whenever required by
law. (68a)
 Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the license, a
foreign corporation, except those engaged in foreign
banking or insurance, shall deposit with the SEC, for the
benefit of creditors, securities consisting of bonds or other
evidence of indebtedness of the Philippine government or
its political subdivision, or of government owned or
controlled corporation, shares of stock in “registered
enterprises” as this term is defined in R.A. 5186, shares of
stock in domestic insurance companies and banks or any
combination thereof with an actual market value of
100,000
- Additional securities may be required by the SEC if the
actual market value of the securities on deposit has
decreased by at least 10%. Section 126 of the code
provides:
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
Commission shall issue a license to the applicant to
transact business in the Philippines for the purpose or
purposes specified in such license. Upon issuance of the
license, such foreign corporation may commence to
transact business in the Philippines and continue to do so
for as long as it retains its authority to act as a
corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered,
revoked, suspended or annulled in accordance with this
Code or other special laws.
Within sixty (60) days after the issuance of the
license to transact business in the Philippines, the
license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors
of the licensee in the Philippines, securities satisfactory to
the Securities and Exchange Commission, consisting of
bonds or other evidence of indebtedness of the
Government of the Philippines, its political subdivisions
and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in
"registered enterprises" as this term is defined in Republic
Act No. 5186, shares of stock in domestic corporations
registered in the stock exchange, or shares of stock in
domestic insurance companies and banks, or any
combination of these kinds of securities, with an actual
market value of at least one hundred thousand
(P100,000.) pesos; Provided, however, That within six (6)
months after each fiscal year of the licensee, the
Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in
actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require deposit of
additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%)
percent of their actual market value at the time they were
deposited. The Securities and Exchange Commission may
at its discretion release part of the additional securities
deposited with it if the gross income of the licensee has
decreased, or if the actual market value of the total
securities on deposit has increased, by more than ten
(10%) percent of the actual market value of the securities
at the time they were deposited. The Securities and
Exchange Commission may, from time to time, allow the
licensee to substitute other securities for those already on
deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the
securities 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
application therefor and upon proof to the satisfaction of
the Securities and Exchange Commission that the
licensee has no liability to Philippine residents, including
the Government of the Republic of the Philippines. (n)
 Other than section 125 and 126. What other requirements
are set under Philippine Law before a foreign corporation
may transact business in the Philippines
- Yes. A Resident agent is required. As a condition
precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation is
 required to designate its resident agent on whom  May a partnership be appointed as a resident agent?
summons and other legal processes may be served in all
actions or legal proceedings against such corporation
- Yes, domestic corporation taken in its general sense not
- Section 128 provides:
legal sense

Section 128. Resident agent; service of process. -

The Securities and Exchange Commission shall require as
a condition precedent to the issuance of the license to
transact business in the Philippines by any foreign
corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney
designating some person who must be a resident of the
Philippines, on whom any summons and other legal
processes may be served in all actions or other legal
proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted
and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office. Any
such foreign corporation shall likewise execute and file
with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper
authorities of said corporation, in form and substance as
follows:
"The (name of foreign corporation) does hereby
stipulate and agree, in consideration of its being granted
by the Securities and Exchange Commission a license to
transact business in the Philippines, that if at any time
said corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in the
Philippines on whom any summons or other legal
processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred
in the Philippines, service of any summons or other legal
process may be made upon the Securities and Exchange
Commission and that such service shall have the same
force and effect as if made upon the duly-authorized
officers of the corporation at its home office."
Whenever such service of summons or other
process shall be made upon the Securities and Exchange
Commission, the Commission shall, within ten (10) days
thereafter, transmit by mail a copy of such summons or
other legal process to the corporation at its home or
principal office. The sending of such copy by the
Commission shall be necessary part of and shall complete
such service. All expenses incurred by the Commission for
such service shall be paid in advance by the party at
whose instance the service is made.
In case of a change of address of the resident
agent, it shall be his or its duty to immediately notify in
writing the Securities and Exchange Commission of the
new address. (72a; and n)
- The necessity of the appointment of a resident agent is
only for the purpose of receiving summons and other legal
processes in any legal action or proceeding against the
foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
Section 127. Who may be a resident agent. - A
resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting
business in the Philippines: Provided, That in the case of
an individual, he must be of good moral character and of
sound financial standing. (n)
 If there is a resident agent appointed. May summons be
served to any officers of the corporation?
- No, if there is a resident agent, the designation is
exclusive and service must be made only to the resident
agent or else the service is without force and effect unless
made to him
- Thus, while the law allows service upon the SEC or any of
its officers or agents within the Philippines
- The two modes may become effective only if the foreign
corporation failed or neglected to designate such a person
or an agent
- Summons must be made only to resident agent except
when there is no resident agent appointed
- Where such foreign corporation actually doing business
here has not applied for a license to do and has not
designated an agent to receive summons, then service of
summons on it will be made pursuant to the provisions of
the rules of court. If such foreign corporation has a license
to do business, then summons to it will be served on the
agent designated by it for the purpose, or otherwise in
accordance with the Corporation Law (General Corporation
of the Philippines vs. Union Insurance Soc. Of Canton Ltd.)
 If the foreign corporation conducts business in the
Philippines without the license requirement. What is the
effect?
- Section 133 provides:
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 permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of
the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of action
recognized under Philippine laws. (69a)
- if they do so, the responsible officers may be subjected to
the penal sanctions provided for in section 144 of the
code, which may either be fine or imprisonment
 What if it is not doing business without a license?
- If it is not transacting business in the Philippines, even
without a license, it can sue before the Philippine Courts
 The general rule is that “it is not the lack of required
license but doing business without a license which bars a
foreign corporation form access to our courts.”
 Exception:
1. Foreign corporations can sue before the Philippine Courts
if the act or transaction involved is an “isolated
transaction” or the corporation is not seeking to enforce
any legal or contractual rights arising from, or growing
out of, any business which it has transacted in the
Philippines
2. Neither is a license required before a foreign corporation
may sue before the forum if the purpose of the suit is to
 protect its trademark, trade name, corporate name, commercial dealings and arrangements, and
reputation or goodwill; contemplates, to that extent, the performance of acts or
3. Or where it is based on a violation of the Revised Penal works or the exercise of some of the functions normally
Code; incident to, and in progressive prosecution of, the purpose
4. Or merely defending a suit filed against it and object of its organization
5. Or where a party is stopped to challenge the personality of - Whatever transaction the Philippine-American Drug Co.
the corporation by entering into a contract with it. had executed in view of the law, the Mentholatum Co. did
it itself. And the Mentholatum Co. being a foreign
corporation doing business in the Philippines without the
 Rules laid down by the SC
license required by section 68 of the Corporation Law, it
may not prosecute this action for violation of trade mark
A. As to whether or not B.
it As to whether or not it and unfair competition
can sue can be sued
 Why is foreign corporations barred access from our courts
A foreign corporation A foreign corporation if they do business without a license?
transacting or doing transacting business in
business in the the Philippines with the - Marshall-Wells Co. vs. Henry W. Elser and Co.
Philippines with a requisite license can be
license can sue before sued in the Philippine
Philippine Courts Courts Marshall-Wells Co. vs. Henry W. Elser and Co.
Subject to certain A foreign corporation
exceptions, a foreign transacting business in - The object of the statute was to subject the foreign
corporation doing the Philippines without a corporation doing business in the Philippines to the
business in the country license can be sued in jurisdiction of its courts. The object of the statute was not
without a license cannot Philippine Courts to prevent the foreign corporation from performing single
sue in Philippine Courts acts, but to prevent it from acquiring a domicile for the
If it is not transacting if it is not doing purpose of business without taking the steps necessary to
business in the business in the render it amenable to suit in local courts.
Philippines, even Philippines, it cannot be
without a license, it can sued in Philippine
sue before the Philippine Courts for lack of Bulakhidas vs. Navarro
Courts jurisdiction
- It is settled that if a foreign corporation is not engaged in
 business in the Philippines, it may not be denied the right
 A foreign corporation not doing business in the to file an action in Philippine courts for isolated
Philippines, may it be sued? transactions
- The object of section 68 and 69 of the Corporation law
was not to prevent the foreign corporation from
- If it is not transacting business in the country it cannot be performing single acts, but to prevent it from acquiring a
sued for lack of jurisdiction domicile for the purpose of business without taking the
steps necessary to render it amenable to suit in the local
 Is there any sanction that can be enforced to foreign courts. It was never the purpose of the Legislature to
corporations which are doing business without the exclude a foreign corporation which happens to obtain an
required license? isolated order for business from the Philippines, from
securing redress in the Philippine courts

- Penal sanctions under section 144

- Any violation of the code is subject to such penal
sanctions
- It must stated that the section is not applicable to a
 What would constitute doing business?
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose
and object of its organization (Mentholatum Co. Inc. vs.
Mangaliman)
The Swedish East Asia Co., Ltd. Vs. Manila Port Service
foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the petitioner
has been in the Philippines engaged in continuing
business or enterprise for which it was organized, when
the sixteen bundles were erroneously discharged in
manila, for it to be considered as transacting business in
the Philippines. The fact is that the bundles, the value of
which is sought to be recovered, were landed not as a
result of a business transaction, isolated or otherwise, but
due to a mistaken belief that they were part of the
shipment of forty similar bundles consigned to persons or
entities in the Philippines, there is no justification
therefore, for invoking the section

 There were 3 contracts entered into, how come they were

Mentholatum vs. Mangaliman
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction however,
is not merely incidental or casual but indicates the foreign
corporation’s intention to do other business in the
 Philippines, said single act or transaction constitutes
“doing” or “engaging in” or “transacting” business in the
Philippines
- In the case at bar, the transaction entered into by the
respondent with the petitioners are not a series of
commercial dealings which signify an intent on the part of
the respondent to do business in the Philippines but
constitute an isolated one which does not fall under the
category of “doing business.”
- The records show that the only reason why the
respondent entered into the second and third transactions
with the petitioner was because it wanted to recover the
loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction
and in order to give the latter a chance to make good on
their obligation. From these facts alone, it can be
deducted that in reality there was only one agreement
between the petitioners and the respondent.
- The three seemingly different transactions were entered
into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part of
the respondent to engage in a continuity of transactions
with petitioners which will categorize it as a foreign
corporation doing business in the Philippines
- 3 contracts, but according to the court was not doing
business in the Philippines
Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme Court
was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction however,
is not merely incidental or casual but indicates the foreign
corporation’s intention to do other business in the
Philippines, said single act or transaction constitutes
“doing” or “engaging in” or “transacting” business in the
Philippines
- In the instant case, the testimony of Atty. Pablo Ocampo,
that appellant was doing business in the Philippines
corroborated by no less than Nabuo Toshida, one of
appellant’s officers, that he was sent to the Philippines to
look into the operation of mines, thereby revealing the
defendant’s desire to continue engaging in business here,
after receiving the shipment of the scrap iron under
consideration, making the Philippines a base thereof.
- In such a case, the single act of transaction is not merely
incidental or casual, but is of such character as distinctly
to indicate a purpose on the part of the operations for the
conduct of a part of corporation’s ordinary business
 If a corporation appoints a distributor or a representative,
will it necessarily imply doing business in the country?
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- Appointment of a distributor or representative in the
Philippines, unless it has an independent status
(transacts and does business in its own name and for its
account and not of the foreign corporation)
- if that be the case the mere appointment of a distributor
will not constitute doing business
 How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner ASPAC
and the respondents show that there are provisions which
are highly restrictive in nature, such as to reduce
petitioner ASPAC to a mere extension or instrument of the
private respondents
- ITEC was doing business without a license, however
ASPAC is estopped
- by entering into the Representative Agreement” with ITEC,
petitioner is charge with knowledge that ITEC was not
licensed to engage in business activities in the country,
and is thus stopped from raising in defense such
incapacity of ITEC, having chosen to ignore or even
presumptively take advantage of the same
- In top-weld we ruled that a foreign corporation may be
exempted from the license requirements in order to
institute an action in our courts if its representative in the
country maintained an independent status during the
existence of the disputed contract. Petitioner is deemed to
have acceded to such independent character when it
entered into the Representative Agreement with ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal or
contract rights arising from, or growing out of any
business which it has transacted in the Philippine
Islands. The sole purpose of the action is to protect its
reputation, its corporate name, its goodwill, whenever that
reputation, corporate name or goodwill have through the
natural development of its trade, established themselves
- And it contends that its rights to the use of its corporate
and trade name, is a property right, a right in rem, which
may assert and protect against all the world, 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 personal, against trespass, or
conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but
extends to every market where the trader’s goods have
become known and identified by the use of the mark
General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business in
the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
favorably known in the Islands through the use therein of
its products bearing its corporate and trade name has a
legal right to maintain an action in the Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to “counteract the effects” of said
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts for
infringement of a mark or trade-name, for unfair
competition, or false designation of origin and false
description, “whether or not it has been licensed to do
business in the Philippines under Act Numbered Fourteen
hundred and fifty-nine, as amended, otherwise known as
Corporation Law, at the time it brings complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and
MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity Fair
Mills Inc. vs. T. Eaton Co. this court further said:
 “By the same token, the petitioner should be given the - How do you distinguish this case with Atlantic?
same treatment in the Philippines as we make available to - In Atlantic it dismissed the case, while in Olympia it did
our own citizens. We are obliged to assure to nationals of not
countries of the Union an effective protection against
unfair competition on the same way that they are
Time Inc. vs. Reyes
obligated to similarly protect Filipino Citizen and firms

- We fail to see how these doctrines can be a propos in the

- The ruling in the aforecited case is in consonance with the
case at bar, since the petitioner is not “maintaining any
Convention of the Union of Paris for the protection of
suit” but is merely defending one against itself; it did not
Industrial Property to which the Philippines became a
file any complaint but only a corollary defensive petition to
party. Article 8 thereof provides that a trade name shall be
prohibit the lower court from further proceeding with a
protected in all the countries of the Union without the
suit that it had no jurisdiction to entertain
obligation of filing or registration, whether or not it forms
part of the trademark
 What law govern foreign corporation doing and
transacting business in the Philippines with a license
Le Chemiste Lacoste vs. Fernandez

- Laws of the Republic of the Philippines save and except

- The French company may gain access to our courts, in
that would normally be those matters which concern its
the first place it was not doing business in the Philippines
formation, organization or dissolution, or those fixing the
- The marketing of its products in the Philippines is done
relationship, liabilities, responsibilities, or duties of the
through an exclusive distributor, Rustan Commercial
stockholders, members or officers of the foreign
Corporation. The latter is an independent entity which
corporation or their relations to each other.
buys and then markets not only products of the petitioner
- In effect, intra-corporate or internal matters not affecting
but also many other products bearing equally well-known
creditors or the public in general are governed not by
and established trademarks and trade-names
Philippine laws but the law under which the foreign
corporation was formed or organized
 Assuming Rustans had no independent status would the
SC grant Lacoste access to our courts?
Section 129. Law applicable. - Any foreign
corporation lawfully doing business in the Philippines
- Even if Lacoste did business in the Philippines it can shall be bound by all laws, rules and regulations
bring action because the case involves a violation of our applicable to domestic corporations of the same class,
penal code except such only as provide for the creation, formation,
- Such was a violation of article 189 of the RPC, if organization or dissolution of corporations or those which
prosecution follows after the completion of the preliminary fix the relations, liabilities, responsibilities, or duties of
investigation being conducted by the Special Prosecutor stockholders, members, or officers of corporations to each
the information shall be in the name of the People of the other or to the corporation. (73a)
Philippines and no longer the petitioner which is only an
aggrieved party since a criminal offense is essentially an
 Will the pre-emptive rights of a foreign corporation be
act against the State. It is the latter which is principally
governed by the same section of the code? Is the pre-
the injured party although there is a private right violated
emptive rights of a stockholder in a domestic corporation
- The records show that the goodwill and reputation of the
same as the pre-emptive of a stockholder of a foreign
petitioner’s products bearing the trademark Lacoste date
corporation.
back even before 1964 when Lacoste clothing apparels
were forst marketed in the Philippines. To allow
Hemandas to continue using the trademark Lacoste for - No
the simple reason that he was the first registrant in the
Supplemental Register of a trademark used in
M.E. Grey vs. Insular Lumber Company
international commerce and not belonging to him is to
render nugatory the very essence of the law on
trademarks and trade names - PNB vs. Gonzales, will this apply to a foreign corporation?
How do you distinguish this case from a Philippine law?
- Since it concerns the rights of stockholders it is the law of
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
New York that should govern

- The law denies to a foreign corporation the right to

 Is the license to do business of a foreign corporation
maintain suit unless it has previously complied with a
subject to suspension or revocation? What are the
certain requirement, then such compliance, or the fact
grounds?
that the suing corporation is exempt there from, becomes
a necessary averment in the complaint
- These are matters peculiarly within the knowledge of - Section 134 provides:
appellants alone, and it would be unfair to impose upon
appellee the burden of asserting and proving the contrary.
Section 134. Revocation of license. - Without
It is enough that foreign corporations are allowed by law
prejudice to other grounds provided by special laws, the
to seek redress in our courts under certain conditions: the
license of a foreign corporation to transact business in the
interpretation of the law should not go so far as to
Philippines may be revoked or suspended by the
include, in effect, an inference than those conditions have
Securities and Exchange Commission upon any of the
been met from the mere fact that the party suing is a
following grounds:
foreign corporation

1. Failure to file its annual report or pay any fees as

Olympia Business Machines Co. vs. E. Razon
required by this Code;
 2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required by
this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment to
its articles of incorporation or by-laws or of any articles of
merger or consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments
or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit to transact
business in the Philippines. (n)
 SEC does not have the sole authority to suspend or revoke
the license of a foreign corporation doing business in the
Philippines, other government agencies like the Central
Bank , the Insurance Commission may also do so within
their respective dominion, despite the provision of section
134
 If the SEC believes that revocation is warranted, section
135 provides that:
Section 135. Issuance of certificate of revocation.
- Upon the revocation of any such license to transact
business in the Philippines, the Securities and Exchange
Commission shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.
The Securities and Exchange Commission shall
also mail to the corporation at its registered office in the
Philippines a notice of such revocation accompanied by a
copy of the certificate of revocation. (n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign corporations.
- Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the
Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license.
No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the
following requirements are met;
1. All claims which have accrued in the Philippines have
been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Philippine Government or any of its
agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks in a
newspaper of general circulation in the Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
 The jurisdiction of SEC for cases falling under section 5
thereof was transferred to the courts of general
jurisdiction designated by the SC, they were called special
commercial courts, the only exceptions were revocation of
corporate franchise and calling of elections
 However the SEC retained receivership or suspension
payments within June 20,2000
 Jurisdiction of special commercial courts are exclusive
and original, jurisdiction is conferred by law; 1 Special
Commercial Court per region except MAKATI and
QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-Special Commercial
Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special Commercial Courts
- Allegation corporate officers employing schemes in
diverting
- Not only detrimental to corporation, but general
membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it may
be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special commercial
courts
- Sole criteria is there must be an intra-corporate
relationship
- Pertaining to a controversy (speaks also of intra-
partnership controversy, that partnership must be
registered with the SEC)
 Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to put it
in the ambit of special commercial courts and courts of
general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel the
corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet fully
paid
- When the transferee has done all he can be required to do
to render the transfer effectual and the corporation
refuses to register the transfer, the requirement of the
registration is waived and the transferee is considered
technically a stockholder who may sue to enforce the right
to have the transfer registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not yet
prima facie; it will not be considered intra-corporate
 Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer elected or
appointed by the BOD is always a corporate act
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and exemplary
damages and attorney’s fees in his complaint will not
operate to prevent the SEC from exercising its jurisdiction
under P.D. 902-A. The jurisdiction will not wrest on the
NLRC just because of that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to special
commercial courts and not in the NLRC
- SEC has jurisdiction over cases of removal from
employment of corporate officers
- The relationship of a person to a corporation, whether as
officer or as agent or employee or not determined by the
nature of the servides performed, but by the incidents of
the relationship on they actually exist
- Corporate officers dismissal is always a corporate act or
intra-corporate controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction exception will not
apply to mere recovery
 Main consideration
- Asserts his right to the office or questions the propriety or
validity of his ouster or removal, it will be the special
commercial courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to Special Commercial
Courts
- Suspension of payment, appointment of management
receivership
 What is the reason for suspension of all claims?
- The reason for suspending actions for claims against the
corporation is not really to enable the management
committee or the rehabilitation receiver to substitute the
defendant in any pending action against it before any
court, tribunal or body. The real justification is to enable
the management committee or rehabilitation receiver to
effectively exercise his powers free from any Judicial or
extra-judicial interference that might unduly hinder or
prevent the “rescue” of the debtor company. To allow such
other actions to continue would only add to the burden of
the management committee pr rehabilitation receiver,
whose time, effort and resources would be wasted in
defending claims against the corporation instead of being
directed towards restructuring and rehabilitation.(PAL vs.
Spouses Sadic and Kurangking)
- To enable the receiver to effectively exercise his or her
power free form any judicial or extra-judicial that may
disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a distress
company; ask the court to be given time to the payment of
liability by postponing the payment
- When it has sufficient assets and liabilities but forces the
impossibility of meeting them when they respectively fall
due
2. Suspension of receiver with a management committee
with a rehabilitation play or suspension of payments
accompanied by a proposal for rehabilitation (with or
without rehabilitation)
- corporation has sufficient assets to cover its liabilities,
but sees the possibility; is or without rehabilitation plans;
normally would attach the rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation has no
sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities than assets
continue its operations profitably?
- Even if the distressed company has no sufficient assets
and liabilities it can go for suspension
- It asked for a management committee without a receiver
plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they became
stockholders instead of creditors
- After 5 years those who converted sold it back to the
corporation, thereby making profits
 Amendment is for the economic development of the
country
 What if walang amendment, e mas maraming liabilities
kesa assets
 Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever stage
the proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature. Assertion of a
right to have money paid
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must present a
monetary claim, liquidated or unliquidated
 Nullification of corporations does not present a monetary
claim of pecuniary nature
Union vs. CA
- It does not allow a mere individual to file the petition
which is limited to corporations partnership or
associations.
- Where no authority is granted to hear petitions of
individuals for suspension of payments, such petition are
beyond the competence of the SEC
 What happens if there is a suspension order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure or unsecure,
holding or lien or without a lien, no creditor may enforce
his lien while rehabilitation is going (Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
 Rule of the thumb
- Automatic suspension even if not decreed in the decision
itself
- Once lifted the preferred creditors will regain their
preference
 Appointment of a management committee
- Take over the management committee of the distressed
corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-corporate
dispute is that if there is an intra-corporate relationship
 Why is there suspension of all actions against claims
when a receiver is appointed?
- To enable the management committee to exercise its
powers
Sy Chim vs. Sy Siy Ho (before a management committee
may be opt by a court)
- 2 requisites for a valid appointment of management
committee
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
2. Paralysis of business operations, the mere apprehension
of future misconduct based upon prior management
- Save and except in the case of a close corporation in case
of deadlock management committee is allowed to take
over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an imminent danger
of dissipation, loss wastage or destruction of assets or
other properties of a corporation and paralysis of its
business operations, the mere apprehension of future
misconduct based upon prior mismanagement will not
authorize the appointment of a management committee
 Section 5 and 6(D) governed by separate rules; interim
rules and intra-corporate controversy
 Venue of actions
- Rules of court- where the parties are residing
- Intra-corporate- no matter where the parties are residing
it will be in the city or municipality where the principal
office is located
 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments thereof
- A creditor may now file the suspension proceedings;
provides that creditors owns at least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections, fraud, etc; if
they are governed by interim rules of procedure on intra-
corporate controversies
 Venue
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Matters of payment/suspension must be filed in the city/
municipality where corporation is located
 Under old rule, creditors have no right to institute an
action for receivership; now creditors, if they sold 20%
they can institute an action for receivership
 Section 5
- Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate controversy
 If the controversy arose out of an intra-corporate dispute
rules on interim rules of procedure of intra-corporate
controversies shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any action,
claim or demand in connection with any act done omitted
by him in good faith in the exercise of his functions and
powers herein conferred
 Claim
- Right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, legal or
equitable and secured or unsecured
 Investment contracts
- A contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to
expect profits primarily from the effects of others
 The management committee and rehabilitation receiver
are empowered to:
1. Take custody and control of all assets of the corporation
2. Evaluate assets and liabilities, earnings operations of the
corporation
3. Determine the best way to protect the investors and
creditors
4. Study, review evaluate the feasibility of continuing
operation and structures
5. Submit recommendations to the RTC regarding
rehabilitation plan
6. Rehabilitate the corporation if determined to be feasible by
the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was enacted to
protect the public from unscrupulous promoters who
stake business which have no basis and sell shares and
interest therein to investors, who are then left holding
certificates representing nothing more than a claim to a
square of the blue sky.
-SEC. 2. Declaration of State Policy. – The State shall
establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect
investors, ensure full and fair disclosure about securities,
minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which
create distortions in the free market.
BROKER - person who buys and sells securities for the
account of others.
DEALER - person who buys and sells securities for
his/her own account in the ordinary course of business.
NOTE: No person shall engage in the business of
buying or selling securities in the Philippines as a broker or
dealer, or act as a salesman, or an associated person of
 any broker or dealer unless registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. It
includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar
instruments;
b) Other instruments as may in the future be determined by
the Commission;
c) Fractional undivided interests in oil, gas or other mineral
rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of
deposit for a future subscription;
f) Proprietary or non proprietary membership certificates
incorporations; and
g) Shares of stock, bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or
distribution within the PH, without a registration
statement filed with and approved by SEC. Prior to such
sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall
be made available to each prospective purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the Government of
the PH, or by any political subdivision or agency thereof,
or by any person controlled or supervised by, and acting
as an instrumentality of said Government.
b) Any security issued or guaranteed by the government of
any country with diplomatic relations with the PH, or by
any state, province or political subdivision thereof on the
basis of reciprocity: Provided, that the SEC may require
compliance with the form and content of disclosures the
Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal
Revenue.
e) Any security issued by a bank except its own shares of
stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy.
b) By or for the account of a pledge holder, or mortgagee or
any other similar lien holder selling or offering for sale or
delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Code, to
liquidate a bona fide debt, a security pledged in good faith
as security for such debt.
c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account,
such sale or offer for sale, subscription or delivery not
being made in the course of repeated and successive
transactions of a like character by such owner, or on his
account by such representative and such owner or
representative not being the underwriter of such security.
d) Distribution by a corporation, actively engaged in the
business authorized by its AOI, of securities to its
stockholders or other security holders as a stock dividend
or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
f) Issuance of bonds or notes secured by mortgage upon real
estate or tangible personal property, where the entire
mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
g) Issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered
in exchange to make such conversion: Provided, That the
security so surrendered has been registered under this
Code or was, when sold, exempt from the provisions of
this Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the
time of such conversion fall within the class of securities
entitled to registration under this Code. Upon such
conversion the par value of the security surrendered in
such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.
h) Broker’s transactions, executed upon customer’s orders,
on any registered Exchange or other trading market.
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale
or disposition of such securities, and only when the
purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of such
law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized capital
increased.
j) The exchange of securities by the issuer with its existing
security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly
for soliciting such exchange.
k) The sale of securities by an issuer to fewer than twenty
(20) persons in the Philippines during any twelve-month
period.
l) The sale of securities to any number of the following
qualified buyers: (i) Bank; (ii) Registered investment
house; (iii)insurance company; (iv) Pension fund or
retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the
Commission may by rule determine as qualified buyers,
on the basis of such factors as financial sophistication,
net worth, knowledge, and experience in financial and
business matters, or amount of assets under
management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)
TENDER OFFER – A publicly announced intention acting
alone or in concert with others to acquire equity securities
of a company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or more of the
equity share of a public company pursuant to an
agreement made between or among the person and one or
more sellers;
2. When the person intends to acquire 30% or more of the
equity share of a public company within a period of 12
months;
3. When the person intends to acquire shares that would
result in an ownership of more than 50% of the equity
shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the proxy
for at least ten per centum (10%) or such percentage as the
Commission may prescribe of the outstanding share of the
issuer, shall submit a report identifying the beneficial
owner within ten (10) days after such acquisition, for its
own account or customer, to the issuer of the security, to
the Exchange where the security is traded and to the
Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a security
which involves no change in the beneficial ownership
thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for the
purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same
size, time and price for the sale or purchase of such
security has, or will be entered by or for the same or
different parties.
Note: Wash sale and matched orders become illegal when
they are used as a means to create false appearance of
active trading in the security concerned.
3. Marking the close – placing the purchase order, at or
near the close of the trading period. The price that was
closed will then be the price that will be posted on the
following trading day.
4. Painting the tape – involves a series of transactions that
are reported publicly to give the impression of an activity
in a security.
5. Squeezing the float – the part of an outstanding security
intentionally held by dealers or other persons with a view
of reselling them later for profit.
6. Hype and dump – Act employed by a person or group of
persons of purchasing the outstanding capital stock of a
dormant public shell company for a nominal amount and
merge it with their privately held company. They would
then gain control of the majority stocks of the merged
entity. Stock certificates are often re-issued in the name
of the merged entity to relatives and associates who act as
nominees of the person or persons employing the device.
They would then look for a broker-dealer who would be
willing to make a “hype” of the securities. The broker-
dealer then generates volume and advance bid price.
When the market reaches a high price, they would “dump”
their shareholdings and bail out.
7. Boiler Room Operations – involves an intensive selling
campaign through numerous salesmen by telephone or
through direct mail offerings for securities of either a
certain type or from a specific issuer. Investors are
induced to purchase through hard-sell based on
unfounded predictions and mailing of misleading market
letters.
Note: Marking the close, Painting the tape, Squeezing the
float, Hype and dump, Boiler Room Operations become
unlawful if it is effected to either raise the price or induce
the purchase of a security or of a controlling, controlled, or
commonly controlled company by others or to depress the
price to induce the sale of a security, whether of the same
or of a different class, of the same issuer or of a controlling,
controlled company or common controlled company by
others or to create active trading to induce the purchase
through said devices or schemes.
8. Circulating or Disseminating Information – circulating
an information that any of the security listed in the
exchange will or is likely to rise or fall because of
manipulative market operations of any one or more
persons conducted for the purpose of raising or
depressing the price of the security and thus inducing the
purchase of such security.
9. Making False or Misleading Statements with respect to
any material fact which he knew or had reasonable
ground to believe was so false or misleading for the
purpose of inducing the purchase or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of security
effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for
such purpose.
11. Short sale – selling of security which the vendor does not
own unless done in accordance with the rules and
regulations of the SEC.
12. Insider Trading – the act of an insider to buy or sell
security of the issuer while in possession of material
information with respect to such security that is not
generally made known to the public unless (a) The insider
proves that the information was 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 otherwise is also in possession of the information.
Note: When is information “material non-public”? - if:
(a) It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
(b) would be considered by a reasonable person important
under the circumstances in determining his course of action
whether to buy, sell or hold a security.
Note: Who is an “insider”? - “Insider” means: (a) the
issuer; (b) a director or officer (or person performing similar
functions) of, or a person controlling the issuer; (c) a person
whose relationship or former relationship to the issuer gives
or gave him access to material information about the issuer
or the security that is not generally available to the public;
(d) a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information about
an issuer or a security that is not generally available to the
public; or (e) a person who learns such information by a
communication from any of the foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation,
which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Corporations which require an Independent Director
1. An exchange; or
2. Any corporation with a class of equity securities listed for
trading on an Exchange or with assets in excess of P50M
and having 200 or more holders, at least 200 of which are
holding at least 100 shares of a class of its equity
securities or which has sold a class of equity securities to
the public pursuant to an effective registration statement
shall have at least two (2) independent directors or such
independent directors shall constitute at least 20% of the
members of such board, whichever is the lesser.
OPTION TRADING
 Put – a transferrable option or offer to deliver a given
number of shares of stock at a stated price on any given
time during the stated period.
 Call – a transferrable option to buy a specified number of
share at a stated price
 Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being investigated
and/or charged may propose in writing an offer of
settlement with the Commission. The Commission may
only agree to a settlement offer based on its findings that
such settlement is in the public interest. Any agreement
to settle shall have no legal effect until publicly disclosed.
Such decision may be made without a determination of
guilt on the part of the person making the offer.

DAMAGES
All suits to recover damages shall be brought
before the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is
authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.

NOTES

 If there are goods involved in the multimarket, it is beyond
the jurisdiction of SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is a specialized
dispute, hence it must be first referred with SEC (Baviera
vs. Paglinawan G.R. No. 168380 Feb 8, 2007)

 T3 Rule in trading of Securities – Trading day + 3 more
days you must comply with your obligations.