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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.
Unpaid Subscriptions When Stock Dividends are Declared
If stock dividends are declared and there are unpaid subscriptions by the
stockholders, the corporation will defer the issuance of the stock dividends until the
stockholder is able to pay his unpaid subscription.
Unpaid Subscriptions, When Cash Dividends are Declared
If cash dividends are declared and there are unpaid subscriptions, the corporation
will set-off such unpaid balance with the cash dividends declared.
Increase of Authorized Capital Stock
When the corporation decides to increase its authorized capital stock, the new
stocks issued will be offered first to the existing stockholders because they enjoy
pre-emptive right as to such new shares.
Increase in Capital Stock Illustration
If the existing stockholders do not have cash to pay their new subscriptions and
there are stock dividends available or declared by the corporation, may the
corporation just issue those stock dividends to represent the subscribed portion of
the stockholders?
The corporation has 1M authorized capital stock, which has been fully subscribed.
There are no more shares of stock available, but the corporation needed
additional capital. It then decided to increase the authorized capital stock to 2M
shares, so there will be an additional 1M shares. The minimum subscription is 25% of
1M which is 250,000 shares available for subscription. Paid-up should be 25% of
250,000 which is 62,500. 62,500 should be the paid-up portion. Now, stock dividends
equivalent to 62,500 were already declared, can the stock dividends be taken out
from the paid-up portion of the increase? May the stock dividends be used as the
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paid-up portion of the increase? May the stock dividends be used to pay for the
unpaid subscriptions?
When the corporation declares dividends, it means that it has unrestricted retained
earnings or money. What could they do with this profit?
 It could declare dividends either as:
o Cash dividends – Take out this money from the company and
distribute it as cash.
o Stock dividends – Because the corporation needs the cash,
distribute stocks instead.
But there are no shares of stocks available for distribution, which is why the
authorized capital stock must be increased. Paid-up capital is 62,500 and stock
dividends are just enough, also 62,500. ―We’re just trying to say that instead of
giving stock dividends, the same shall be applied to the paid-up portion. We are
giving this (stock dividends) to you through the increase.” Can it be done?
 Yes. There is just a transfer of money or profit to capital. Fresh capital need
not be demanded from the stockholders. Instead of being made part of
the profit, it shall be moved to the other side of the book. Cash is not
distributed since money might be needed for expansion purposes. Hence,
money should stay in the corporation. But because stocks are not
available anymore for distribution, stocks are created through the
increase of the capital stock by 1M. Instead of distributing and requiring
payment from the stockholders, these are already paid. Money is gotten
from profits converted to capital.
Stock Split Illustration
The board deems it that its shares would become more affordable to the public by
decreasing its par value without impairing its capital. If there are 1M shares of
stocks originally valued at 10 pesos per share, and the board feels that this is too
expensive, then they can order a stock split by splitting the stocks, from 1M shares
to 2M shares. The value of each share would be down to 5 pesos which is more
marketable to the public.
The par value was only decreased so that more would be interested the buy the
shares. The total capital stock remains the same. This is called stock split.
Reverse Stock Split
By reducing the number of shares, it would in effect also increase the par value of
the shares. Instead of having 2M shares, in a reversed stock split, the corporation
now has 1M shares. Instead of 5 pesos per share, with 1M shares, the par value of
each is now 10 pesos.
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 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
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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 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.
Management is vested in the Board of Directors.
Yet, we learned that the corporation can enter into a management contract. Is
this not abandonment by the board of its function?
 So long as the complete control is retained by the Board, certain aspects
of management may be undertaken by a separate company but still
related to this principal company.
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.
Ultra Vires Acts v. Illegal Acts
ULTRA VIRES ACTS ILLEGAL ACTS
Acts of the corporation which are
Acts which are contrary to law
beyond its express, implied and
incidental powers
Voidable and may be ratified Void and cannot be ratified
Rules Governing Ultra Vires Acts
1. An ultra vires contract, while executory on both sides, cannot be
enforced by either party thereto.
2. When an ultra vires contract has been fully performed on both sides,
neither party can maintain an action to set aside the transaction or to
recover what has been parted with.
3. When an ultra vires contract has been performed on one side and the
other has received benefits by reason of such performance, recovery is
permitted.
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 Generally, the law does not favor ultra vires acts. Hence, as much as
possible, they are given binding effect. To hold otherwise would make the
business world chaotic since all ultra vires acts of a corporation will be
questioned and thereby rendered not valid.
 Only the State can question such ultra vires acts. It is the State who has
granted a corporation its powers.
Ultra Vires Acts in Relation to the Business Judgment Rule
In relation to the Business Judgment Rule, where the decisions of the board are
binding and cannot be questioned by the stockholders or the courts, ultra vires
acts, on the other hand, can be questioned.
How can this be reconciled? If the court will say that a corporation is liable for ultra
vires acts, and the board contends that their decisions are not subject to
intervention by virtue of such rule, how do we resolve this clash of principles?
There is no clash of principles. Even if ultra vires acts appear to be inconsistent with
the business judgment rule, as much as possible, the principles and rules governing
ultra vires acts are not strictly applied.
The business judgment rule supports the concept, that as much as possible, the
rules governing ultra vires acts are not to be applied; rather, it is only the State who
can seek the application of ultra vires rules.
Even if the State does not question it, it can be cured by performance, ratification
or estoppel. An ultra vires act is only voidable and can only be considered void
when the State questions such act.
Ultra vires acts are subject to ratification, provided that they are not illegal.
However, contracts that are inexistent or void from the beginning are not subject
to ratification.
TITLE V – BY-LAWS
Section 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate
of incorporation by the Securities and Exchange Commission, adopt a code of by-
laws for its government not inconsistent with this Code. For the adoption of by-laws
by the corporation the affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the members
in case of non-stock corporations, shall be necessary. The by-laws shall be signed
by the stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of the directors
or trustees countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original
articles of incorporation. Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to incorporation; in such case,
such by-laws shall be approved and signed by all the incorporators and submitted
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to the Securities and Exchange Commission, together with the articles of
incorporation. In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code. The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in accordance with
law. (20a)
By-Laws
- Rules of action adopted by a corporation for its internal government and
for the government of its stockholders or members and those having the
direction, management and control of its affairs in their relation to the
corporation and as among themselves
Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation
may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates;
and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)
Section 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation, at
a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
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delegated to the board of directors or trustees to amend or repeal any by-laws or
adopt new by-laws shall be considered as revoked whenever stockholders owning
or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the Securities
and Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws. The amended or new by-laws shall only be
effective upon the issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code. (22a and 23a)
Contents of the By-Laws
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members
3. The required quorum in meetings of stockholders or members and the
manner of voting therein
4. The form for proxies of stockholders and members and the manner of
voting them
5. The qualifications, duties and compensation of directors or trustees,
officers and employees
6. The time for holding the annual election of directors or trustees and the
mode or manner of giving notice thereof
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees
8. The penalties for violation of the by-laws
9. In the case of stock corporations, the manner of issuing certificates
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs
By-Laws and Third Parties
- General rule: Third parties are not bound.
- Except: When they have knowledge of the by-laws‘ provisions
TITLE VI - MEETINGS
Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
members may be regular or special. (n)
Section 50. Regular and special meetings of stockholders or members. - Regular
meetings of stockholders or members shall be held annually on a date fixed in the
by-laws, or if not so fixed, on any date in April of every year as determined by the
board of directors or trustees: Provided, That written notice of regular meetings
shall be sent to all stockholders or members of record at least two (2) weeks prior to
the meeting, unless a different period is required by the by-laws. Special meetings
of stockholders or members shall be held at any time deemed necessary or as
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provided in the by-laws: Provided, however, That at least one (1) week written
notice shall be sent to all stockholders or members, unless otherwise provided in the
by-laws. Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member. Whenever, for any cause, there is no person authorized to
call a meeting, the Securities and Exchange Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may issue an order
to the petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority of
the stockholders or members present have chosen one of their number as
presiding officer. (24, 26)
Section 51. Place and time of meetings of stockholders of members. - Stockholder's
or member's meetings, whether regular or special, shall be held in the city or
municipality where the principal office of the corporation is located, and if
practicable in the principal office of the corporation: Provided, That Metro Manila
shall, for purposes of this section, be considered a city or municipality. Notice of
meetings shall be in writing, and the time and place thereof stated therein. 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. (24
and 25)
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority of
the outstanding capital stock or a majority of the members in the case of non-
stock corporations. (n)
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)
Meetings
1. Stockholders or Members
- Regular meetings
- Held annually on a date fixed in the by-laws, or
- If not fixed, on any date in April
- Held in the city where the principal office of the
corporation is located
- Special meetings - at any time deemed necessary
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2. Directors
- Regular meetings
- Held monthly, unless the by-laws provide otherwise
- Special meetings
- Any time upon the call of the president
- Held anywhere in or outside PH since they are fewer in
number, so less expensive
- Presided by the President
Section 54. Who shall preside at meetings. - The president shall preside at all
meetings of the directors or trustee as well as of the stockholders or members,
unless the by-laws provide otherwise. (n)
Section 55. Right to vote of pledgors, mortgagors, and administrators. - In case of
pledged or mortgaged shares in stock corporations, the pledgor or mortgagor
shall have the right to attend and vote at meetings of stockholders, unless the
pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in
writing which is recorded on the appropriate corporate books. (n) Executors,
administrators, receivers, and other legal representatives duly appointed by the
court may attend and vote in behalf of the stockholders or members without need
of any written proxy. (27a)
Section 56. Voting in case of joint ownership of stock. - In case of shares of stock
owned jointly by two or more persons, in order to vote the same, the consent of all
the co-owners shall be necessary, unless there is a written proxy, signed by all the
co-owners, authorizing one or some of them or any other person to vote such share
or shares: Provided, That when the shares are owned in an "and/or" capacity by
the holders thereof, any one of the joint owners can vote said shares or appoint a
proxy therefor. (n)
Section 57. Voting right for treasury shares. - Treasury shares shall have no voting
right as long as such shares remain in the Treasury. (n)
Voting Rights
a. Voting Trust Agreements
- Trustee has the right to vote and be voted for
- Trustor does not have right to vote, only right to the dividends
b. Pledge
- The pledgor, although no longer in possession of the certificate of
stock, is still entitled to vote.
c. Joint Ownership of Stocks (and/or)
- Both of them or either of them may vote
- They should, however, have a unanimous decision on who to
vote
d. Treasury Shares
- No voting rights
- Might be used by BOD to extend their terms by voting for
themselves
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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)
Amores, who was the stockholder and the one who executed the proxy in
Montecillo‘s favor. During the meeting, who has the right to vote?
 It is Mr. Amores. One of the limitations of a proxy is that it is revocable.
His presence disallows the holder to represent the stockholder. The
presence of the stockholder indicated that he has revoked the
authority.

Management Control Device On the other hand, Montecillo saw Ms. Vergara, who was also the proxy of Mr.
It is a device that a corporation may use to ensure a positive result and enable Amores. Who can now vote?
management to carry out its intended plans. That is why it is called a device. The  The proxy that was issued at a later date would be the one to vote. It,
management wants to make sure that the results during a meeting, voting or in effect, revoked the proxy previously issued.
election will be in accordance with their plans.
What if both proxies were made on the same date, same time, who can now
Kinds of Management Control Devices vote?
1. Proxy  The one who presents the proxy first will be the one that can vote.
2. Voting Trust Agreement
3. Voting Agreement If both parties were presented at the same time, who will be recognized?
4. Management Contract  There is a proxy committee that will decide.

Proxy
- To effect representation by the majority of the stockholders
- There could thousands of stockholders all over the country, so there will be
no need for all of them to be present. That could be addressed by the
required proxy executed.
- To determine the required number of votes
- To achieve the necessary quorum in a meeting or to ensure attendance
Limitations of a Proxy
1. No right to inspect the corporation books
2. No legal right to the shares of stocks
3. The proxy is revocable any time and it is only for the intended purpose or
particular meeting
4. If it is a continuing proxy, it will only have a limit of five (5) years
5. It must be in writing
Revocation of Proxy
- Implied revocation – when the stockholder himself who has issued such
proxy is present at the meeting
- If there are two proxies, the proxy with the later date have the authority to
vote
- If the two proxies bear the same date, then the one who first presented
the proxy should be given the authority to vote
- If the time of presentation of the proxies are the same, then a special
proxy committee decides
Shangri-La Illustration
Montecillo was the holder of a proxy in a stockholders‘ meeting to be held on
Sunday at Shangri-la Mactan. But when she got there, she also saw Mr.
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
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in the name of the transferors. The voting trustee or trustees may vote by proxy Types of Stocks
unless the agreement provides otherwise. (36a) 1. Par value shares, Non-Par value shares
2. Common shares, Preferred shares
Voting Trust Agreement 3. Voting shares, Non-voting shares
- Agreement between a stockholder and another person wherein the legal 4. Shares in escrow
interest is transferred to the trustee. 5. Promoter‘s shares
- The certificate stock of the stockholder is cancelled and a new certificate 6. Founder‘s shares
of stock is issued in the name of the trustee and to be recorded in the 7. Redeemable shares
corporate books. The trustee will have the legal interest and rights of the 8. Treasury shares
stockholder for a definite or limited time. 9. Convertible shares
- The trustor in the voting trust agreements is deprived of his legal interest for
that definite time. The right to vote is trusted to the trustee.
- Trustor is entitled to dividends, having retained beneficial ownership of the TITLE VII - STOCKS AND STOCKHOLDERS
stocks.
- Upon the expiration of the term of the agreement, the certificate of stock Section 60. Subscription contract. - Any contract for the acquisition of unissued
issued to the trustee is cancelled, and a new one is issued in favor of the stock in an existing corporation or a corporation still to be formed shall be deemed
trustor. 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)
Proxy v. Voting Trust Agreement
PROXY VOTING TRUST AGREEMENT How One Becomes A Stockholder
In writing and filed with the corporate 1. By a subscription contract
In writing but it must be notarized and 2. By purchase of treasury shares
secretary before the scheduled
filed by the SEC 3. By transfer of shares
meeting
Legal title of the share is transferred to  By assignment
Legal title is not transferred
the trustee
A stockholder who no longer wants to be such may transfer his shares to third
Irrevocable because it is valid as to
persons and need not return them to the corporation, unless he is a holder of
Revocable the specific fix period provided in the
redeemable shares.
agreement
Subscribing Shares v. Buying Shares
Proxy v. Voting Trust Agreement Illustration
1. Subscription – acquisition of unissued shares of the corporation
 If a proxy and a voting trust agreement were executed, the latter shall
2. Buying/Purchasing – refers to acquisition of those shares already issued
prevail. In a VTA, legal ownership is transferred to the trustee, while in a
before such as outstanding shares from existing stockholders
proxy, there is no such transfer.
 Even if the proxy bears a later date, such shall not be considered an
Subscription Contract
implied revocation of the VTA.
It in itself is a contract. Just like any other contract, it can contain any terms or
 Although it was the legal owner who has issued a proxy, he no longer has
conditions as long as it is not contrary to law, morals, good customs, public order,
the right to do, having conferred ownership of the stocks to the trustee. He
and public policy.
merely has beneficial ownership of the stocks, and is only entitled to
dividends.
 Principle of liberality of contracts apply
 If there were two proxies, the one with the later date is preferred. This is by
 Elements of a valid contract must be present, consent, subject matter and
virtue of an implied revocation made.
consideration
 Generally, a proxy is revocable and a voting trust agreement is
irrevocable, valid and binding up to the period stated in the agreement.
Reacquisition of Shares by the Corporation
General Rule: A corporation cannot re-acquire its own shares unless authorized
Voting Agreement
under certain circumstances
- Agreement among the shareholders themselves that they will have a
unified vote, that they vote as one
Reason: Violation of the trust fund doctrine - In effect, the corporation is returning
the capital of the stockholder and it will prejudice the creditors of the corporation.
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50 Shares Illustration
The stockholder has 50 shares and he wants to subscribe another 50 shares using
his previously subscribed 50 shares. Is it allowed? How many shares does he have
now?
 The stockholder still has 50 shares.
Did he actually pay?
 No, he did not actually pay for the new shares because he used the old
shares that were already previously paid. No new cash was ever used to
pay for the new 50 shares.
The stockholder only has 50 shares because he gave back the 50, but what has
happened to the capital?
 In effect, the capital is returned to the stockholder. When a total of 100
shares were actually issued, it was supposed to represent or reflect the
true capital of the corporation. The capital should have indicated only 50
shares issued but what happened was that there were actually 100 shares
issued, the 50 of which were returned to the corporation, meaning, no
longer outstanding. As a result, 100 shares were issued but the capital was
only 50.
 There was a violation of the trust fund doctrine because that will now
jeopardize the corporation‘s creditors.
 When a stockholder wishes to buy new stocks and to use as payment his
old stocks, there is a violation of the trust fund doctrine. There was no
actual payment or consideration made for the new stocks. Twice the
number of shares was actually issued, but half of which were returned to
the corporation.
 Corporation‘s creditors will be jeopardized.
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6)
months from the date of subscription, unless all of the other subscribers consent to
the revocation, or unless the incorporation of said corporation fails to materialize
within said period or within a longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation subscription may be revoked
after the submission of the articles of incorporation to the Securities and Exchange
Commission. (n)
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;
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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)
Consideration for Stocks
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.
Yongco’s Barber Illustration
Mr. Y is the president of a corporation. While in the barber shop, the barber asked Y
how much the shares of their corporation cost since he would like to subscribe for
1,000 shares. Y agreed and gave the barber 1,000 shares with 10 pesos par value
or a total of 10,000 pesos in exchange for Y‘s future haircuts. Do you think the
barber could subscribe to the 1000 shares?
 No. When labor or services are used as compensation for subscription of
shares, it must only pertain to past services that were rendered or
performed to the corporation and not to future services.
However, the barber insisted. He gave Y a promissory note which states: ―I promise
to pay 10 shares of stocks after February 14 when all the boyfriends have already
visited the barbershop.‖ Is it allowed?
 No, because promissory notes cannot be considered valid compensation
for subscription of shares.
 Future services and promissory notes cannot be considered proper
consideration. They are uncertain. Subscriptions must already indicate
their values. There is a violation of the trust fund doctrine.
 For labor or services to be proper consideration, they must have been
already rendered or performed to the corporation.
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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)
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)
Issuance of Stock Certificates With Regard To Subscriptions Not Fully Paid
 Certificates of stocks shall only be issued when they have been fully paid.
Hence, the issuance thereof raises the presumption that the subscription
has been fully paid.
 If certificates are issued for unpaid shares, this could mislead the public.
Application of Payments
The corporation has the following options in applying payments made by
subscribers on account of their subscriptions:
a) Full payment for the corresponding number of shares, the par value of
which is covered by such payment, OR
b) As payment pro rata to each and all the entire number of shares
subscribed for.
Certificate of Stock
 Considered personal property
 A transferrable document, NOT a negotiable instrument
 Does not contain an unconditional promise or order to pay a sum certain
in money
 How transferred – indorsement and delivery
 It looks like a diploma and contains the ff:
o Name of the corporation
o When the corporation was incorporated
o Name of the holder
o Number of shares, par value
o Date of issuance
 Signed by the president or vice-president, countersigned by the secretary
or assistant secretary
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Transferability of a Certificate of Stock
 A certificate of stock, although not a negotiable instrument, is
transferrable by endorsement and delivery.
 When we say transferrable, it means that the stock certificate can be
transferred from one person to another so as to constitute the transferee
as the lawful owner thereof.
 If the stock certificate was merely given by the owner to another person
to simply hold it in the meantime, without intending to transfer ownership
(Sibay‘s example where she was asked to hold the certificate while he
goes to the bathroom), does not constitute a lawful transfer.
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)
Watered Stock Illustration
A stockholder subscribed for 100,000 shares amounting to P100,000 but paid with a
property with a valuation of P75,000. How many shares will be registered in his
name?
 100,000 shares will be registered in his name because he subscribed to it.
His entire subscription will be registered in his name. Although not fully
paid, it is already his to all intents and purposes.
But, if the question was ―how many certificates will be issued in his name?‖
 Then the answer will depend on the options: whether to apply the P75,000
to all 100,000 shares then no certificate will be issued or apply it to only
75,000 shares then certificates for the 75,000 shares will be issued.
Using the illustration, to apply the Watered Stocks Rule, what could have
happened?
 He was issued shares of stock worth P100,000 with a consideration of
property worth only P75,000, making it appear indeed that the property
was worth P100,000 when in fact it was only worth P75,000. Any shares
issued in exchange for that property will be considered watered stocks.
 Property assessed and evaluated at a price higher that what it is worth.
IOW, there is an exchange between shares of stocks worth higher than the
property exchanged.
Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)
Section 67. Payment of balance of subscription. – Subject to the provisions of the
contract of subscription, the board of directors of any stock corporation may at
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any time declare due and payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay on
such date shall render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is made, all
stocks covered by said subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of directors orders
otherwise. (38)
Payment of Unpaid Subscription
If prior to incorporation, a subscriber signs a pre-incorporation subscription, he
should pay at least 25% of the total subscription. The balance due may be paid on
the date specified in the subscription agreement or upon call by the board of
directors.
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
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from the
date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his subscription,
plus accrued interest, costs of advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent stock shall be sold at public
auction to such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if
any, shall be credited in favor of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of this Code, bid for the
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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)
Delinquent Shares, Delinquency Sale
1. The shareholder has 30 days to pay from such call or such date in the
subscription agreement, otherwise, the shares shall be considered as
delinquent stocks.
2. Once delinquent, it is subject to a delinquency sale. Before selling, as a
consequence, the shareholders shall lose their voting rights. If cash
dividends are to be distributed, it shall be used to pay the unpaid portion
of the subscription and as for stock dividends, it will be withheld until the
stockholder pays the unpaid balance.
3. Delinquency sale could either be judicial or extrajudicial.
4. During the sale, the shares shall be sold to the highest bidder.
5. If some shares are not sold at the auction, the corporation may bid for the
same, and they shall be part of the treasury shares, which can still be sold
at a later time by the corporation.
Highest Bidder Illustration
There are 10 shares, after being declared delinquent, offered for sale in a public
bidding. The shares were worth P1,000 each and 10 shares were bid out.
Bidder 1 – P6,000 for 5 shares
Bidder 2 – P7,000 for 7 shares
To whom shall you sell the shares?
 Bidder 1 – P6,000 for 5 shares
But the law says that it must be sold to the highest bidder. There are 10 delinquent
shares but the bidders do not want to buy all of the 10 shares.
 The highest bidder is the one the offers the highest price for the least
number of shares.
In other words the law is misleading. It is not the highest bidder but the best bidder.
The law therefore is looking not for the highest bidder but the best bidder.
Who is the best bidder?
 He who offers the highest amount for the least number of shares. The bid
of P6,000 for 5 shares is equivalent to 1,200 per share while the bid of P7000
for 7 shares is equivalent to 1000 per share.
Section 69. When sale may be questioned. – No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of
sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain
such action first pays or tenders to the party holding the stock the sum for which
the same was sold, with interest from the date of sale at the legal rate; and no
such action shall be maintained unless it is commenced by the filing of a
complaint within six (6) months from the date of sale. (47a)
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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)
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)
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)
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.
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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)
Would you still be considered as a stockholder if you lost or destroyed your
certificates?
 Yes. The stockholder must prepare an affidavit of loss of the certificate of
stock. There must be a publication of the fact of lost for at least once a
week for three consecutive weeks. A bond should be given. If there is no
contest within one year after the last date of publication then the old
certificate will be cancelled and a new certificate of stock will be issued.
There is a waiting period of one year; however, if you do not have the
patience to wait, you can file a bond. You should have the money to file
a bond that would serve as a security to other contesting persons that the
certificate of stock was actually sold to him.
February 8 Quiz
1. When the corporation demanded for the balance of unpaid subscription,
stockholder X refused to pay by saying he is expecting cash dividends by
the end of the year and directed the corporation to apply this to unpaid
subscription.
a. May corporation insist for the payment?
The corporation can still demand for the payment of the unpaid
subscription. Because it is a subscription contract, there is an agreement
to acquire the shares of the corporation and there is already a
commitment for the stockholder to pay for the subscription.
Insofar as the unpaid balance, the relationship between the
corporation and the stockholder is that of a debtor and creditor. While
insofar as the unpaid subscription is concerned, he is an investor.
b. If X, refuses to pay. What may the corporation do?
The corporation can declare it as a delinquent share and proceed
with the delinquency sale. (Public auction is the delinquency sale)
2. Distinguish stock option from pre-emptive right.
Stock option is a privilege given to a non-stockholder to subscribe to a
certain number of shares and he is given limited period to decide. A pre-
emptive right is a right given to existing stockholders to have previously
unissued shares of stocks offered to them in order to prevent any dilution
in their ownership of the corporation.
In relation to stock options, if you are given a stock option, do you
think you can sell it? And why will somebody buy it?
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Because a stock option is a guarantee from the corporation that
within the period given, it will not be offered to other people. So if you
have the right of stock option then you may take advantage of it by
selling to other persons who are willing to buy it at a higher price.
Correct because options have value, it’s a right. Sometimes we say
“laway ray puhunan ani.” Say for example, you are given a stock option
by a certain corporation but you are not interested in buying, then you
can look for other people who might be interested to buy it at a higher
price.
3. If stockholder Y subscribed for 100 shares with par value of 1 per share
and he paid only 50, may he transfer all of his 100 shares to stockholder Z?
Y can already transfer because upon subscription, he becomes the
owner of all the shares he subscribed. The only concern here is on the
collection of the unpaid balance. In this regard, the transfer would be
valid (honored by the corporation) as long as there a commitment that
the unpaid balance will be collected by the corporation.
So in the instance that a commitment is included in the assignment
that Z will pay the unpaid portion of the subscription, the transfer will be
honored by the corporation.
The case does not involve a watered stock because the shares was
issued at par value, only that it was not yet fully paid.
4. What are the requirements for one to file a derivative suit?
a. Cause of action belongs to the corporation
b. Previous demand for the board to take action
Exhaustion of intra-corporate remedies
c. The action is instituted in behalf of the corporation
d. He was a stockholder at the time the incident occurred
TITLE VIII - CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer agent. – Every corporation shall keep
and carefully preserve at its principal office a record of all business transactions
and minutes of all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any director, trustee, stockholder or
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member on any action or proposed action must be recorded in full on his
demand.
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code, shall be
liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for such action
shall be imposed upon the directors or trustees who voted for such refusal: and
Provided, further, That it shall be a defense to any action under this section that the
person demanding to examine and copy excerpts from the corporation‘s records
and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of any installment; a
statement of every alienation, sale or transfer of stock made, the date thereof, and
by and to whom made; and such other entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the principal office of the corporation or in
the office of its stock transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in
the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be
renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable. (51a and 32a; P.B. No. 268.)
Books and Records of the Corporation
 Articles of Incorporation
 By-laws of the incorporation
 Minutes of the meeting of the shareholders
 Minutes of the meetings of the board of directors
 Stock and Transfer Book
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What is the purpose of maintaining all these records? It is not easy to maintain all  Merger or consolidation
these records.
 Books of the corporation should be maintained because it is vital to the Corporate Combinations
existence of the corporation and it is a proof of its existence and its 1. Sale of Assets
transactions. 2. Lease of Assets
 It is a proof of its transactions. It is the best evidence that these 3. Sale of Stocks, provided there is assumption of control by the acquirer
transactions occurred. 4. Stock-Asset Swap
5. Merger
As a matter of fact, what kind of evidence is it? Is it absolute evidence that cannot 6. Consolidation
be overturned?
 It is a prima facie evidence. In the business world they call it MERGERS and ACQUISITIONS (M&A)
 It is only a prima facie evidence. It can be rebutted. But in the absence of
any other, they could be the best evidence. Just like you birth certificate, Acquisitions (Nos. 1-4) Mergers (Nos. 5 & 6)
it is the best evidence. It is prima facie, the records taken from the office Transfer of assets, liabilities, rights,
of the civil registrar or from the NSO. privileges, franchises, and even
There is a need for the execution of employees HOWEVER take note of
Corporate Books Illustration separate deeds of conveyance the SC decision saying that
A girl‘s boyfriend learned that the girl has stockholdings worth millions. Can the girl employees are not assets is
authorize her boyfriend to inspect the corporation’s books? automatic.
 Yes. This power can be delegated, provided it has the proper The constituent corporations cease to
authorization and if the circumstances are justifiable. exist except in merger where there is
a surviving corporation
Section 75. Right to financial statements. – Within ten (10) days from receipt of a The participating corporations remain  Merger- there is a surviving
written request of any stockholder or member, the corporation shall furnish to him to exist corporation
its most recent financial statement, which shall include a balance sheet as of the  Consolidation-there is
end of the last taxable year and a profit or loss statement for said taxable year, consolidated corporation
showing in reasonable detail its assets and liabilities and the result of its operations. The rest ceases to exist.

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)
Corporate combinations are devices that a corporation may decide to pursue to
achieve certain objectives. In defining these corporate combinations, there are
three possible actions that a corporation may take.
a. A corporation may actually sell some or all of its assets, so that the cash
that it may realize will be devoted to some other activities or business
ventures.
b. It may also sell the business itself, so that when it sells its business it may
have decided to pursue other types of business.
c. It may sell its equity or the stocks of the corporation.

TITLE IX – MERGER AND CONSOLIDATION Sale of All or Substantially All of the Assets of the Corporation
It is allowed as long as there is a majority vote by the directors and ratification by a
Corporate Combinations vote of the stockholders representing 2/3 of the outstanding capital stocks.
Corporations may look for collaborators or partners for joint ventures.
However, when a corporation sells all of its assets, this does not amount to the
As the corporation continues its business, there could be some need for changes in dissolution of the corporation. It does not necessarily mean that the corporation
its structure. already ceased to exist. Actually the corporation still has assets in the form of cash
 Expansion from the sale of the assets or properties. It continues to exist because nobody will
 Change of Business own the assets remaining.
 Disposal of certain assets
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A corporation continues to exist even after selling all of its assets, unless, it so
decides. In such event, there will be liquidation. All assets shall be sold, all liabilities,
paid, and the remaining assets shall be distributed to the stockholders. Only then
can the corporation cease to exist.
Sale of its Business
A corporation may own different kinds of properties. What is contemplated here is
the sale of assets relating to the business. If the corporation business is
transportation, what are sold are the busses, the spare parts, or the goodwill.
Disposing of the business does not really mean the end of the corporation. There
are still other assets to speak of. The corporation might decide to engage in a new
business. Hence, it continues to exist.
Selling of Equity or Stocks
In such case, the corporation still exists. What happens is that the stockholders are
a new set of stockholders since the original ones cease to be stockholders.
Disposing all these stocks does not mean the end of the corporation.
Sale of Assets
The stockholders might intend to pursue some other activities or maybe acquire
new assets. The corporation may sell all the assets, or short of selling, lease the
assets. This could be a possible solution when the stockholders no longer want to
devote so much time in the business of the corporation.
Funeral Parlor Illustration
A funeral parlor has cars, chapels, ovens, crematoriums for assets, among others. If
all these assets are leased out, the corporation still exists. It still has assets in the form
of cash earned from the rentals received.
Sale of Stocks as a Corporate Combination
It is not necessarily a corporate combination because when you sell shares it is only
one of the ways to gain control of the corporation.
When the corporation sells its stocks, what happens to that corporation?
 Ownership is transferred if all of the stocks are sold because if it is just a
sale of some of the stocks, there is no effect, it‘s normal.
When we talk of corporate combinations we are referring to situations where there
are some changes in the structure not just in the stockholdings.
To become a corporate combination, the sale of stocks must be equivalent to the
assumption of control of the corporation.
- A sale of all or substantially all of the stocks is not necessary, the sale of
majority of the stocks is sufficient.
- Purchase of more than the majority, perhaps 2/3 of the stocks, is more
preferable.
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Subsidiary-Parent Company Relationship Illustration
If there is a shipping company which would like to enter into a new business
venture, and there‘s already an existing arrastre or stevedoring company, the
shipping company could just buy majority of the shares of stocks of the arrastre or
stevedoring company.
Parent company – Shipping company; Subsidiary – Arrastre company
It wants control of the arrastre company. Shipping companies need not engage in
arrastre because that would be a big headache. But it is a bigger headache if you
do not have control over the pier area where arrastre operations are being
undertaken. Here, the shipping company decides to acquire the arrastre
company, not necessarily 100%; 60% might be enough to control the arrastre.
Stock-Asset Swap
 A corporation exchanges its assets for the stocks of another corporation.
 The corporation which issues the shares of stocks acquires the asset of the
other corporation but not the liabilities of the other corporation.
Stock-Asset Swap Illustration
Corporation A is a transportation or trucking company and Corporation B is
engaged in the sale of tires. Corporation B wants to engage in transportation
because it‘s a related business. Corporation B now wants to become a stockholder
of Corporation A. So what could happen?
 Corporation B sells its assets to Corporation A in exchange for the shares of
stocks of Corporation A. The assets will include the tire manufacturing
facilities, sold now to the trucking company. So instead of selling it for
cash, it was sold for the assets of the corporation.
 Tire Company being a stockholder of a transportation company.
 ASSETS CHANGED WITH STOCKS. NO CASH INVOLVED.
The trucking company will now manufacture its own tires and the moment it needs
tires it manufactures its own tires and because the transportation company is
related to other transportation company it’s easy for them to call this companies “if
you need tires we have tires”. So assets vs. stocks. No cash involved.
Section 76. Plan or merger of consolidation. – Two or more corporations may
merge into a single corporation which shall be one of the constituent corporations
or may consolidate into a new single corporation which shall be the consolidated
corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the
same into effect;
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3. A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, with respect to the consolidated
corporation in case of consolidation, all the statements required to be set forth in
the articles of incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)
Merger
Two corporations decide to combine and only one of them survives.
For a valid merger to effect there must be a majority vote of the directors or
trustees and approval of the stockholders representing at least 2/3 of the
outstanding capital stocks or 2/3 of the members in a non-stock corporation.
Why Corporations Merge
1. Expansion
2. Savings
3. Survival
4. New Technology or Knowledge
Merger Illustration (Fresh Noodles Company + Instant Noodles Company)
Instead of selling only fresh noodles in the Carbon market, the corporation wants to
sell instant noodles. That corporation can merge with another already running
instant noodle manufacturing. Automatically, the former has an instant noodle
business. It need not hire new people. It can just merge with the other corporation.
Section 77. Stockholder’s or member’s approval. – Upon approval by majority vote
of each of the board of directors or trustees of the constituent corporations of the
plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations, at least two (2) weeks
prior to the date of the meeting, either personally or by registered mail. Said notice
shall state the purpose of the meeting and shall include a copy or a summary of
the plan of merger or consolidation. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations shall be necessary for the approval
of such plan. Any dissenting stockholder in stock corporations may exercise his
appraisal right in accordance with the Code: Provided, That if after the approval
by the stockholders of such plan, the board of directors decides to abandon the
plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided
such amendment is approved by majority vote of the respective boards of
directors or trustees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members of each of the
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constituent corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation. (n)
Section 78. Articles of merger or consolidation. – After the approval by the
stockholders or members as required by the preceding section, articles of merger
or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case
of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and
against such plan, respectively. (n)
Requirements for Merger
1. Plan of merger of consolidation
- Majority vote of the board of directors or trustees of the
constituent corporations
- Ratification by the stockholders by a vote of 2/3 representing of
the outstanding capital stock
2. Articles of Merger (AOM)
- Submitted to the SEC
- Signed by the President or VP and certified by the Secretary or
Assistant Secretary
- If approved, SEC will issue a Certificate of Merger
Procedure in a Merger or Consolidation
1. Determination of net worth of constituent corporations
- Due diligence to be observed
- The corporation must look into the assets and liabilities of the
other corporation. In a merger, the surviving corporation shall
assume the liabilities of the other corporation. Hence, the former
must ensure that the latter has enough assets to pay for its
liabilities; otherwise, it would be paying off the latter‘s debts with
its own assets.
2. Decision by the Board, majority vote needed
3. Proposal to the stockholders of plan of merger or consolidation
- Plan of merger or consolidation presented to the stockholders
4. Ratification by a vote of 2/3 of the stockholders representing the
outstanding capital stock
5. Execution of Articles of Merger or Consolidation and submission thereof to
the SEC
- signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation
6. Approval by SEC of the Articles, issuance of Certificate of Merger or
Consolidation
- The separate existence of a corporation ceases, while the
surviving corporation continues to exist.
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- If it were a consolidation, the two separate entities will cease
while a new corporation will be created.
- There will be merger of all assets, rights and liabilities between the
two corporations, such that all the creditors of the dissolved
corporation will now be creditors of the surviving corporation.
With respect to assets, the surviving company will also have
ownership of the assets.
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)
Section 80. Effects of merger or consolidation. – The merger or consolidation shall
have the following effects:
1. The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal, and all receivables due
on whatever account, including subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable
for all the liabilities and obligations of each of the constituent corporations in the
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same manner as if such surviving or consolidated corporation had itself incurred
such liabilities or obligations; and any pending claim, action or proceeding
brought by or against any of such constituent corporations may be prosecuted by
or against the surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be impaired by
such merger or consolidation. (n)
Effects of Merger
- Possession of all the rights and privileges (such as licenses, franchises) of
the constituent corporations
- Transfer of all properties and assets
- Assumption of liabilities by the surviving corporation
- Creditors of the dissolved corporation may go after the surviving
corporation despite the latter not being privy to the transaction
Transfer of Properties in a Merger
TCTs in a Merger Illustration
Corporation A and B entered into a merger. B is the surviving corporation. There
are transfer certificates of title (TCTs) which are in the name of A. B, who becomes
the owner of these properties, wants to borrow money from the bank and offers as
collateral the properties subject of the TCTs, still in the name of A.
Corporation B should present the Articles of Merger before the bank. When the
bank refuses, requiring proof of ownership, B must go to the Register of Deeds. A
deed of sale need not be presented. The Registry of Deeds can‘t demand a
separate deed of sale when you process the change or transfer of name in the
title. The Articles of Merger should be presented. It serves as the deed of
conveyance. By virtue of the merger, there is automatic transfer of ownership of
the properties to the surviving company.
The Register of Deeds cannot insist on proof of payment of capital gains tax, which
is generally, required when there is a sale property, because it is not required to be
paid. There is no gain to speak of because this is one of the tax-free exchanges as
provided in the National Internal Revenue Code.
Rationale: Assets are exchanged with shares and the value of the shares
fluctuates. It may involve gain or loss. At the time of the exchange, you can‘t really
determine the gain or loss yet. The BIR or the Registry of Deeds can‘t insist on the
payment of taxes.
As to the liabilities, it will be assumed by Corporation B, the surviving corporation. It
cannot argue that it has a separate and distinct personality from Corporation A,
the dissolved corporation. In a merger, the liabilities are also automatically
assumed by the surviving corporation. The creditors of Corporation A shall demand
from Corporation B.
- Articles of Merger, evidence of merger
- For the transfer of properties to take effect, as when the title to a parcel of
land is transferred in the name of the surviving corporation in the Register
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of Deeds, a deed of sale or conveyance is not necessary. The Articles (or  Transfer of the title of the properties is automatic
Certificate, maybe) may be presented as proof of the merger.
- Automatic transfer of properties in a merger Bus + Food Company Illustration
- No capital gains tax to be paid, since there is no gain to speak of A was a bus company and B was merged with A, B being a restaurant or food
company. B now operates the buses of A. The licenses and franchises were earlier
Buses Merger Illustration issued to A. What could happen?
A and B entered into a merger. The buses were originally labeled as ―A Buses  These licenses would also be exercised by B, being the surviving
Corporation‖ and now it is changed to ―B Buses Corporation‖. When the police corporation because it has also assumed all the privileges exercised by A.
inspected the documents, the registration certificate was still under the name of
company A. Can they apprehend the bus company? The buses were originally labelled as ―A Buses Corporation‖ and now it is changed
 No, because the rights of A are now transferred to B. to ―B Buses Corporation.‖ It‘s a new name, but when the police inspected the
documents the registration certificate is still under the name of A company. Can
Do you think the traffic officer will understand? The police officer will say, ―I‘m they apprehend the bus company?
asking for your certificate of registration, what is this all about?‖ He did not take up  No, because the rights of A are also assumed by Corporation B. They have
corporation law under Atty E. How could he understand? What should the operator to indicate that they have merged with Corporation A and they can
of the bus do? exercise the rights of Corporation A.
 The operator of the bus should register the buses under the new
corporation by presenting the Articles of Merger with the LTO. Stock-Asset Swap or De Facto Merger
Corporation A sells its assets to Corporation B. The latter, as payment for the assets,
Automatic transfer does not mean that you could just bring around your articles of will issue stocks to the former, such that Corporation A will now become a
merger and show it to anyone. They will not understand. Automatic transfer means stockholder of Corporation B.
that you still have to go to the appropriate agencies to transfer the registration.
- Both corporations continue to exist.
When the LTO asks for the documents, what then will be your basis for the transfer? - There is no automatic assumption of liabilities.
 The basis would be the Certificate of Merger issued by the SEC. - To effect transfer of properties, a deed of sale or conveyance must be
 The LTO cannot insist on presentation of a deed of sale. By operation of executed.
law, the transfer is automatic.
Stock Asset Swap v. Merger
No! This time you can lecture, not to the police because they will not understand. It STOCK ASSET SWAP MERGER
does not mean that you could just carry around the articles of merger and insist on Two or more corporations may merge
The assets of one corporation are
automatic transfer. into a single corporation which shall
exchanged for the stocks of another
be one of the constituent
corporation.
Tax Implications in a Merger corporations
In a merger, one is not required to pay the capital gains tax because there is no Only the assets are acquired by the
The assets, as well as the liabilities, are
gain to speak of because the assets are essentially exchanged with stocks and the buying corporation, the liabilities are
assumed by the surviving corporation.
value of stocks fluctuates from time to time. not assumed
To transfer title, there is a need for a
No need for a separate deed of sale.
Motion to Dismiss Illustration deed of sale or transfer, be it assets,
Transfer is automatic. By virtue of the
A case was filed against Corporation B. Its counsel was hard-headed and filed a properties or personal properties.
law, there is no need to execute a
motion to dismiss on the ground that B is not privy to the transaction. It was never a There is a need for a separate
deed or contract.
party thereof. Rule on the motion. document, a deed of sale.
 The motion to dismiss should be denied because by virtue of the merger, The constituent corporation ceases to
the liabilities were automatically assumed. Since Corporation A does not exist and the surviving corporation
The seller corporation remains to exist.
exist anymore, it is now Corporation B who will be the party to the case. survives. So the personality is now
within the surviving corporation.
What are other effects of the merger or consolidation?
 All the rights, privileges, obligations will be assumed by the surviving
corporation automatically - If given the choice whether to choose to enter into a stock-asset swap or
 No more need to pay capital gains tax a merger, one must consider the circumstances involved. The right choice
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is highly situational. If perhaps the other corporation has more liabilities
than assets, then it would be wise to enter into a stock-asset swap, there
being no automatic assumption of liabilities.
- Many corporations, in the present, enter into stock-asset swaps since the
corporation has enough leeway. It can choose which assets to buy, which
liabilities to assume, if there be any.
- The stocks to be paid shall be based on the fair market value of the assets
purchased.
Stock-Asset Swap, No Automatic Transfer
In all of corporate combinations, which ones would involve automatic transfer?
 Only merger and consolidation.
 All the rest will involve the specific documents to establish the
conveyance or the transfer. If corporation A, the selling corporation,
transfers all of its assets to corporation B, the acquiring corporation, and
the latter, in turn, pays these assets with stocks worth the value of the
assets, the acquiring corporation B now owns the assets.
Is the corporation A, the selling corporation dissolved or ceased to exist?
 No. It continues to exist.
 It still has assets composed of the stocks for which the assets that they sold
were transferred and exchanged.
The assets included the buses, 20 units of the buses were transferred as part of the
assets. They were originally under the name of the selling corporation, A. Now, it is
exchanged with stocks and it is now owned by corporation B. Can corporation B
ask or insist that there was automatic transfer?
 No. The LTO shall demand from B the deed of sale.
 Deed of Sale and NOT the articles of merger because this is not a merger.
Employees of the Selling Corporation in a Stock-Asset Swap
Corporation A operated 20 buses, of course, it has employees. What happens to
these employees? No more buses to run and no more buses to check.
 A stock-asset swap does not include employees.
 The employees stay with corporation A.
In the morning, afternoon, evening they are just watching TV because there are no
buses to run, then corporation A can properly lay-off its employees on the following
grounds, as learned from labor class:
 Redundancy - Still operating but only there are positions that are more
than necessary.
 Closure - Corporation continues to exist, yet the corporation is asking that
it be allowed to terminate its employees because of closure.
Do you think the Department of Labor will believe your application for authorization
to terminate your employees? You still exist. How come closure is included as a
ground?
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 The corporation is entitled to divest or sell some of its businesses so that it
can continue to exist or focus on its other businesses. A corporation can
validly lay-off its employees.
IOW, what corporate combination has occurred? It is a stock-asset swap. It sold its
business but it did not sell its people.
If this was a merger what could have happened?
 The surviving corporation will also assume the employees.
Merger Illustration
When they acquired the buses what the company had in mind was to change its
old fleet. If they assume the existing employees, they will now have 200 employees
in their payroll. It cannot be realized. It will just be another problem. What do we
do?
 The Corporation can offer compensation packages to employees
(Golden Parachute).
 It is better to give it before they cross to the other corporation because if
they discover that the salary is double, they will not accept the package.
Assumption of Employees in a Merger
 General Rule: Employees are assumed absent any stipulation.
o In merger there is automatic transfer/assumption of rights,
privileges, obligations, responsibilities.
 EXCEPTION (Unusual Rule): SC deviated from the normal and said that it
cannot compel surviving corporation to assume the employees for the
following reasons:
1. Employees are not assets.
2. No corporation can be compelled to accept employees. Each
corporation should be given the opportunity to stream and find
out if the employees they will take in are qualified and
competent.
This is a deviation from the consequence of a merger
Three (3) Ms in Management:
1. Machineries
2. Money
3. Manpower – most important yet most difficult to manage
In corporate combinations, only mergers and consolidations have automatic
transfer of the rights, obligations, assets, and liabilities, among others.
If you are one of the stockholders who did not want the idea of merger and
consolidation, what are your options?
 Exercise the right of appraisal of a stockholder
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TITLE X - APPRAISAL RIGHT
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)
Instances when the Right of Appraisal is applicable (Section 81)
1. In case of any amendment to the articles of incorporation which has the
effect of changing or restricting the rights of any stockholders 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;
3. In case of merger or consolidation;
4. In case where a corporation decides to invest its funds in another
corporation or business for any purpose other than its primary purposes;
and
5. For any reason, in case of a close corporation, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of
capital stock.
How do we reconcile this Right of Appraisal to the prohibition on return of
investments of stockholders in violation of the Trust Fund Doctrine?
 General Rule: The SH cannot demand for the return of his stocks because
it violates the Trust Fund Doctrine.
 EXCEPTIONS: (Purpose of the Appraisal Right of Stockholders)
1. When there are fundamental changes in the business, purposes,
or assets of the corporation.
2. When the situation calls for the need to protect the rights of the
minority.
Trust Fund Doctrine
 Stockholder cannot demand payment of his share, because it is reserved
for the creditors, however there are instances the stockholder may
exercise his appraisal right.
 Therefore, this is an exception.
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Section 82. How right is exercised. – The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by
making a written demand on the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair value of his shares: Provided,
That failure to make the demand within such period shall be deemed a waiver of
the appraisal right. If the proposed corporate action is implemented or affected,
the corporation shall pay to such stockholder, upon surrender of the certificate or
certificates of stock representing his shares, the fair value thereof as of the day
prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and appraised
by three (3) disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The
findings of the majority of the appraisers shall be final, and their award shall be
paid by the corporation within thirty (30) days after such award is made: Provided,
That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment:
and Provided, further, That upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer his shares to the corporation.
(n)
Requirements for the Exercise of Appraisal Right
1. Dissented or vote against the corporate act - You should have dissented
at the time when the corporate act was presented for approval
2. Written demand - A written demand on the corporation for payment of his
shares must be made by him within 30 days after the date the vote was
taken.
3. Notation - Within 10 days from the submission of written demand, the
certificate of stock must be surrendered or presented to the corporation
for notation
4. Determination on the Fair Market Value - Within a period of 60 days from
the date the corporate action was approved by the stockholders, the
withdrawing stockholder and the corporation cannot agree on the fair
value of the shares
5. Appraisal Committee - If there is failure to agree or 60 days have lapsed,
FMV shall be determined and appraised by 3 disinterested persons, one of
whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen.
6. Award - The findings of the majority of the appraisers shall be final, and
their award shall be paid by the corporation within 30 days after such
award is made provided that the payment of the shares must be made
only out of the unrestricted retained earnings of the corporation.
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
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dividend rights, shall be suspended in accordance with the provisions of this Code, Instances when a dissenting stockholder is restored to his rights
except the right of such stockholder to receive payment of the fair value thereof: 1. Such stockholder withdraws his demand for payment and the corporation
Provided, That if the dissenting stockholder is not paid the value of his shares within consents thereto
30 days after the award, his voting and dividend rights shall immediately be 2. The proposed corporate action is abandoned or rescinded by the
restored. (n) corporation
3. The proposed corporate action is disapproved by the Securities and
Effect of Stockholder’s Desire to Exercise Appraisal Right Exchange Commission where its approval is necessary
Once a stockholder expresses his desire to exercise his appraisal right, his rights 4. The Commission determines that such stockholder is not entitled to
pertaining to his shares are suspended including the right to vote and be voted appraisal right
upon, and the right to dividends, except the right to receive the fair market value
of your shares. All he has to do is wait. If any of the above cases arise, the stockholder shall not be paid the fair value of
his shares, his status as a stockholder shall thereupon be restored, and all dividend
Once established, he must be paid within 30 days from such award. If not paid distributions which would have accrued on his shares shall be paid to him.
within such date, his rights are automatically restored.
Section 85. Who bears costs of appraisal. – The costs and expenses of appraisal
The stockholder could not yet demand for the payment of his shares. The shall be borne by the corporation, unless the fair value ascertained by the
corporation must first determine whether or not it has enough unrestricted retained appraisers is approximately the same as the price which the corporation may have
earnings. Otherwise, the trust fund doctrine is violated. He has to wait for 30 days. If offered to pay the stockholder, in which case they shall be borne by the latter. In
no payment has been made within such time, the rights of the stockholder are the case of an action to recover such fair value, all costs and expenses shall be
thereby reinstated; he is still a regular full-pledged stockholder with all the rights. assessed against the corporation, unless the refusal of the stockholder to receive
However, he could only make such demand when there is unrestricted retained payment was unjustified. (n)
earnings.
Who bears the cost?
Stock certificates are marked and annotated - this is a dissenting certificate, it is CORPORATION DISSENTING STOCKHOLDER
now indicated, is it transferable? Where the price which the corporation
Where the price offered by the
 Yes, the rights of the transferor will cease as stockholder and the offered to pay the dissenting
corporation is APPROXIMATELY the SAME
transferee will become a regular stockholder. All the dividends that would stockholder is LOWER THAN the fair
AS the fair value ascertained by the
have accrued to the share would be transferred. value as determined by the appraisers
appraisers
 Even if annotated, the stockholder may transfer the shares. named by them
Where an action is filed by the
Where the same action is filed by the
Option of Stockholder dissenting stockholder to recover such
dissenting stockholder and his refusal to
The stockholder can sell his shares to someone interested with the necessary fair value and the refusal of the
accept payment is found by the court
adjustments as to price in case he has been waiting to be paid the fair market of stockholder to receive payment is
to be UNJUSTIFIED
his shares for too long or if the corporation has no upcoming unrestricted retained found by the court to be JUSTIFIED
earnings.
Section 86. Notation on certificates; rights of transferee. – Within ten (10) days after
Section 84. When right to payment ceases. – No demand for payment under this demanding payment for his shares, a dissenting stockholder shall submit the
Title may be withdrawn unless the corporation consents thereto. If, however, such certificates of stock representing his shares to the corporation for notation thereon
demand for payment is withdrawn with the consent of the corporation, or if the that such shares are dissenting shares. His failure to do so shall, at the option of the
proposed corporate action is abandoned or rescinded by the corporation or corporation, terminate his rights under this Title. If shares represented by the
disapproved by the Securities and Exchange Commission where such approval is certificates bearing such notation are transferred, and the certificates
necessary, or if the Securities and Exchange Commission determines that such consequently cancelled, the rights of the transferor as a dissenting stockholder
stockholder is not entitled to the appraisal right, then the right of said stockholder under this Title shall cease and the transferee shall have all the rights of a regular
to be paid the fair value of his shares shall cease, his status as a stockholder shall stockholder; and all dividend distributions which would have accrued on such
thereupon be restored, and all dividend distributions which would have accrued shares shall be paid to the transferee. (n)
on his shares shall be paid to him. (n)
Transferability is not affected despite annotation that it is a dissenting stock
You have to make adjustments to the price because buyers in the market are
smart - the point is you can transfer that. You want immediate money you can
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transfer it. Can he still transfer? Yes even if it is annotated as ―dissenting stock‖.
Transferability is not affected. In which case, what could happen?
 The transferee becomes a regular stockholder. The transfer is deemed a
waiver of the original stockholder of his appraisal right so the transferee will
not assume the exercise of the appraisal right. In which case he has the
right to vote, to dividends, etc.
TITLE XI - NON-STOCK CORPORATIONS
Section 87. Definition. – For the purposes of this Code, a non-stock corporation is
one where no part of its income is distributable as dividens to its members, trustees,
or officers, subject to the provisions of this Code on dissolution: Provided, that any
profit which a non-stock corporation may obtain as in incident to its operations
shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the provisions of this
Title.
The provisions governing stock corporation, when pertinent, shall be applicable to
non-stock corporations, except as may be covered by specific provisions of this
Title. (n)
Non-stock Corporations
Stocks in a Stock Corporation
They are used as a measure in the distribution of dividends or profits.
In non-stock corporations, there is no such measure because Section 87 of the
Corporation Code provides that 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
Non-stock corporations don’t distribute dividends so they don’t talk about stocks in
a non-stock corporation
Non-stock Corporation, Entitled to Profits
Are Non-stock corporations entitled to earn profits? What happens to the profits?
 Yes. The profits will be used for the furtherance of the purpose of such non-
stock corporation
The profits that a non-stock corporation earns are just brought back to the
corporation, whether it was incidental for the purpose for which it was organized or
perhaps it was intended to improve the facilities for its member.
Section 88. Purposes. Non-stock corporations may be formed or organized for
charitable, religious, education, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of this Title
governing particular class of non-stock corporations.
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Purpose of the Non-stock Corporation
 Charitable
 Religious
 Educational
 Professional
 Cultural
 Fraternal
 Literary
 Scientific
 Social
 Civic service or
 Similar purposes like trade, industry, agricultural and like chambers, or any
combination thereof
CHAPTER I – MEMBERS
Section 89. Right to vote. – The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied, each
member, regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member
may vote by proxy in accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations may
be authorized by the by-laws of non-stock corporations with the approval of, and
under such conditions which may be prescribed by, the Securities and Exchange
Commission.
Section 90. Non-transferability of membership. – Membership in a non-stock
corporation and all rights arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide. (n)
Country Club Illustration
In a country club, as it is private, one can own a share. The mere fact of owning a
share thereat does not mean that the holder is already a member. He must still
apply for membership. This share is transferable, If the holder does not want to
enjoy the privileges anymore, he could just sell it. The buyer can assume the
ownership, but he is not yet a member. He has to apply for membership. Every
applicant is screened to make sure that all the members are decent people; and if
you do not follow the house rules, you will be disciplined.
Somebody questioned this process. Since he is already an owner of a share, he is
supposed to automatically exercise the rights of a member. This is not so, because
in the articles of incorporation of a non-stock corporation, the rights of the
members are very limited. In what way are the rights of the members limited?
 The right to vote can be limited, restricted or even denied by the by-laws
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Membership v. Ownership of Shares
The members‘ right to vote in non-stock corporations can be limited, broadened or
denied. The purpose is to control the management of the corporation. There can
be voting and non-voting members as defined in the by-laws. It can also classify
members as proprietary members and non-proprietary members.
 Proprietary member — Owns shares in the corporation
 Non-proprietary member — Does not own shares but is given membership
subject to certain conditions
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 by the by-laws. (n)
CHAPTER II – TRUSTEES AND OFFICERS
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.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of
a non-stock corporation may be directly elected by the members. (n)
The Board of Trustees
 Management is vested with the Board of Trustees.
 There must be at least 5 which may be more than 15 trustees on the
board.
 The initial trustees have staggered terms such that, according to the
Code, the term of 1/3 of their number shall expire every year.
Example: If there are 15 trustees.
(1/3) 1st five trustees — 1-year term
(1/3) 2nd five trustees — 2-year term
(1/3) 3rd five trustees — 3-year term
Thus, there will be an annual election to fill the vacancies after the expiration of the
term of 1/3 of the number of the trustees. The trustees subsequently elected will
have a term of three (3) years.
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Section 93. Place of meetings. – The by-laws may provide that the members of a
non-stock corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is located:
Provided, that proper notice is sent to all members indicating the date, time and
place of the meeting: and Provided, further, that the place of meeting shall be
within the Philippines. (n)
CHAPTER III – DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS
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, education 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)
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 that 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)
Distribution or Liquidation of Assets of a Non-stock Corporation
1. Answer first for all liabilities.
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2. Return to the donor if the condition to return is made in the deed of
donation upon the liquidation of the corporation.
3. Transfer to a corporation with substantially similar activity with that of the
dissolving corporation if such is the condition in the donation.
4. Distribute it to members in accordance to what is provided in the articles
of incorporation or by laws with regard to their distributive rights.
5. Distribute to anyone as may be specified in the distribution plan.
TITLE XII - 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.
Any corporation may be incorporated as 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.
Closed Corporations
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.
Why Close Corporations Are Organized
a. It is a tax shelter. In distributing income it could be by way of stock
dividends and it is not taxable because the value of the stocks would
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fluctuate. There is no gain in distributing stock dividends. Usually, in a close
corporation, the stockholders are family members. Being a close
corporation, there is no need to declare dividends. It is a tax shelter
because every cost in the family is the expense of the corporation.
Close Corporation As A Tax Shelter
 There is no need to declare dividends. The family is already enjoying the
benefits. If the family asks for dividends, the father will answer that they
have already been enjoying the benefits. If they want dividends, they
should pay for their own expenses.
 If the corporation declares dividends, the same shall be liable for
corporate income tax for the first time.
For example: P1 million dividends for the 5 children, P200, 000 to each
child. Once given as a dividend, it is taxed again to the children-
stockholders. As a close corporation, you would not allow such to be
taxed again.
 There are two definite things in life: death and taxes. You cannot live
without taxes; without taxes, no government will survive.
 In a close corporation, income may be hidden and not distributed. When
expenses are incurred, the corporation just assume the same when the
corresponding receipts are furnished.
 If we declare dividends directly to the individual stockholder, it will be
taxed the second time. There is double taxation. This is what we don‘t
want to happen to our money. It is merely tax avoidance, not illegal.
b. Limited Liability of Stockholders. One of the many reasons why people
incorporate is that their liabilities are limited. Personal assets are preserved.
If you are not a corporation and one of the children happened to run
over a pedestrian who died. The registered owner of the vehicle will be
liable. The father will assume the liability and personal assets may be held
liable. Yet, if it were a corporation, the corporation can just sell stocks or
other assets, and so, limited liability.
Limited Liability of Stockholders
While in a close corporation, there is still a fiduciary relationship like that in a
partnership, but the shareholders are only liable to the extent of their investments.
c. Ensure Continuity (Right of Succession). In case the ancestor dies, it will be
inherited by his heirs and so they are ensured that the business of the
family continues. That is why, sometimes, the in-laws are never part of the
family business because it is very dangerous. He/she might go to
somebody else who is not a member of the family. Although our culture
dictates that when you marry, you also marry the family, but not in
business. It shall only be succeeded by a family member. Unless you are
absolutely outstanding, you might be invited in the board even if you are
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not a family member, but your holdings will be very limited. You will be in
the board so that your family could benefit in your expertise and skills, but
other than that, you are never part of the business. The point system is
most often followed.
Continuity of Existence (Succession)
Once the ancestor dies, such as the father, the child succeeds and assumes. It
makes sure that the corporation will always be owned by the family.
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.
The articles of incorporation of a close corporation may provide that the business
of the corporation shall be managed by the stockholders of the corporation rather
than by a board of directors. So long as this provision continues in effect:
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 for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees or
that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
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.
Absolute Prohibition in the Transfer of Stocks, Invalid
Absolute prohibition or absolute obligation to offer it first to existing stockholders
alone – not allowed. It violates the proprietary rights of the stockholders.
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If the condition says,
“The stocks covered by this certificate must be offered first ONLY to existing
stockholders residing in the city of Cebu.”
- Not an absolute prohibition to sell, merely qualified prohibition
- He can still sell, but only to existing stockholders residing in Cebu City.
- Even if merely qualified, it is not allowed by the Corporation Code by
virtue of Section 98 thereof.
xxx 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. xxx
- It is still violates the owner‘s right to dispose of the shares because the
Corporation Code sets the standard of how the restrictions apply in the
transferability, such that the terms and conditions of the transfer must be
reasonable. That‘s the standard. Although qualified, yet it must be under
reasonable terms and conditions.
- The foregoing condition was not reasonable. Why only in Cebu City?
According to Amores, what about those living outside of Cebu City? Can
they buy? If they cannot buy, then, you are unreasonable.
Here‘s another condition,
―The stockholder must offer it to the existing stockholders within a period of 1 year,
only then can he offer it to others.‖
- Unreasonable, you cannot require the stockholder to starve for 1 year and
wait. There is already somebody willing to pay, but the stockholder has to
wait for 1 year before he could sell. These people might be taking their
time.
- Unreasonable period may also be used to question the condition
imposed. So the period is important.
In a situation where the restriction further says,
―These stocks covered by this certificate must first be offered to the existing
stockholders at a price 10% below the market value before the offer to the public.‖
- The provision is burdensome on the part of the stockholder because he is
forced to sell at a lower price.
Right of First Refusal Illustration
Stocks may be pledged. A stockholder offered as pledge his shares of stocks when
he obtained a loan from the bank. He did not pay his loan with the bank. The latter
foreclosed the securities offered, including the certificates of stocks, and sold the
same in a public auction. The highest bidder bought the certificates. Now the
existing stockholders claimed that they have the right of first refusal and so they
should be offered the foreclosed shares first. They did not participate in the
bidding, but they claimed that they need not bid because they have the right of
first refusal. Can they do that?
 No. The restrictions on transfers of shares refer only to voluntary sales.
 The foreclosure sale was an involuntary sale, thus, there is no right of first
refusal.
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If the restriction was stated in the AOI, the by-laws, and the stock certificate, but
despite such restriction, there was a buyer who bought such shares in violation
thereof, what could happen? Can the existing stockholders demand from him the
return of such shares?
 Yes. He must surrender such shares. The corporation is not bound to
register such transfer in the name of the transferee. The transferee can
rescind the contract and demand the seller of the shares to return what
he paid.
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions.
– and organization of a close corporation, signed by all stockholders, shall survive the
1. If stock of a close corporation is issued or transferred to any person who is
not entitled under any provision of the articles of incorporation to be a holder of
record of its stock, and if the certificate for such stock conspicuously shows that
qualifications of the persons entitled to be holder of record thereof, such person is
conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of its
stock, and if the certificate for such stock conspicuously state such number, and if
the issuance or transfer of stock to any person would cause the stock to be held by
more than such number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section to have,
notice either (a) that he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the transfer of
stock is in violation of a restriction on transfer of stock, the corporation may, at its
option, refuse to register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of
stock, though contrary to subsections (1), (2) or (3), has been consented to by all
the stockholders of the close corporation, or if the close corporation has amended
its articles of incorporation in accordance with this Title.
6. The term ―transfer,‖ as used in this section, is not limited to a transfer for
value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty,
express or implied.
Where Restrictions On Transfers Are Indicated
The restrictions should be indicated in the
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1. The articles of incorporation,
2. The by-laws, and
3. The certificate of stocks.
If there is a buyer who would violate the conditions of the closed corporation, he
would be conclusively presumed to have notice of such fact. He could never
feign ignorance; he could never claim good faith.
Section 100. Agreements by stockholders. –
1. Agreements by and among stockholders executed before the formation
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles of incorporation, irrespective
of where the provisions of such agreements are contained, except those required
by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating
to any phase of the corporate affairs, shall be invalidated as between the parties
on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the conduct
of the business and affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: Provided, That such agreement shall
impose on the stockholders who are parties thereto the liabilities for managerial
acts imposed by this Code on directors.
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.
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.
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If a director‘s meeting is held without proper call or notice, an action taken therein
within the corporate powers is deemed ratified by a director who failed to attend,
unless he promptly files his written objection with the secretary of the corporation
after having knowledge thereof.
Management in a Close Corporation
Management in a close corporation is not necessarily vested on a board, but may
be exercised by the stockholders themselves because most of the time, in a close
corporation, the stockholders are also the members of the board.
Board Meetings in Close Corporations
As a general rule, management is vested with the board. But in a close
corporation, there may not be a board since the stockholders themselves can
directly manage the corporation. Thus, they are not bound to strictly follow the
formal requirements on board meetings applicable to widely-held corporations.
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.
“No portion of the stocks shall be offered to the public unless first offered to the
existing stockholders.”
Such provision shall be stipulated in the Article of Incorporation, the by-laws, and
the certificates of stocks as to the transferability of shares to ensure that such will
remain solely in the family.
v. Cane’s version: “No stocks shall be offered to the public unless offered to the
existing stockholders.”
1st interpretation: It could be offered to both the public and existing shareholder
simultaneously.
2nd interpretation: It should be offered first to the public and then to the existing
shareholders.
3rd interpretation: ABSOLUTE PROHIBITION because you are not allowing the
stockholder to sell the shares to anybody but rather to existing stockholders only.
This is however wrong because you are in a sense restricting the rights of the
stockholder as the owner of the shares, what is allowed only is qualified restriction
which means that it should not reach to the extent of depriving you of your right as
an owner to dispose. Like example, ―you could dispose but please offer it first to
the existing stockholders.‖
IF THE CERTIFICATE SAYS:
OFFER ONLY TO EXISTING SHAREHOLDERS: invalid because it would amount to
absolute prohibition.
OFFER ONLY TO THE PUBLIC: invalid because right of first refusal no longer exists.
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TO BE PROPER: “NO PORTION OF THE SAID STOCKS SHALL BE OFFERED TO THE PUBLIC
WITHOUT OFFERING IT FIRST TO THE EXISTING STOCKHOLDERS.”
Pre-Emptive Right v. Right of First Refusal
PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL
Right to offer first to existing stockholders Refer to stocks which are already held
the newly issued stocks by the stockholders
Transferred by the corporation Transferred by the stockholder
To maintain the close ownership of the
As to purpose, in order to avoid dilution
corporation and avoid strangers from
of interest of the existing stockholders
entering.
Stock Option
It is a privilege extended by corporation that gives the buyer the right, but not the
obligation, to buy (call) or sell (put) a stock at an agreed price within a certain
period or on a specific date.
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.
Section 103. 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) canceling or altering any provision contained
in the articles of incorporation, by-laws, or any stockholder‘s agreement; (2)
canceling, 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.
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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 or by all the stockholders. His compensation
shall be determined by agreement between him and the corporation subject to
approval of the Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and
the corporation.
Deadlocks
However, despite the informalities observed in close corporations, there could still
be problems. If the conflict amounts to a deadlock, such that the business
operations of the corporation are paralyzed, the corporation, through any
stockholder, can file a written petition with the SEC to arbitrate the dispute.
The SEC shall have authority to issue an order:
1. Canceling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
2. Canceling, 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;
7. Granting such other relief as the circumstances may warrant.
The SEC will first resort to the solutions in 1-5. But if it feels that this is a concern that
cannot be easily resolved, then it may order the dissolution of the corporation.
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.
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Withdrawal of Stockholder
Short of dissolution, if one is no longer interested in being part of the corporation,
he may require the corporation to purchase his shares.
In an open corporation: the general rule prevails, no return of investment unless
a. (Condition) There are unrestricted retained earnings.
b. (Exception) When he exercises his right of appraisal as a dissenting
stockholder as when there is, among others,
o change in the articles of the corporation
o sale of all or substantially all of the corporate assets
o merger or consolidation
o investment in another company not for its primary purpose.
PROVIDED, there are unrestricted retained earnings.
In a close corporation: a corporation may purchase the shares of its stockholders
regardless of the presence of unrestricted retained earnings, as long as the assets
of the corporation exceed its liabilities (corporate solvency). The stockholder may
demand for the purchase of his shares for any reason.
Dissolution by Stockholder
If the stockholder does not want to go alone and leave by himself, he may file a
written petition to the SEC to compel the dissolution of the corporation, provided
that the activities of the corporation are illegal, fraudulent, dishonest, oppressive
and prejudicial to the corporation.
TITLE XIII – SPECIAL CORPORATIONS
SPECIAL CORPORATIONS
Special corporations are those that are governed by specials charters and to
which the Corporation Code applies suppletorily. These include educational
corporations and religious corporations.
CHAPTER I – EDUCATIONAL CORPORATIONS
Section 106. Incorporation. — Educational corporations shall be governed by
special laws and by the general provisions of this Code. (n)
Educational Corporations
Those that provides facilities for learning and instruction.
Section 107. Pre-requisites to Incorporation. — Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of incorporation
and by-laws of any educational institution. (168a)
Section 108. Board of Trustees. — Trustees of educational institutions organized as
non-stock corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in multiples of five (5).
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Unless otherwise provided in the articles of incorporation or the by-laws, the board
of trustees of incorporated schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration
of term shall hold office for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and authority of trustees shall
be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations. (169a)
Educational Corporations
An educational institution can be stock or non-stock.
 University of San Carlos is an example of a non-stock educational
corporation.
USC Dance Studio Illustration
USC, in its effort to utilize its assets, allows the use of its assets after 8:30 pm. For this,
a new educational institution (School #2) was organized, with the purpose of
offering, maintaining and promoting dancing as a wellness activity. School #2
opens at 8:30 pm.
The opening of school #2 does not require the recommendation from the
Department of Education because it is not devoted to academic education.
How do we now distinguish educational corporation from ordinary schools? What
about the dancing school in our illustration?
 Educational corporations offer formal academic courses as distinguished
from other schools which offer only technical courses or specific skills.
 The distinction is now clear. Formal academic courses and technical or
vocational training or skills training program are different, even if the latter
specialize on certain skills like dancing, cooking, etc.
Requirements for the Opening of an Education Institution
1. Approval of the Department of Education
2. Articles of Incorporation
You have to refer to the Department of Education because it will accredit the
school. It will conduct verification as to your facilities, your faculty, the courses that
you are offering, and the administration perhaps. After evaluation, when the
DepEd is convinced, it will issue a recommendation. Without that recommendation
from DepEd, the SEC will not issue the proper certificate of incorporation.
CHAPTER II – RELIGIOUS CORPORATIONS
Section 109. Classes of Religious Corporations. — Religious corporations may be
incorporated by one or more persons. Such corporations may be classified into
corporations sole and religious societies.
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Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable. (n)
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)
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 or 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 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 as the case may be, 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
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of his religious denomination, sect or church, including hospitals, schools, colleges,
orphan asylums, parsonages and cemeteries thereof. (n)
Section 113. Acquisition and Alienation of Property. — Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may mortgage or sell real property held by it upon
obtaining an order for that purpose from the Court of First Instance of the province
where the property is situated; but before the order is issued; proof must be made
to the satisfaction of the court that notice of the application for leave to mortgage
or sell has been given by publication or otherwise in such manner and for such
time as said court may have directed, and that it is to the interest of
the corporation that leave to mortgage or sell should be granted. The application
for leave to mortgage or sell 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)
Section 114. Filling of Vacancies. — The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole
shall become the corporation sole on their accession to office; and shall be
permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election, or
letters of appointment duly certified by any notary public.
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)
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.
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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)
Corporation Sole
One individual becomes a corporation. In other countries, a single individual can
incorporate by himself. The only purpose of which is to avoid personal liabilities.
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 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 some religious denomination, sect, or
church;
2. That 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)
Religious Corporations
Those that are in furtherance of religious purposes by different religious
denominations.
Sister Vergara Illustration
Vergara was recruited and joined a religious group. She became the head sister.
She was requested to prepare the proper documents, so that the group could now
exist as a religious society. What does she do now?
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 The document or the articles of incorporation shall be verified, stating,
among others, the name of such religious society, the board of trustees,
names and residences and the nationalities of the trustees, which shall be
less than 5 but not more than 15. It shall also state the manner of filling the
vacancies.
 The document shall also state whether or not it is inconsistent with the rules
and regulations of the society to enter into such corporation.
She was required to draft all these documents and she noticed while drafting the
same that the Elder instructed her to indicate the manner of prayer. Blah blah
blah, *bastos part* “open heart” etc. small bells, waggling hair… The SEC
examined the document. Do you think the SEC will approve?
 No. The manner of prayer is contrary to public morals – indecent exposure.
The manner of prayer indicated must be amended or cancelled.
The articles, the by-laws and all other necessary documents were filed, and the
persons in the religious society started praying as narrated in the documents (minus
the bastos part). Thereafter, the police only wanted to arrest the leader, Sr.
Vergara, but everybody won‘t allow it unless they are arrested as well. They all
went to the police precinct, still. As the lawyer of the group, how will you argue for
their release? Did they commit any wrong?
 No. They did not commit any wrong. Prior to the approval of the articles
by the SEC, they can already start praying in the manner provided.
 The police need not ask for their AOI. Under the Constitution, they are
entitled to their freedom of religion, as to carrying out their prayer even
prior to the approval of the AOI.
The police further said, ―No, you can carry out your functions as a religious society
only after you are approved by the SEC. You wait until the SEC approves.‖ If you
argue your freedom of religion, then the police can contend, ―What then is the
purpose of filing with the SEC the AOI when you cannot even wait for its issuance?‖
What can you say about the contention?
 The purpose of incorporating is for the administration of the properties of
the corporation. A religious corporation may acquire properties, real or
personal, and aside from its spiritual activities, it also has temporal
activities.
 Temporal activities relate to the administration of the properties, the
ownership, and the manner of selling or acquiring them, etc.
 Spiritual activities relate to matters that are religious in nature and which
relate to the practice thereof.
Insofar as spiritual activities are concerned the corporation need not be
incorporated because they are entitled to do so under their freedom of religion.
Our religious activities are covered and protected by the Bill of Rights.
Can your church now solicit contributions every time a ceremony is held? Sister
Vergara will now go around and ask for contributions. Can she do that? Is that
temporal?
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 Yes and no. It somehow relates to the exercise of our freedom of religion.
(Sir actually said it’s 50-50 in this case. Maybe it would depend on purpose
for such solicitation and other surrounding circumstances.)
Can they now acquire properties?
 No. Prior to approval of the articles by the SEC, they cannot acquire or
administer properties, because they do not have juridical personality yet.
 However, subsequent to such approval, they can already do so.
Acquisition of juridical personality is not necessary insofar as exercise of religion is
concerned, but it is necessary to acquire properties.
Term of Religious Corporations
It can exist perpetually. This is because freedom of religion is perpetual.
Succession in Religious Corporations
When the head of the church dies, the person who will step into his position
succeeds.
Management in Religious Corporations
Management is with the board of trustees except when the religious corporation
involves a corporation sole, which means that it is only incorporated by one
individual - the chief archbishop, the bishop, the priest, who intends to form a
corporation
Father Sabino Illustration
Father Sabino is an Italian priest. He is already registered as a corporation sole. He
wanted to buy a parcel of land. Can he buy the parcel of land?
 Yes. Since he is already registered as a corporation sole, he has a juridical
personality to acquire that parcel of land. As long as, it is under the name
of the corporation. When he acquires the land, he must do it for the
purpose of the corporation under his own name. Since he is already
registered, I think there is no need to acquire an accreditation.
Under what name may Father Sabino register the parcel of land?
 In the name of Father Sabino, but acting as a corporation sole, not in his
personal capacity.
If he dies, what happens to the property?
 It will still belong to the corporation sole, because such corporation sole
enjoys continuity of existence.
Are Father Sabino and the corporation sole one and the same?
 No. They are not the same. Both have separate existence. Therefore, the
property is owned by the corporation sole and not by Father Sabino.
Therefore, in the event that Father dies, the property of the corporation
sole will remain with the corporation. However, there will be a new
successor. The successor will be the one appointed by the religious
congregation. The religious congregation in Italy will have to elect a new
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successor so that the property remains in the name of the corporation TITLE XIV - DISSOLUTION
sole.
Section 117. Methods of Dissolution. — A corporation formed or organized under
What is the purpose of allowing a corporation sole? the provisions of this Code may be dissolved voluntarily or involuntarily. (n)
 It is to avoid the unlimited liabilities that a person representing the
corporation sole may incur. It is to save him from any personal liability. Dissolution of a Corporation
Otherwise, he will be subjected to unlimited liabilities.  Corporation cannot dissolve by itself.
 It requires approval of the SEC
Therefore, he could not also be compelled to get additional people; otherwise, if  To ensure no creditors are prejudiced
you will be compelling someone exercising his religion to look for more people;
otherwise, they could not register. If it cannot be given a juridical personality as a Steps before a Corporation is considered Dissolved
corporation sole and he cannot buy or acquire parcels of land, what happens? 1. Cessation of the business operations of the corporation
2. Liquidation and the winding up of the affairs of the corporation
We have here a person, who in the name of the Lord, would like to promote his
religion. Yet, he could only promote it if we allow him to establish certain facilities Liquidation/Winding up
to exercise his religion. Here is his predicament: you are alone, you are a foreigner Settle obligations; dispose assets, if any is remaining they will have to be distributed
and therefore, following the normal rules, you cannot acquire properties. If he to the stockholders because the moment dissolution happens? What happens to
cannot acquire properties, what happens to his religion? the stockholders insofar as assets are concerned? There will be distribution of assets
 There could be a violation of his freedom of religion. Here is a situation and once all the assets are distributed then the corporation is considered
where we have to accommodate that person. That is the way that we dissolved.
could assist. To be able to exercise his freedom of religion, he needs
certain facilities. To be able to acquire and establish certain facilities, he Types of Dissolution
has to have a juridical personality. Because he is a foreigner, he is given VOLUNTARY INVOLUNTARY
that authority to exist as a corporation sole. That is the logic there. Voluntary Dissolution where NO
Otherwise, if we do not accommodate him, his right or freedom of religion CREDITORS are affected Expiration of the Term
will be violated. - MAJORITY vote of the BOD/BOT
and 2/3 of SH or MEMBERS
Dissolution of Religious Corporations Voluntary Dissolution where CREDITORS
 Submission to the Securities and Exchange Commission a verified are affected Legislative Enactment
declaration of dissolution. - By JUDGMENT of SEC
 The declaration of dissolution shall set forth: - Upon filing a verified petition
1. The name of the corporation Shortening Corporate Term Failure to formally organize and
2. The reason for dissolution and winding up - By AMENDING the AOI commence
3. The authorization for the dissolution of the corporation by the In case of Corporation Sole
particular religious denomination, sect or church - Upon filing a verified declaration By Order of SEC
4. The names and addresses of the persons who are to supervise the submitted to SEC
winding up of the affairs of the corporation.
 Upon approval of such declaration of dissolution by the Securities and When One Stockholder Acquires All the Stocks
Exchange Commission, the corporation shall cease to carry on its One stockholder may acquire all the stocks of the corporation. The corporation
operations except for the purpose of winding up its affairs. cannot be dissolved because this is not a ground for dissolution.

Now, we will discuss tokhang. Relating this to corporations, we said this juridical
person could be facing death. The dissolution of the juridical person is very similar
to death. Therefore, may the corporation commit suicide?
 No, because the approval of the SEC is needed to dissolve a corporation.
The transfer of shares neither dissolves the corporation nor renders the same
inoperative even if the transfer results to only four or less stockholders. A
corporation may be owned substantially by a single individual and the rest of the
stockholders may only be qualifying shareholders for the purpose of complying
with the statutory requirement of at least five incorporators/stockholders directors.

Example one share will be given to the driver, one to the gardener, one to the
security driver and another one for the helper. The sole stockholder did not buy all
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the shares to dissolve, he bought it for a purpose. However, if you do not distribute
the shares and remain as the sole stockholder there might be a technical problem
on that. In that case there will be no board and no officers. You may be the
President but we all know that you cannot be the secretary nor the treasurer at the
same time. And in every year, you are supposed to submit to the SEC a general
information sheet which contains information that are crucial because it will state
who are the directors, stockholders, and officers. And if you don‘t file this,
eventually after many fines and penalties, SEC will order the dissolution of your
corporation NOT BECAUSE YOU ARE SINGLE STOCKHOLDER BUT BECAUSE YOU DID
NOT COMPLY WITH SOME REPORTORIAL REQUIREMENTS. But again if you don‘t want
to dissolve, distribute the shares to others.
Section 118. Voluntary Dissolution where no Creditors are Affected. — In case
dissolution of a corporation does not prejudice the rights of any creditor having a
claim against such corporation, then such dissolution may be effected by majority
vote of the board of directors or trustees, and by a resolution duly adopted by the
affirmative vote of the stockholders owning at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members at a
meeting to be held on the call of the directors or trustees after publishing the
notice of the time, place and object of the meeting for three (3) consecutive
weeks in a newspaper published in the place where the principal office of
said corporation is located; and if no newspaper is published in such place, then in
a newspaper of general circulation in the Philippines, and after sending such
notice to each stockholder or member either by registered mail or personal
delivery at least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of directors
or trustees and countersigned by the secretary of the corporation. The Securities
and Exchange Commission shall thereupon issue the certificate of dissolution. (62a)
Section 119. Voluntary Dissolution where Creditors are Affected. — Where the
dissolution of a corporation may prejudice the rights of any creditor, a petition for
dissolution of a corporation shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its board of directors or
trustees or other officers having the management of its affairs, verified by its
president or secretary or one of its directors or trustees, and shall set forth all claims
and demands against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members at a
meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission, by an order
reciting the purpose of the petition, shall fix a date on or before which objections
thereto may be filed by any person, which date shall not be less than thirty (30)
days nor more than sixty (60) days after the entry of the order. Before such date, a
copy of the order shall be published at least once a week for three (3) consecutive
weeks in a newspaper of general circulation published in the municipality or city
where the principal office of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation in the Philippines, and a
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similar copy shall be posted for three (3) consecutive weeks in three (3) public
places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections
as fixed in the order has expired, the Commission shall proceed to hear the petition
and try any issue made by the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are true, it shall render
judgment dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa)
Modes of Voluntary Dissolution
a. When creditors are not affected, by the majority vote of the board and
affirmative vote of the stockholders representing 2/3 of the outstanding
capital stock
b. When creditors are affected, by petition for dissolution with the SEC:
1. Signed by majority of the board
2. Verified by the president or secretary
3. Setting forth all the claims against the corporation
4. Showing that the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock was
obtained
The SEC shall then issue and order fixing the date for the filing of an objections, and
shall order the publication of such order once a week for three (3) consecutive
weeks in a newspaper of general circulation.
c. By amendment of the AOI to shorten the corporate term
d. For religious corporations, by the filing of a verified declaration of
dissolution with the SEC
Section 120. Dissolution by Shortening Corporate Term. — A voluntary dissolution
may be effected by amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the amended
articles of incorporation or the expiration of the shortened term, as the case may
be, the corporation shall be deemed dissolved without any further proceedings,
subject to the provisions of this Code on liquidation. (n)
Section 121. Involuntary Dissolution. — A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and after
proper notice and hearing on grounds provided by existing laws, rules and
regulations. (n)
Involuntary Dissolution
1. By expiration of the term provided for in the original articles of
incorporation.
2. Order of the SEC due to:
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a. By failure to formally organize and commence the transaction of
its business within 2 years from date of incorporation
b. In case of deadlock
Ex. Deadlock in a close corporation, then shareholder
petitions the SEC to dissolve corporation
c. When there is fraud or misrepresentation in the registration
3. Legislative enactment
Ex. Legislative passed a special law creating a GOCC. Then, it
later on passed another law in dissolving such GOCC.
General Information Sheet
After repeated penalties and fines, the SEC could dissolve the corporation, not
because there is only one shareholder, but because of failure to comply with the
reportorial requirements. Eventually, it shall be dissolved. In order to avoid
dissolution, then at least four shares must be distributed to others, which is just a
fraction of what the shareholder owns.
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, said 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)
Dilemma of Minority Stockholders Illustration
There could be minority stockholders and the majority stockholders. If a majority
stockholder wants to get rid of these minority stockholders because the majority
wishes to monopolize the ownership of the corporation, one possible option is to
dissolve the corporation even with the huge profits being made. How many votes
are required to affect the dissolution?
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 Majority of the board and 2/3 of OCS, which could be easily obtained as
they own the controlling interest.
Being a minority, would there be any chance to prevent the dissolution? Why
dissolve when the corporation has huge profits? Can the minority prevent
dissolution?
 Yes. The minority stockholder can write a petition to the SEC by alleging
that the majority stockholders are doing acts that are not beneficial to the
corporation.
What happens if the corporation is dissolved?
 There will be liquidation.
What could be the ground for the minority to prevent the dissolution? Do you think
this could happen that the minority will question the decision despite compliance
for the dissolution?
 They can ask for right of appraisal if they don‘t agree with the acts of the
board. They could get back their investment.
What is the point of questioning the sudden dissolution of the corporation despite
the profits being made? Is there any chance to reverse the decision and prevent
dissolution?
We go back to the reasons why an investor invests: Profit. Investment is usually
voluntary. An investor cannot be compelled to invest in a corporation.
So here there will really be a problem for the minority because the majority would
say they may want to use their money for something else. Despite the huge profits,
they simply want to invest in another venture. They can say that they cannot be
compelled to stay in the corporation. That is the dilemma of the minority
stockholders. No one can be compelled to stay in business.
So normally there’s no way we can prevent the dissolution so long as the
requirements are there complied with, the majority vote of the board and vote of
2/3 of the stockholders.
HOWEVER, some authors insist that there is a slim chance for the minority to prevent
the dissolution and they could now question the motive. If the minority could
establish that ―you know this is just a scheme, they really wanted to get rid of us.
We understand that after the dissolution they would put up a new corporation
without us anymore and pursue exactly the same business‖ If they could establish
that then there‘s a chance. They could establish bad faith on the part of the
majority.
If they could establish bad faith then there’s a slim chance we could prevent the
dissolution. But that’s not easy to do because against bad faith is the principle
where no one can be compelled to stay in business.
De Jure Dissolution v. De Facto Dissolution
Other than voluntary and involuntary, we further classify dissolution into:
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1. De jure dissolution - all the requirements required by law to legally dissolve
the corporation has been complied with.
2. De facto dissolution - the corporation still exists, but for one reason or
another, like insolvency, it is no longer operational.
Examples of de facto dissolution
a. A bus company decides to sell all its buses. The proceeds of the sale are
used to pay the creditors but there are still creditors left after exhausting all
the bus company‘s assets.
 Sell its assets, get the cash, pay all obligations, but after
exhausting all the cash, still there remains some liabilities so it has
become insolvent. Even if does not have to dissolve formally, by
its lack of funds, due to insolvency, it is in fact dissolved.
b. A corporation engaged in a public utility has its franchise already expired.
Since the franchise has already expired, then, the corporation cannot
anymore operate because it would be illegal to continue operating
without a franchise.
 It could no longer operate its business because it has no more
franchise, unless the franchise is renewed.
But if it cannot renew to support the operation, it is not insolvent, but it does not
have the necessary secondary franchise anymore. When we talk of secondary
franchise, which was the franchise to operate as a public utility. Therefore, there
should be a primary franchise. What happens to the primary franchise?
 The primary franchise still exists, it is not lost, but because it does
not have a secondary franchise there would be a de facto
dissolution.
Winding Up
It is the payment of the corporation‘s debts and distribution of the remaining assets
to the investors. The corporation is also given 3 years to complete its winding up of
affairs.
After its dissolution, can the corporation still exist?
 Yes. It still exists in order to exercise corporate powers, but only to the
extent of its winding up affairs.
 Once a corporation dissolves, it cannot enter into new contracts for the
continuation of its business since the effect of dissolution is the cessation of
the business operations. However, it can still enter into new contracts in
relation to the winding up.
Example: A contract with an accounting firm for the winding up of its affairs.
Cement Manufacturer Illustration
If a corporation is engaged in the manufacture and distribution of cement, can it
continue to distribute cement after it dissolves?
 It depends. If it is pursuant to a new contract, it cannot distribute
anymore. But if the distribution is to fulfill its obligation under a contract
entered into before the dissolution, then it can still distribute cement. The
continuation of the manufacturing and distribution is allowed for the
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purpose of completing transactions previously entered into. Otherwise,
the corporation will be held liable for breach of contract.
General Rule: Once a corporation dissolves, it cannot continue its business
operations or enter into new contracts.
Exceptions:
1. If the contract entered into is in relation to the winding up of its affairs
2. If the continuation of its operations is intended to complete existing
contracts
Once all the stockholders are dead what happens to the corporation?
 The corporation still exists. Death of all the stockholders does not dissolve
the corporation because of the power of succession.
Liquidation
Once the order of dissolution is issued, what happens after?
 The corporation will proceed to liquidation; it could either be:
a) Liquidation by the corporation
b) Liquidation by the receiver
c) Liquidation by the trustee
 In liquidation, the corporation will settle its obligations and any remaining
assets, if any, shall be distributed to its stockholders.
Pending Cases By and Against the Corporation at the Time of Liquidation
Part of the assets are the collectibles, part of the liabilities are the unpaid debts.
Both are now pending in court. What happens to the collection cases filed BY the
corporation and cases filed AGAINST the corporation?
 Generally, liquidation takes place for only for 3 years, but there are times
when it exceeds 3 years. The court or the SEC should be allowed to
appoint a receiver of all the assets of the corporation.
 Let the dissolution continue and after 3 years, the dissolution shall be
closed. However, before closing the dissolution, these pending cases will
also remain not as part of the dissolution, but as part of the collection
process. The trustee will represent the corporation, but the receiver will
represent both the stockholders and the creditors. They will be considered
in equal footing.
 The receiver is appointed by the court. As a representative of the court,
he represents both parties. He sees to it that all the parties are actively
involved and to determine if there are any chances of reconciling or
entering into amicable settlements.
 The trustee, on the other hand, is someone appointed by the corporation
to handle its assets for liquidation.
 Once the 3-year period expires, you will determine if there are still
remaining assets and if there are any, they will be distributed to the
remaining stockholders or their heirs. If there no heirs, then it will be
escheated to the government.
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TITLE XV – FOREIGN CORPORATIONS
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)
Domestic Corporation
One organized under Philippine laws and follows the procedure set forth by the
Corporation Code.
Boracay Illustration
There were 5 Russians who came to the Philippines on a tour. They found their new
girlfriends while in Boracay. The girlfriends‘ nationalities were: Chinese, Italian,
Japanese, Korean and Filipina. After a one-day acquaintance party, they all
discovered that all of them were businessmen. They then decided to organize a
corporation here in the Philippines. The corporation, if organized under the
Philippine laws, is considered a domestic corporation. To determine whether the
corporation is domestic or foreign, we do not look into the shareholders’ or
incorporators’ nationality but we rather look into the laws which they used for the
organization and incorporation of their business. They decided to organize here
and their business is to engage in retail of rice and corn. Can they engage in such
business?
 Yes. They can do so because 60% of the ownership of that corporation is
held by the Filipina and the remaining 40% is with the foreigners. IOW, we
look at the ownership of the corporation and not the citizenship, 60-40 in
this case.
Foreign Corporation
It is a corporation formed, organized and existing under laws other than Philippine
laws AND whose state allows Filipinos to form a corporation in that state.
(Reciprocity)
Saudi Arabia Illustration
5 Filipinos decided to create a corporation in Saudi Arabia. Later on, they found
their own respective foreigner partners. They decided to create a corporation
engaged in running a Nursing Home. Can they engage in a Nursing Home
business?
 Yes, as long as they are accredited by the government.
Are they a domestic or foreign corporation?
 It would depend on where they incorporate, such that if they choose
Saudi Arabia, then they will be considered as a foreign corporation. On
the other hand, if they choose to incorporate here in the Philippines, then
they can be considered as a domestic corporation. What is important is
the place where they are registered or incorporated as a corporation.
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What is required to be a foreign corporation here in the Philippines?
 The country of origin of the foreign country must have a reciprocity
agreement which means that both countries allow each other‘s citizens to
organize corporations with respect to the other country.
What is required to be able to engage in business?
 The foreign corporation must obtain a license from SEC, as well as a
certificate of authority from the appropriate government agency.
Tests to Determine the Nationality of a Corporation
1. Control test – nationality of a corporation is determined by the nationality
of the stockholders having control thereof.
2. Incorporation test – nationality of a corporation is determined by the
country under whose laws it is organized.
Purpose of Regulating Foreign Corporations
1) So that PH courts can assume jurisdiction
2) To protect our local businesses (to put them in equal footing as the local
businesses)
Section 124. Application to Existing Foreign Corporations. — Every
foreign corporation which on the date of the effectivity of this Code is authorized
to do business in the Philippines under a license theretofore issued to it, shall
continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws. (n)
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 shall specifically
set forth the following, unless already stated in its articles of incorporation:
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 of the corporation which it 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;
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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)
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,
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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)
License to Engage In Business
Foreign corporations are required to secure a license to engage in business,
though even without the license, they still exist as a corporation.
A license may be issued when the following are submitted:
1. Apply with the SEC to secure a license
2. Submit to SEC a copy of the Articles of Incorporation and by-laws which
must be certified in accordance with law
3. Submit their translation to an official language of the Philippines, if
necessary
4. Application shall be under oath and must specify the following, UNLESS,
already stated in the AOI:
a. The date and term of incorporation
b. The address, including the street number, for the principal office
of the corporation in the country or state of incorporation
c. The name and address of its resident agent authorized to accept
summons and process in all legal proceedings
d. The place in the Philippines where the corporation tends to
operate
e. The specific purpose/s of the corporation which it intends to
pursue in the transaction of its business in the Philippines. Provided
that said purpose/s are those specifically stated in the certificate
of authority issued by the appropriate government agency
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f. The names and addresses of the present directors and officers of
the corporation
g. A statement of its authorized capital stock
h. A statement of its outstanding capital stock
i. A statement of the amount actually paid in
j. Such additional information as may be necessary
5. Submit a certificate under oath by the authorized official 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 corporation to do business
therein, and that the applicant is an existing corporation in good standing
(Proof of Reciprocity)
6. Submit statement under oath of the president or any other person
authorized by the corporation showing 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 1 year immediately prior to the
filing of the application.
7. No application for license to transact business in the Philippines shall be
accepted by SEC without previous authority from the appropriate
government agency, whenever required by law.
8. Within sixty (60) days after the issuance of the license, deposit bonds.
 The bond will answer for the liabilities the foreign corporation may
incur in cases wherein the foreign corporation would suddenly
close.
 Bond may be in cash or in commercial bonds.
 These bonds are evidences of credit. The national or local
government will redeem these bonds. It‘s a guaranteed credit
issued by the government. From time to time, these will be
reviewed by the SEC. The intention is to protect the public from
any potential prejudice.
Japanese BF Selling Tractor Illustration
Situation 1
Japanese BF went home to Japan and communicated with Filipina GF, ―May I
course through you the delivery of 1 unit of tractor to Mr. X in Cebu City and the
moment I receive payment I will be giving you a commission of 5%‖.
So it was sent to Cebu City and GF was advised now that the unit is ready for
withdrawal in the customs and so GF delivered it to Mr. X. However it bugged
down. Mr. X sued GF for warranty. Will GF be liable?
 Not liable. No formal appointment GF merely facilitated the delivery of
the unit.
Situation 2
The delivery was effected through GF but the buyer did not pay the balance. It
was payable in installment. May GF file a case against the buyer?
 No. GF is not duly appointed. She cannot represent either as a broker,
agent or middle man. Not in any manner because she has no authority.
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How can the Japanese BF collect the balance?
 Since it was a one time or isolated transaction only, he cannot be said to
have engaged in business in the Philippines, it can sue without securing a
license by executing an SPA in favor of GF to represent and effect the
collection of the balance.
Situation 3
The counsel of the buyer filed a motion to dismiss on the complaint for collection,
saying that GF do not have the personality to file a case since the corporation you
are representing does not have a license.
 A corporation may be able to sue even without license if it involves an
isolated transaction and it is not engaged in business here in Philippines.
So no business, no need for a license. So the license is only required when
the foreign corporation is engaged in a business here.
Indicators of “Doing or Transacting Business”
1. Soliciting orders, purchases (sales) and service contracts 

2. Opening offices, whether called ‗liaison‘ offices or branches 

3. Appointing representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for a period
or periods totaling one hundred eighty days or more 

4. Participating in the management, supervision or control of any domestic
business firm, entity or corporation in the Philippines 

5. And any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization. 

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)
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
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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)
When Case is Filed Against a Foreign Corporation
If a case is filed against a foreign corporation, summons will be served through its
resident agent. If there is no more resident agent, the notices and summonses will
now be served with the SEC.
The SEC may be the one who will issue the notice. (not sure about this part)
Upon application of the foreign corporation to the SEC, the corporation must
execute a written agreement, or an oath, or undertaking to the SEC that processes
may be served upon SEC. The service of summons made to the SEC has the force
and effect as if it has been served outside. (No more need for extraterritorial
jurisdiction.)*
*Not sure but that is the tenor of the discussion since prior to this was about
extraterritorial service, and then sir said something about the Corporation Code
having a quick way where it’s just a matter of oath.
Sir: In other words, there is an oath, an undertaking that they will have to sign
authorizing the SEC to accept summons or notices in behalf of the corporation. If
the representatives could no longer be found, all SEC has to do is to send a notice
to the last known address of the foreign corporation in the country. As long as SEC
could prove that they have sent that notice to that address, whether that address
is occupied or represented by anyone else, e.g. security guard, maid, helper or
driver, that would be enough. SEC must only prove sending such notice such
address in the Philippines. With that, jurisdiction is assumed or acquired.
Resident Agent
A written power of authority designating a resident agent must be executed. An
agent must have good moral character and good financial standing.
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Foreign Corporation’s Right to Sue
For a foreign corporation to be able to sue, a license must first be secured.
However, this does not apply in all cases. In other words, such corporation may
sue even without having a license.
Appointment of an Agent
The appointment of an agent may be an indication of an intention to have a
business here in the Philippines.
But the argument now is that you appointed an agent, which means you intend to
do business here and that requires a license so you cannot sue me because you
don‘t have a license, so the case should be dismissed. Is it correct?
 No. Because the appointment of the agent in the illustration given was
intended, not for him to carry out the business but rather solely to file the
case and for that case alone. (Refer to Japanese BF selling tractor
illustration)
Section 129. Law applicable. - Any foreign corporation lawfully doing business in
the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which fix
the relations, liabilities, responsibilities, or duties of stockholders, members, or officers
of corporations to each other or to the corporation. (73a)
Section 130. Amendments to articles of incorporation or by-laws of foreign
corporations. - Whenever the articles of incorporation or by-laws of a foreign
corporation authorized to transact business in the Philippines are amended, such
foreign corporation shall, within sixty (60) days after the amendment becomes
effective, file with the Securities and Exchange Commission, and in the proper
cases with the appropriate government agency, a duly authenticated copy of the
articles of incorporation or by-laws, as amended, indicating clearly in capital letters
or by underscoring the change or changes made, duly certified by the authorized
official or officials of the country or state of incorporation. The filing thereof shall not
of itself enlarge or alter the purpose or purposes for which such corporation is
authorized to transact business in the Philippines. (n)
Section 131. Amended license. - A foreign corporation authorized to transact
business in the Philippines shall obtain an amended license in the event it changes
its corporate name, or desires to pursue in the Philippines other or additional
purposes, by submitting an application therefor to the Securities and Exchange
Commission, favorably endorsed by the appropriate government agency in the
proper cases. (n)
Section 132. Merger or consolidation involving a foreign corporation licensed in the
Philippines. - One or more foreign corporations authorized to transact business in
the Philippines may merge or consolidate with any domestic corporation or
corporations if such is permitted under Philippine laws and by the law of its
incorporation: Provided, That the requirements on merger or consolidation as
provided in this Code are followed.
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Whenever a foreign corporation authorized to transact business in the Philippines
shall be a party to a merger or consolidation in its home country or state as
permitted by the law of its incorporation, such foreign corporation shall, within sixty
(60) days after such merger or consolidation becomes effective, file with the
Securities and Exchange Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or consolidation duly
authenticated by the proper official or officials of the country or state under the
laws of which merger or consolidation was effected: Provided, however, That if the
absorbed corporation is the foreign corporation doing business in the Philippines,
the latter shall at the same time file a petition for withdrawal of it license in
accordance with this Title. (n)
Mergers and Consolidation
 Foreign Corporation + another foreign corporation (done abroad)
- The foreign corporation must file with the SEC a copy of the
articles of merger or consolidation within sixty (60) days from the
effectivity of the merger/consolidation, duly authenticated by
the authorized officials in the foreign country.
- Provided, however, that if the absorbed corporation is the foreign
corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of its license. Here, the
foreign corporation is deemed dissolved.
 Foreign Corporation + Domestic Corporation
- The merger or consolidation must be permitted under Philippine
laws and under the law of its incorporation, provided that the
requirements on merger and consolidation in the Corporation
Code.
To legitimize the activities of the foreign corporation. What is needed?
 The foreign corporation should obtain a license.
Should a foreign corporation come and without a license enters into contracts.
What do you think the nature or status of the contract?
 Unenforceable, because the foreign corporation don‘t have such license.
Thus, it has no capacity to enter into a contract. To have a valid contract,
the 3 elements must be present a) Consent b) Object c) Consideration. In
this case what is lacking is the consent of the foreign corporation. Lack of
license will also be considered lack of capacity to do any legal act here.
Therefore, it cannot enter into a contract.
If the foreign corporation enters into a lease contract and did not pay and the
owner of such condominium sues that foreign corporation. Can the foreign
corporation say that it is not binding?
 That foreign corporation is now estopped by entering into a contract in
the Philippines. Thus, that foreign corporation must secure a license to
cure the defect.
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2 Conflicting Authority
1. Void: No authority, and so, the foreign corporation can just run away
2. Valid: Because that foreign corporation cannot raise the defense of lack
of capacity because it will enrich itself at the expense of another.
Authors suggest that FC is now estopped and cannot deny liability. (Not sure about
this part)
Reversed situation:
When the representative of that foreign corporation checked in the condominium,
they found a lot of cockroaches. Then that foreign corporation sued the
condominium. That foreign corporation is doing business in the Philippines but
don‘t have a license. Can the foreign sue?
 Yes, because even if it does not have a license to engage in business in
the Philippines, what it is enforcing is a legitimate cause of action, it is
separate from its business.
The condominium owner says, ―Sorry you don‘t have a license, you can‘t sue us‖.
 So you cure the defect, if there‘s no license, then obtain one.
When the license is issued, it‘s a privilege and under what circumstances may a
license be issued?
 Application
 By-laws and AOI with translation
 Proof of reciprocity
 President attests that the corporation is solvent
 Posts a bond for security
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)
Online Shopping Illustration
There is an internet advertisement about computer and Rolloma bought online but
there was a defect. After using it for 2 days, she communicated online with the
seller and was told how to repair, still doesn't work. Now she decided to sue the
foreign supplier. Could you sue for breach of warranty?
 Yes but it might be difficult.
You think you will be successful? Very difficult. Summons should be served. How
should summons be served on a foreign corporation? Very expensive. Give the
sheriff airline ticket or if you are lucky, the sheriff will teach you how we request
sheriff in Japan.
Now if it were a heavy equipment worth million, and again it was defective. Can
you sue?
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 But again, problems and complicated. You could sue even if it doesn't
have a license is a useless provision.
Let’s reverse.
You did not pay the balance. Can the corporation sue? Can it file a case here?
 It cannot sue without a license, it should have a license.
Was it engaged in business?
 There was an advertisement. It solicited orders online and therefore,
before you can sue you need a license.
Let‘s assume, there was no solicitation of orders, but through information of friends
of Rolloma, just the same she communicated, please deliver to me a tractor at this
price and it was deliver. The equipment did not work. Can Roloma sue?
 Yes but it might not be easy.
Again, let’s reverse.
Now, Roloma did not pay the balance, corporation refuses to pay despite
demand. Can it sue?
 Yes it can sue, even if it does not have a license.
However if it were the 10th transaction that the foreign corporation entered into the
Philippines without a license. It‘s no longer isolated, in that logic can Roloma just
keep on ordering? Is that the case? If we follow the logic, would it be a fair policy?
 No, Roloma is already taking advantage of the fact that the foreign
corporation does not have a license, therefore she would be estopped to
raise the argument that the corporation does not have a license.
 The purpose of estoppel of that situation is to prevent the party from
taking advantage of the fact of no license, because the law considers
the fact that one of the party has knowledge of the fact that it does not
have license, and is fact taking advantage.
Foreign Corporation Without a License – Right to Sue
General rule: That a corporation engaged in continuing business in the Philippines,
without a license is not allowed to sue
Exception:
1. In Pari Delicto
Situation:
Ms. Roloma was engaged in a series of transactions with an online company and
on that last transaction Ms. Roloma refused to pay prompting the online company
to sue her. Is the foreign company without a license from the SEC allowed to sue
Ms. Roloma?
 Yes. Since Ms. Roloma and the company were both in pari delicto,
then the foreign company without a license should be allowed to sue
Ms. Roloma for the recovery of payment.
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 Ms. Roloma cannot file a motion to dismiss on the ground that the
foreign corporation does not have a license to sue because of the
principle of pari delicto.
 Dahil alam mong wala akong lisensya bili ka ng bili hoping na pag
dinemanda kita sasabihin mo lang wala akong lisensya. Di pwede
yan. Malabo yan.
Doing or Transacting Business
1. Soliciting orders, purchases (sales) and service contracts;
2. Opening offices, whether called ―liaison‖ offices or branches;
3. Appointing representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for a
period or periods totalling 180days or more;
4. Participating in the management, supervision or control of any
domestic business firm, entity or corporation in the Philippines; and
5. Any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or for
purpose and object of the business organization.
So a foreign corporation opened a factory here and the foreign corporation sent
some technicians and trained the locals about the business of the foreign
corporation but it did not sell anything here because it sold all of its products
outside the Philippines. Is it doing business?
 Doing business does not only cover where the corporation earns profit
here. So long as it operates here, so long as they set up factory here, they
must secure a license. Their engagement in business is not limited to profit-
making activities but may include manufacturing or other training
activities.
Instances When the Foreign Corporation May Sue
1. When the foreign corporation has secured a license
2. The cause of arose from a different transaction (not related to any
business)
3. Isolated transaction
4. When corporation is protecting its trademark or goodwill
5. When the parties are in pari delicto
The president of a foreign corporation was ran over by a local jeepney. Because
they lost the president, they suffered losses and damages. Can the foreign
corporation file a case for damages against the jeepney driver?
 Yes, they can sue because the case is not related to the business.
 Nothing at all, no relation at all to the business, it is not engaged in
business. So it can sue.
If they were engaged in business here selling trucks, and somebody stole some of
their products. It‘s not about their products. Not about business. It‘s about stealing.
Can it sue in our courts?
 It can. The corporation is just enforcing its right.
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A license extends a privilege to the corporation to be accorded personality and
certain rights enjoyed by citizens of the Philippines. In other words, your right will
now be recognized upon acquiring a license. That is also why there must be a
certification executed by the authorized official from the foreign country stating
that the same privilege is extended to Filipinos in the foreign country. However, if
one day, the president of the corporation came here to Cebu, checked in to a
hotel, and one evening his laptop was stolen. All the files and records were in the
laptop. Can the foreign corporation who owns the records sue in our courts?
 The foreign corporation can sue. It was not engaged in business, and it
was not an isolated transaction. In this scenario, the corporation is merely
enforcing its right and there was no transaction involved.
If that same corporation was actually engaged in business here selling tractors.
One day the president came to explore the honeybee production business, far
from the heavy equipment business. The president figured in a violent exchange of
physical blows. The foreign corporation sued the assailant for damages. Can it
sue?
 Yes. The cause of action refers to a different transaction.
Instances When a Foreign Corporation Can Sue
1. If it is engaged in business and has a license
2. If it is an isolated transaction
3. When there is no transaction involved
4. When the cause of action refers to a transaction different from its ordinary
business
Instances When a Foreign Corporation CANNOT Sue
1. If they do not have license in the Philippines
2. The transaction that they are entering is considered doing or transacting
business in the Philippines
The foreign corporation may be sued on any and all instances.
Section 134. Revocation of license. - Without prejudice to other grounds provided
by special laws, the license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required by
this Title;
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;
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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)
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)
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.
When Corporation is No Longer Profitable
A corporation may ask for the withdrawal of its license provided:
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
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2017

TITLE XVI - MISCELLANEOUS PROVISIONS Application of Payments

1. As many as to be covered by the payment
Section 137. Outstanding capital stock defined. - The term "outstanding capital 2. Apply the payment proportionately
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 Issuance of certificates is different from issuance of shares.
partially paid, except treasury shares. (n)
Section 138. Designation of governing boards. - The provisions of specific provisions
Capital Structure Composition of this Code to the contrary notwithstanding, non-stock or special corporations
 Authorized capital stock – what is indicated in the Articles of may, through their articles of incorporation or their by-laws, designate their
Incorporation. This is the totality of the stocks that may be issued by the governing boards by any name other than as board of trustees. (n)
corporation to the public
 Subscribed capital stock – portion of the authorized capital stock that has Section 139. Incorporation and other fees. - The Securities and Exchange
been subscribed, whether paid or unpaid Commission is hereby authorized to collect and receive fees as authorized by law
 Paid in capital – subscribed capital stock which have already been paid or by rules and regulations promulgated by the Commission. (n)
 Additional paid-in capital – money in excess of the par value or the stated
value of shares Section 140. Stock ownership in certain corporations. - Pursuant to the duties
 Treasury shares – shares of the corporation which has already been issued specified by Article XIV of the Constitution, the National Economic and
but later reacquired Development Authority shall, from time to time, make a determination of whether
the corporate vehicle has been used by any corporation or by business or industry
Outstanding capital stock v. Subscribed capital stock – THE SAME to frustrate the provisions thereof or of applicable laws, and shall submit to the
If the share is already subscribed by a person, such is already owned by the Batasang Pambansa, whenever deemed necessary, a report of its findings,
subscriber. As such, the share is already outside of the capital of the corporation. It including recommendations for their prevention or correction.
is no longer part of the corporation as it is already owned by the stockholder.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
Previous year's transcript: corporations declared by it to be vested with a public interest pursuant to the
Outstanding capital stock – it refers to the subscribed capital stock due to the way provisions of this section, belonging to individuals or groups of individuals related to
it is defined in section 137 of the corporation code. However, although it is out, it each other by consanguinity or affinity or by close business interests, or whenever it
does not include treasury shares because in subscribed capital stock, the is necessary to achieve national objectives, prevent illegal monopolies or
subscriber is already the owner and already entitled to dividends even if his combinations in restraint or trade, or to implement national economic policies
subscribed shares are not fully paid. If of the 100 shares, you only paid for the 30 declared in laws, rules and regulations designed to promote the general welfare
shares, you still have votes for the full 100 shares. You are the owner of the 100 and foster economic development.
shares, paid or unpaid. Therefore, as an owner and stockholder, you enjoy the
rights of a stockholder. Outstanding capital stock is just the same as the subscribed In recommending to the Batasang Pambansa corporations, business or industries to
capital stock. This is just to clarify to any confusion. be declared vested with a public interest and in formulating proposals for
limitations on stock ownership, the National Economic and Development Authority
SUBSCRIBED CAPITAL STOCK OUTSTANDING CAPITAL STOCK shall consider the type and nature of the industry, the size of the enterprise, the
economies of scale, the geographic location, the extent of Filipino ownership, the
All the shares issued by the
The subscribed capital stock are the labor intensity of the activity, the export potential, as well as other factors which
corporation by virtue of the binding
shares issued by the corporation to are germane to the realization and promotion of business and industry.
subscription agreement, whether or
the shareholder by virtue of the
not they are fully paid except for
subscription agreement Section 141. Annual report or corporations. - Every corporation, domestic or
treasury shares.
foreign, lawfully doing business in the Philippines shall submit to the Securities and
Ownership has already been
Exchange Commission an annual report of its operations, together with a financial
transferred to shareholders but it There are times when outstanding
statement of its assets and liabilities, certified by any independent certified public
doesn’t necessarily mean that the capital stock will be less than
accountant in appropriate cases, covering the preceding fiscal year and such
certificates of stocks are issued subscribed capital stock when there
other requirements as the Securities and Exchange Commission may require. Such
because what is required in a are treasury shares.
report shall be submitted within such period as may be prescribed by the Securities
certificate of stock is full payment.
and Exchange Commission. (n)
Include the treasury shares Exclude the treasury shares
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Section 142. Confidential nature of examination results. - All interrogatories
propounded by the Securities and Exchange Commission and the answers thereto,
as well as the results of any examination made by the Commission or by any other
official authorized by law to make an examination of the operations, books and
records of any corporation, shall be kept strictly confidential, except insofar as the
law may require the same to be made public or where such interrogatories,
answers or results are necessary to be presented as evidence before any court. (n)
Section 143. Rule-making power of the Securities and Exchange Commission. - The
Securities and Exchange Commission shall have the power and authority to
implement the provisions of this Code, and to promulgate rules and regulations
reasonably necessary to enable it to perform its duties hereunder, particularly in
the prevention of fraud and abuses on the part of the controlling stockholders,
members, directors, trustees or officers. (n)
Which government agency administers these situations?
 It is the Securities and Exchange Commission.
o It is an administrative and quasi-judicial agency.
Powers of the SEC
 Regulatory power to impose penalty when the corporation violates the
Corporation Code
 Impose penalties if there is a violation of the corporation code, it can issue
subpoena duces tecum
 Can cite contempt
 Supervise corporations in order to ensure compliance of the corporation
code
As a quasi-judicial body, what cases would it assume jurisdiction?
 It has jurisdiction on cases which involves intra-corporate conflicts in the
corporation.
Take note:
 Issue on election of president – SEC
 Dismissal of a manager – NLRC for illegal dismissal
 Nonpayment of income tax by manager - BIR
The point is, although the SEC is a quasi-judicial agency, it simply means its
jurisdiction is limited to intra-corporate conflicts or matters. However, long before
PD 902-A everything was assumed by the SEC, all cases, regardless of the nature,
whether intra-corporate or outside of the corporation, so long as it involved
corporate matters. Some of these, if not most, are now transferred to the regular
courts. However, because corporation was not a very interesting subject at that
time, many judges hardly understand corporation. That‘s why not every court is
given the jurisdiction or is assigned cases relating to corporation law. There are
special courts handling corporate cases, so that corporation cases could be
decided by those who somehow have expertise on the Corporation Code.
Although the RTC has general jurisdiction, the Supreme Court has the discretion to
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appoint special courts to whom special types of cases may be assigned like drug
courts, family courts, and corporate courts.
Section 144. Violations of the Code. - Violations of any of the provisions of this Code
or its amendments not otherwise specifically penalized therein shall be punished by
a fine of not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but
not more than five (5) years, or both, in the discretion of the court. If the violation is
committed by a corporation, the same may, after notice and hearing, be
dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer of the corporation
responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in
this Code. (190 1/2 a)
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)
Section 146. Repealing clause. - Except as expressly provided by this Code, all laws
or parts thereof inconsistent with any provision of this Code shall be deemed
repealed. (n)
Section 147. Separability of provisions. - Should any provision of this Code or any
part thereof be declared invalid or unconstitutional, the other provisions, so far as
they are separable, shall remain in force. (n)
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)
Section 149. Effectivity. - This Code shall take effect immediately upon its approval.
Effectivity of the code (Section 149) - May 1, 1980.
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CASE DIGESTS
Pantranco Employees Association v. National Labor Relations Commission
G.R. No. 170689, 170705, [March 17, 2009] (as discussed)
Facts:
There was Pantranco North Express is a bus company which caters passengers
from Manila to other different provinces in Laguna. Pantranco needed money for it
was suffering from financial distress. It borrowed money from PNB and offered its
properties as security for payment for the loan. However, Pantranco failed to pay
so PNB attached all the properties of Pantranco forcing the latter to close its
operations resulting to termination of employees.
Employees as a consequence to the termination, filed a case and won the case in
the Labor Arbiter. After winning, they wanted to enforce the judgment so they tried
to trace the properties of Pantranco.
PNB, on the other hand, created another corporation to manage the properties
from Pantranco named MADECOR where all the properties of Pantranco are
placed under its name instead of PNB. MADECOR was composed of stockholders
where PNB is the majority stockholder thereof. Later on, after MADECOR comes
another corporation, MEGA. PNB sold all its shares from MADECOR to MEGA. And
so with all these corporations, the laborers can no longer identify from whom to
collect or whom to execute. And so, they executed against everybody. MADECOR
and MEGA are now the owners of the properties which were originally owned by
Pantranco and then by PNB, the employees wanted to execute writ of execution
against all of them including MADECOR and MEGA.
MADECOR and MEGA protested alleging that they were not the employers, the
laborers were never their employees in fact Pantranco was their employer.
Held:
The Supreme Court said that these corporations couldn‘t be made liable to the
employees because MADECOR and MEGA have separate and distinct personality
from that of Pantranco. Every corporation has its own separate and distinct
personality independent from that of its stockholders.
Seaoil Petroleum Corporation v. Autocorp Group, G.R. No. 164326, [October 17,
2008]
Facts:
Petitioner Seaoil Petroleum Corporation purchased one unit of ROBEX 200 LC
Excavator, Model 1994 from respondent Autocorp Group (Seaoil and Autocorp).
The sales agreement was embodied in the Vehicle Sales Invoice No. A-0209 and
Vehicle Sales Confirmation No. 258. Seaoil issued 12 checks as payment therefor;
however 10 checks were not honored by the bank since Seaoil requested that
payment be stopped. Autocorp filed a complaint for recovery of personal
property with damages and replevin in the Regional Trial Court.
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Seaoil claims that Seaoil and Autocorp were only utilized as conduits to settle the
obligation of one foreign entity named Uniline Asia, in favor of another foreign
entity, Focus Point International, Incorporated (Uniline and Focus Point). The real
transaction is that Uniline, through Rodriguez (a stockholder and director of
Autocorp and the owner of Uniline), owed money to Focus. In lieu of payment,
Uniline instead agreed to convey the excavator from AutoCorp to Focus. This was
to be paid by checks issued by Seaoil but which in turn were to be funded by
checks issued by Uniline.
Trial Court rendered in favor of plaintiff Autocorp Group and against defendant
Seaoil Petroleum Corporation. The third-party complaint filed by defendant Seaoil
Petroleum Corporation against third-party defendant Paul Rodriguez is hereby
DISMISSED for lack of merit.
Issue:
Whether or not, given the facts in evidence, the lower courts should have pierced
the corporate veil.
Held:
Whatever obligations Rodriguez contracted cannot be attributed to Autocorp and
vice versa. In fact, the obligation that petitioner proffers as its defense — under the
Lease Purchase Agreement — was not even incurred by Rodriguez or by Autocorp
but by Uniline.
The Lease Purchase Agreement clearly shows that the parties thereto are two
corporations not parties to this case: Focus Point and Uniline. Under this Lease
Purchase Agreement, it is Uniline, as lessee/purchaser, and not Rodriguez, that
incurred the debt to Focus Point. The obligation of Uniline to Focus Point arose out
of a transaction completely different from the subject of the instant case.
It is settled that a corporation has a personality separate and distinct from its
individual stockholders or members, and is not affected by the personal rights,
obligations and transactions of the latter. The corporation may not be held liable
for the obligations of the persons composing it, and neither can its stockholders be
held liable for its obligation.
Of course, this Court has recognized instances when the corporation's separate
personality may be disregarded. However, we have also held that the same may
only be done in cases where the corporate vehicle is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime. Moreover, the
wrongdoing must be clearly and convincingly established. It cannot be presumed
To reiterate, the transaction under the Vehicle Sales Invoice is separate and distinct
from that under the Lease Purchase Agreement. In the former, it is Seaoil that owes
Autocorp, while in the latter, Uniline incurred obligations to Focus. There was never
any allegation, much less any evidence, that Autocorp was merely an alter ego of
Uniline, or that the two corporations' separate personalities were being used as a
means to perpetrate fraud or wrongdoing.
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Moreover, Rodriguez, as stockholder and director of Uniline, cannot be held
personally liable for the debts of the corporation, which has a separate legal
personality of its own. While Section 31 of the Corporation Code lays down the
exceptions to the rule, the same does not apply in this case. Section 31 makes a
director personally liable for corporate debts if he willfully and knowingly votes for
or assents to patently unlawful acts of the corporation. Section 31 also makes a
director personally liable if he is guilty of gross negligence or bad faith in directing
the affairs of the corporation. The bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed
The burden of proving bad faith or wrongdoing on the part of Rodriguez was, on
petitioner, a burden which it failed to discharge. Thus, it was proper for the trial
court to have dismissed the third-party complaint against Rodriguez on the ground
that he was not a party to the sale of the excavator.
What was the justification in not agreeing in the defects?
 The contention of Seaoil, is that, the director of Autocorp., who owes the
president of Seaoil through online, the SC said that these are two separate
corporation, and while they have the same directors it does not follow the
obligation of one corporation can be assume by another corporation with
different set of directors and stockholders.
 IOW, the liability of the various directors remain to be their own, and it
cannot be used to relate it to an obligation of the corporation.
Secondly, there was an issue of that director, guilty of patently illegal acts, what did
the SC say?
 Even if the director is guilty of patently illegal acts, the corporation is not
liable per se on the separate obligation of the director
Could it refer to bad faith?
 A director is separately liable for acts amounting to bad faith, the
corporation.
 Bad faith, according to the Supreme Court, cannot be presumed, it must
be established.
China Banking Corp. v. Dyne-Sem Electronics Corp., G.R. No. 149237, [July 11,
2006]
Same premises, same business, same equipment acquired, but still the Supreme
Court said, separate from each other, in the absence of any indication or proof
that there was fraud.
Facts:
Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total of P8,939,000 from
petitioner China Banking Corporation. The borrowers failed to pay when the
obligations became due. The complaint sought payment of the unpaid promissory
notes plus interest and penalties.
Summons was not served on Dynetics, however, because it had already closed
down.
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An amended complaint4 was filed by petitioner impleading respondent Dyne-Sem
Electronics Corporation (Dyne-Sem) and its stockholders Vicente Chuidian, Antonio
Garcia and Jacob Ratinoff. According to petitioner, respondent was formed and
organized to be Dynetics‘ alter ego as established by the following circumstances:
1) Dynetics, Inc. and respondent are both engaged in the same line of
business of manufacturing, producing, assembling, processing, importing,
exporting, buying, distributing, marketing and testing integrated circuits
and semiconductor devices;
2) The principal office and factory site of Dynetics, Inc. located at Avocado
Road, FTI Complex, Taguig, Metro Manila, were used by respondent as its
principal office and factory site;
3) Respondent acquired some of the machineries and equipment of
Dynetics, Inc. from banks which acquired the same through foreclosure;
4) Respondent retained some of the officers of Dynetics, Inc
Issue:
What is the quantum of evidence needed for the trial court to determine if the veil
of corporate fiction should be pierced?
Held:
The question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a
sham or subterfuge or whether petitioner adduced the requisite quantum of
evidence warranting the piercing of the veil of respondent‘s corporate entity. This
Court is not a trier of facts. Findings of fact of the Court of Appeals, affirming those
of the trial court, are final and conclusive. The jurisdiction of this Court in a petition
for review on certiorari is limited to reviewing only errors of law, not of fact, unless it
is shown, inter alia, that: (a) the conclusion is grounded entirely on speculations,
surmises and conjectures; (b) the inference is manifestly mistaken, absurd and
impossible; (c) there is grave abuse of discretion; (d) the judgment is based on a
misapplication of facts; (e) the findings of fact of the trial court and the appellate
court are contradicted by the evidence on record and (f) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions
of both parties.
In this case, petitioner failed to prove that Dyne-Sem was organized and
controlled, and its affairs conducted, in a manner that made it merely an
instrumentality, agency, conduit or adjunct of Dynetics, or that it was established
to defraud Dynetics‘ creditors, including petitioner.
The similarity of business of the two corporations did not warrant a conclusion that
respondent was but a conduit of Dynetics. As we held in Umali v. Court of
Appeals, "the mere fact that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent
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sufficient showing that the corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights."
Likewise, respondent‘s acquisition of some of the machineries and equipment of
Dynetics was not proof that respondent was formed to defraud petitioner. As the
Court of Appeals found, no merger took place between Dynetics and respondent
Dyne-Sem. What took place was a sale of the assets of the former to the latter.
Merger is legally distinct from a sale of assets. Thus, where one corporation sells or
otherwise transfers all its assets to another corporation for value, the latter is not, by
that fact alone, liable for the debts and liabilities of the transferor.
Pasricha v. Don Luis Dison Realty, Inc., G.R. No. 136409, [March 14, 2008]
Facts:
The Pasrichas entered into a contract of lease with Don Luis Dison Realty for nine
(9) units of the San Luis Building. Lease of three (3) units did not materialize. The
rentals of the remaining six (6) units were paid religiously by the Pasrichas from 1991
until May 1992 when payments were no longer made. Demand letters were sent,
and after the last demand letter by the counsel of Don Luis, an unlawful detainer
case was filed against the Pasrichas.
The Pasrichas admitted their failure to pay the stipulated rent for the leased
premises starting July until November 1992, but claimed that such refusal was
justified because of the (1) internal squabble in respondent company as to the
person authorized to receive payment. They also claimed that they were (2)
prevented from using the units except for one. They also claimed damages due
allegedly to the malicious filing of the case by Ms. Bautista, the General Manager,
who did not initially present her authority to sue in behalf of the corporation. In
addition, they also claimed that since after the filing of the case, the SEC had
revoked DLDR‘s certificate of registration, supporting the Pasricha‘s allegation that
it had no personality to sue.
Issues:
1. Whether or not Ms. Bautista had authority to file the case
2. Whether or not DLDR had personality to sue
Held:
1. Yes. In turn, a corporation exercises said powers through its board of
directors and/or its duly authorized officers and agents. Physical acts, like
the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of
the board of directors. A corporation has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied from or are incidental to its existence. Thus, any person suing on
behalf of the corporation should present proof of such authority. Although
Ms. Bautista initially failed to show that she had the capacity to sign the
verification and institute the ejectment case on behalf of the company,
when confronted with such question, she immediately presented the
Secretary's Certificate confirming her authority to represent the company.
45
There is ample jurisprudence holding that subsequent and substantial
compliance may call for the relaxation of the rules of procedure in the
interest of justice. In all of the above cases, we brushed aside
technicalities in the interest of justice.
2. Yes. We uphold the capacity of respondent company to institute the
ejectment case. Although the Securities and Exchange Commission (SEC)
suspended and eventually revoked respondent's certificate of registration
on February 16, 1995, records show that it instituted the action for
ejectment on December 15, 1993. Accordingly, when the case was
commenced, its registration was not yet revoked, and therefore it could
still avail of judicial processes since it still has at that time juridical
personality. Besides, as correctly held by the appellate court, the SEC later
set aside its earlier orders of suspension and revocation of respondent's
certificate, rendering the issue moot and academic.
Pasricha questioned the capacity of Don Luis to sue, alleging that it has no
personality since its certificate was revoked by the SEC, however it was deemed as
irrelevant because the SEC reversed itself and set aside its previous order of
revoking Don Luis’ certificate.
SC also affirmed Ms. Bautista’s authority to sue in behalf of Don Luis’ corporation
even though initially Ms. Bautista was not able to present a written authority from
the corporation because a Secretary’s Certificate was presented later on, which
according to SC, confirmed her authority to file the ejectment suit.
Even during the pendency of the revocation process of the corporation, the fact
that the revocation was not yet done at that point in time the filing was still within
the proper time; meaning the corporation still continues to exist and therefore st ill
avail of the judicial processes until its franchise is revoked.
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BARCENAS
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