01barops Corp 1to84

1
Has the right of succession:

1. its continued existence during the
CORPORATION LAW term stated in its articles of incorp.
cannot be affected by any change in
the members or stockholders
2. nor is it affected by the transfer of
shares by a stockholder to a 3 rd per-
Chapter I son
INTRODUCTION
Has the powers, attributes and properties
expressly authorized by law or incident to its
Corporation Defined existence: as it is a mere creature of the law,
it can exercise only such powers as the law
A Corporation is an artificial being created by may choose to grant it, either expressly or
operation of law, having the right of impliedly
succession and the powers, attributes, and
properties expressly authorized by law or
incident to its existence. (§2) Advantages of corporate
organizations
A corporation is a creature of:
• A general enabling statute (require- 1) Strong separate juridical personality –
ments of the law must be complied personality separate and distinct from in-
with); and dividual stockholders and members
• The agreement of individuals who
seek to incorporate (internal con- 2) Limited liability to investors – stockholders
tractual arrangements: articles of are liable only to the extent of their con-
incorporation and by-laws). tribution
• General rule: Where a corporation
Four attributes of a corporation buys all the shares of another corpor-
ation, this will not operate to dissolve
An artificial being: the other corporation and as the two
corporations still maintain their separ-
1. a juridical person capable of having
ate corporate entities, one will not an-
rights and obligations, w/ a person-
swer for the debts of the other. [Nell
ality separate and distinct from its
v Pacific Farms]
members or stockholders
2. hence, stockholders are not person- • Exceptions:
ally liable for corp. obligations and o If there is an express assumption
cannot be held liable to third per- of liabilities;
sons who have claims against the o There is a consolidation or mer-
corp. beyond their agreed contribu- ger;
tion to the corporate capital (paid- o If the purchase was in fraud of
up capital and unpaid subscriptions) creditors;
o If the purchaser becomes a con-
tinuation of the seller;
Created by operation of law: o If there are unpaid subscriptions
(stockholder is liable for the un-
1. mere consent of the parties to form
paid balance).
a corp. is not sufficient: the State
must give its consent either through
a special law (in the case of a gov’t 3) Free transferability of units of ownership –
corp.) or a general law (for a private stockholders hold their shares as personal
corp.) property with rights to dispose, assign or
2. the general law under w/c a private encumber them as they may desire (§63)
corp. may be formed or organized is
the Corporation Code 4) Centralized Management – all corporate
powers are vested in the board of direct-
ors (§23)
[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Bobbie_StaMaria.printing] [Miles Malaya.lectures]
[Japee_DeLeon.poli_law] [Ascheia_Yumul.rem_law] [Paul_Sorino/Judy_Ripol.civ_law] [Hya_Rafael/Mac_Macapagal.crim_law]
[Vivian_Tan/Justin_Mendoza.labor_law] [Miguel_DeJesus.legal_ethics] [Lianne_Gervasio.comm_law]
[Ces_Sicangco/Rowena_Romero.tax_law]
2
be extinguished, and that all accrued
obligations shall not bear interest. Among
those ordered extinguished was a lien in
Partnership vs. Corporation favor of Phil Veterans Bank over prop in LB.
1. partners are personally liable for the NDC filed to foreclose the mortgage.
debts of the partnership; stockhold- HELD: New Agrix was created by special
ers cannot be made to personally decree even if 1973 Consti mandates that
answer to corporate creditors Batasang Pambansa, cannot, except by
2. mere agreement of the parties, w/c general law, provide for formation,
can be composed of just 2 persons, organization and regulation of private corps,
gives rise to the juridical personality unless for GOCCs.
of the partnership, whether or not
registered w/ the SEC (Art. 1768, NDC was only mandated to extend loan and
NCC); a corp., w/ a minimum of 5 to manage company. New Agrix was entirely
incorporators, derives its juridical private and should have been organized
personality from the certificate is- under Corp Law.
sued by the SEC (§19)
3. in most cases, all the owners in a
partnership actively participate in
management, w/ capacity to bind it
by any usual contract (Art. 1818,
NCC); in a corp., management is By the SEC
centralized in the board of directors
w/c has exclusive power to bind the Basis: Sec. 3, PD 902-A and Sec 5.1(a),
corp. (§23) RA8799. The Commission shall have absolute
4. partnership is based on mutual trust jurisdiction, supervision and control over all
and confidence (delectus personae) corporations, partnerships or associations,
so that its existence is precarious who are the grantees of primary franchises
because of the facility w/ which it and/or licenses or permits granted by the
can be dissolved (i.e. through the government, to operate in the Philippines; xxx
death or unilateral act of a partner);
a corp. has more stability as it en-
joys the right of succession and is Note: Under Sec. 5.2 of RA8799, SEC’s
not affected by the death or insolv- jurisdiction over all cases enumerated under
ency of a stockholder; also, dissolu- Sec. 5, PD 902-A was transferred to the
tion before a corp.’s term requires a Regional Trial Court which has jurisdiction
2/3rds vote of the stock (Secs. 118 over the principal office of the corporation,
and 119, Corp. Code), always sub- partnership or association concerned.
ject to SEC intervention
According to the Interim Rules of Procedure

Government Regulation of Corporations for Intra-Corporate Controversies (A.M. No.
01-2-04-SC), which took effect on April 1,
By the Legislature 2001, the Regional Trial Court has jurisdiction
Basis: police power of the state (Northern Ry over cases involving the following:
Co. v. State of Washington, 300 U.S. 154) 1. Devices or schemes employed by, or
and the fact that corporations owe their any act of, the BOD, business associ-
existence to the state ates, officers or partners, amounting
Manner: by amending or repealing the Corp. to fraud or misrepresentation which
Code or any part thereof may be detrimental to the interest of
the public and/or of the stockholders,
partners or members of any corpora-
tion, partnership, or association;
NDC v Phil Veterans Bank (1990) 2. Controversies arising out of intra-
PD 1717 ordered the rehabilitation of the corporate, partnership, or association
Agrix Group of Companies to be relations, between and among stock-
administered by NDC. Sec 4(1) provides that holders, members or associates; and
all mortgages and liens presently attached between, any or all of them and the
corporation, partnership, or associ-

3
ation of which they are stockhold-
ers, members or associates, re- partnerships, or other associations,
spectively; or of their stockholders, officers or
3. Controversies in the election or ap- partners, including any fraudulent
pointment of directors, trustees, of- devices, schemes or representa-
ficers, or managers of corporations, tions, in violation of any law or
partnerships, or associations; rules and regulations administered
4. Derivative suits; and and enforced by the Commission;
5. Inspection of corporate books. to file and prosecute in accordance
with law and rules and regulations
issued by the Commission and in
Morato v CA (August, 2004) appropriate cases, the correspond-
Petitioners, stockholders of TF Ventures, ing criminal or civil case before the
Inc., filed a petition with the SEC against Commission or the proper court or
private respondents for the declaration of body upon prima facie finding of
nullity of stockholders’ and directors’ violation of any laws or rules and
meetings and damages. They assail the regulations administered and en-
validity of the notice and stockholders’ forced by the Commission; and to
meeting of TF Ventures, Inc. and the perform such other powers and
organizational meeting of the members of functions as may be provided by
the BOD. The petition was referred to the law or duly delegated to it by the
Securities Investigation and Clearing Commission.
Department (SICD) of the SEC for
investigation and resolution. Prosecution under this Decree
Meanwhile, one of the private respondents or any Act, Law, Rules and Regula-
(Matsura, Chairman of the BOD), wrote a tions enforced and administered by
letter to the Examiners and Appraisers Dept the Commission shall be without
of the SEC, requesting for an examination of prejudice to any liability for viola-
the basis for the capital increase of T.F. tion of any provision of the Revised
Ventures, Inc. from P10,000,000 to Penal Code.
P100,000,000, alleging the commission of
Under the said provision, the SEC,
devices, schemes and criminal acts. The
through the PED, is vested with authority to
letter was forwarded by the SEC to the
investigate, either motu proprio or upon
Prosecution and Enforcement Dept (PED).
complaint, any act or omission, fraudulent
Petitioners contended that with the filing of
schemes, devices or misrepresentations in
the letter-petition with the PED, Matsura
violation of any law, rules or regulations, ad-
resorted to forum shopping.
ministered and enforced by the SEC, and to
HELD: Matsura is not guilty of forum shop- file and prosecute appropriate civil or crimin-
ping. There is no identity of causes of action al cases upon a prima facie finding of viola-
or identity of rights asserted by the parties in tion of such laws, rules or regulations. The
both cases. In this case, SEC Case is pending petitioners, in the SEC case, sought the nulli-
before the SICD, which has exclusive juris- fication of the Notice for the Annual Stock-
diction to investigate and resolve intra-cor- holders’ Meeting, the stockholders’ meeting
porate disputes. The respondent’s letter- and organizational meeting held on Septem-
petition, on the other hand, was referred by ber 22, 1997, on their claim that the holding
the SEC to the PED and is pending before the of the same was in violation of the Corpora-
Prosecution and Enforcement Department of tion Code and the By-Laws of the petitioner
the SEC. corporation. In his answer to the petition,
the respondent asserted the validity of the
Section 8 of P.D. No. 902-A, as said meeting and prayed, by way of counter-
amended, provides: claim, for the nullification of the October 20,
1997 meeting of the petitioners, and for
SECTION 8. The Prosecution
damages. In contrast, the respondent al-
and Enforcement Department shall
leged in his letter-petition in the PED case
have, subject to the Commission’s
that the petitioners were engaged in fraudu-
control and supervision, the ex-
lent schemes, devices or misrepresentations
clusive authority to investigate, on
in violation of the law, and SEC rules and
complaint or motu propio, any act
regulations. The complainant Matsuura asked
or omission of the Board of Direct-
the PED to investigate the complaint and file
ors/Trustees of corporations, or of

4
the corresponding administrative, civil or SEC. Hence, the said case should be trans-
criminal cases before the SEC, the proper ferred to the RTC of Makati City, to be raffled
court or body, for violation of the laws, rules to the appropriate branch thereof assigned
or regulations administered and enforced by to try such cases. Despite the repeal of Sec-
the SEC. The fact that the SICD has not yet tion 8 of P.D. No. 902-A and the abolition of
resolved the SEC case does not constitute a the PED, the SEC may continue with its in-
bar to the resolution of the PED case. The vestigation of the letter-petition of respond-
proceedings in the said cases are independent Matsuura.
ent and separate of each other and may thus
proceed separately.
Note that while this case was pending in the

SC, RA 8799, Securities Regulation Code,
took effect on August 8, 2000. Section 5.2
of the law provides that SEC’s jurisdiction
over all cases under Sec 5 of PD 902-A is
transferred to the RTCs.
• The Sandiganbayan has jurisdiction over
Among the powers and functions of the SEC presidents, directors or trustees, or man-
which were transferred to the RTC include agers of government-owned or controlled
the following: (a) jurisdiction and supervision corporations organized and incorporated
over all corporations, partnerships or associ- under the Corporation Code for purposes
ations who are the grantees of primary fran- of the provisions of RA 3019, otherwise
chises and/or a license or permit issued by known as the Anti-Graft and Corrupt Prac-
the Government; (b) the approval, rejection, tices Act. Basis: Sec 4, RA 8249 (People v
suspension, revocation or requirement for Sandiganbayan, 2005)
registration statements, and registration and
licensing applications; (c) the regulation, in-
vestigation or supervision of the activities of
persons to ensure compliance; (d) the super-
vision, monitoring, suspension or take over
Chapter II
the activities of exchanges, clearing agencies
and other SROs; (e) the imposition of sanc- CLASSIFICATION OF PRIVATE
tions for the violation of laws and the rules, CORPORATIONS
regulations and orders issued pursuant
thereto; (f) the issuance of cease-and-desist
orders to prevent fraud or injury to the in- General Classification under §3:
vesting public; (g) the compulsion of the of-
ficers of any registered corporation or associ-
ation to call meetings of stockholders or
1. Stock corporation
members thereof under its supervision; and,
(h) the exercise of such other powers as may • One which has a capital stock divided
be provided by law as well as those which into shares and is authorized to dis-
may be implied from, or which are necessary tribute to the holders of such shares
or incidental to the carrying out of, the ex- dividends or allotments of the surplus
press powers granted the Commission to profits (i.e., retained earnings on the
achieve the objectives and purposes of these basis of the shares held (§3)
laws. • It is organized for profit.
• The governing body of a stock corpor-
However, Section 8 of P.D. No. 902-A, as ation is usually the Board of Directors.
amended, has already been repealed, as
provided for in Section 76 of RA 8799.
Thus, under the new law, the PED ceased to

2. Non-stock corporation
exist. However, the SEC retains jurisdiction
to continue with its investigation of the let- • All other corporations are non-stock
ter-petition of respondent Matsuura. corporations (§3)
• One where no part of the income is
When RA 8799 took effect, the SEC case had distributable as dividends to its mem-
not yet been submitted for decision by the bers, trustees, or officers, subject to
the provisions of the Code on dissolu-

5
tion. Provided that any profit which d) at least 2/3 of its voting stock must
a non-stock corporation may obtain not be owned or controlled by another
as an incident to its operation shall corporation which is not a close
whenever necessary or proper be e) must not be a mining or oil company,
used for the furtherance of the pur- stock exchange, bank, insurance com-
pose or purposes for which the cor- pany, public utility, educational insti-
poration was organized. (§87) tution or corporation vested with pub-
• Not organized for profit. lic interest
• Its governing body is usually the 4. Educational corporation (§106) - Those
Board of Trustees. corporations which are organized for edu-
cational purposes. This type of corpora-
CIR vs. Club Filipino, Inc de Cebu tion is governed by Section 106 of the
(1962) Corporation Code
Club Filipino is a civic corporation organized 5. Religious sole and aggregate (§110, 111
to develop and cultivate sport of all class and (2), 123)
denomination for the healthful recreation
and entertainment of its SH and members. • A corporation sole is one formed for
Its AOI and by-laws are silent as to the purpose of administering and man-
dividends and their distribution but it was aging, as trustee, the affairs, property
provided that upon its dissolution, the Club’s and temporalities of any religious de-
remaining assets after paying debts shall be nomination, sect, or church, by the
donated to a charitable Phil. Institution. chief archbishop, bishop, priest, rabbi,
or other presiding elder of such reli-
HELD: Club Filipino is a non-stock gious denomination, sect or church.
corporation. According to Section 3 of the (§110)
Corporation Code, there are two elements • The corporation sole is an exception to
for a stock corporation to exist: 1) capital the general rule that at least five (5)
stock divided into shares, and 2) an members are required for a corporation
authority to distribute to the holders of such to exist. Here, there is only one (1) in-
shares, dividends or allotments of the corporator. This is applicable to reli-
surplus profits on the basis of shares held. gious communities the regulations of
Nowhere in Club Filipino’s AOI or BL could be which provide that the community’s
found an authority for the distribution of its properties are to be placed in the name
dividends or surplus profits. of the head and administered by him.
(§111(2))
• A corporation aggregate is a religious
Other kinds of corporations: corporation incorporated by more than
1. Public corporation - One formed or or- one person.
ganized for the government or a particu- 6. Eleemosynary corporation – One organ-
lar state. Its purpose is for the general ized for a charitable purpose
good and welfare. 7. Domestic corporation – A domestic cor-
2. Private corporation - One formed for poration is one formed, organized, or ex-
some private purpose, benefit, aim or isting under the laws of the Philippines
end 8. Foreign corporation – One formed, organ-
3. Close corporation (§96) – One whose ized or existing under any laws other than
Articles of Incorporation provide that: those of the Philippines and whose law al-
a) all of the corporation’s issued stock lows Filipino citizens and corporations to
of all classes, exclusive of treasury do business in its own country and state.
shares, shall be held of record by (§123)
not more that a specified number of 9. Corporation created by special laws or
persons, not exceeding 20 charter (§4)
b) all of the issued stock of all classes • Corporations which are governed
shall be subject to one or more spe- primarily by the provisions of the spe-
cified restrictions on transfer permit- cial law or charter creating them (§4)
ted by the Code • Corporation Code is suppletory in so
c) the corporation shall not list in any far as they are applicable (Ibid)
stock exchange or make any public
offering of any of its stock of any
class

6
10. Subsidiary corporation – one in which 3) Majority of the incorporators must be
control, usually in the form of ownership residents of the Philippines
of majority of its shares, is in another • General rule: need not be a citizen
corporation (the parent corporation) • Exceptions: public utilities (Art XII,
Sec 11. Consti), schools (Art XIV, Sec
11. Parent corporation – its control lies in its 4(2), Consti), banks (General Banking
power to elect the subsidiary’s directors Act), retail trade (RA 1180), savings
thus controlling its management policies and loan associations (RA 3799),
investment houses (Sec 5, PD 129),
and other areas of investment as
congress may by law provide (Art XII,
Sec. 10, Consti).
Chapter III • Even though there are no legal re-
FORMATION AND ORGANIZATION strictions as to alien ownership, where
> 40% of the outstanding capital
OF CORPORATION stock will be owned and controlled by
aliens, must get written authorization
from BOI before it can register with
Any number of natural persons not less than SEC. (purpose is to enable BOI to de-
five (5) but not more than fifteen (15), all of termine whether such corporation
legal age and a majority of whom are wherein aliens own a substantial num-
residents of the Philippines, may form a ber of shares would contribute to the
private corporation for any lawful purpose or sound and balanced development of
purposes. Each of the incorporators of a the national economy)
stock corporation must own or be a
subscriber to at least one (1) share of capital 4) Incorporators must be of legal age
stock of the corporation. (§10)
Conditions Precedent for Incorporation

Who may form a corporation
• Consent or agreement of at least 5
1) Natural persons natural persons with respect to:
 Corporations and partnerships 1. Compliance with the Corp Code;
cannot be incorporators, but may be 2. Contribution/pooling of resources
stockholders. This prevents – delivered to and held in trust by
“layering” which may harbour a designated trustee;
criminals and will make the 3. Governance of:
corporation a tool for defrauding the • Contributions;
public. • Distribution of
 Incorporators are those stockholders contributions;
or members mentioned in the • Division of profits/sharing
articles as originally forming and of losses;
composing the corporation and who • Pursuit of
are signatories thereof. purpose/objectives;
 Corporators are stockholders or • Corporate combination;
members who join the corporation and
after its incorporation. • Transactions with third
 Original subscribers are persons parties; and
whose names are mentioned in the 4. Continuity or termination of
Articles, but not as incorporators. existence.
They do not sign the Articles.
• Mandatory Requirements of the Code:
2) At least five incorporators but not more 1. Execution of constitutive
than fifteen documents (AOI, By-laws);
 They must sign the articles of 2. Payment/delivery of contributions
incorporation. – delivered to and held in trust by
 GENUINE INTEREST: Each a designated trustee;
incorporator must own or subscribe 3. Submission of constitutive
to at least one share of stock of the documents to SEC for review or
corporation. evaluation; and

7
4. SEC action – issuance of • It is the sole means of identifying
certificate of registration. the corporation from its members
or stockholders, and from other
Note that once contributions are made entities and corporations
before incorporation, such subscriptions are • Amendment in a corp’s AOI chan-
irrevocable for a period of 6 months (general ging its corporate name does not
rule). extinguish the personality of the
• Exceptions: original corporation. The corp
1. When all of the other subscribers upon such change of its name, is
consent to the revocation; or in no sense a new entity, nor the
2. When the incorporation fails to successor of the original corp. it
materialize (Sec. 61) is the same corp with a different
name, and its character is not
changed. Consequently, the
Steps in the formation of a corporation “new” corp is still liable for the
debts and obligations of the “old”
A. PROMOTION corp (Republic Planters Bank v
CA, 1992)
 The “promoter” brings together • This is essential because through
persons interested in the business it, corporation can sue and be
enterprise and sets in motion the sued
machinery that leads to the • SEC may allow incorporators to
formation of the corporation. reserve the name for a particular
 “Promoter” is a person who, acting period
alone or with others, takes initiative • To distinguish from partnerships
in founding and organizing the and other business orgs, the law
business or enterprise of the issuer requires corporations to append
and receives consideration therefor.1 the word “Corporation” or “Inc” to
its chosen name
• A corporation should transact
B. DRAFTING OF ARTICLES OF business only through its chosen
INCORPORATION – these constitute the name
charter of the corporation
1. CORPORATE NAME Philips Export BV (PEBV) v CA (1992)

• No corporate name may be al- PEBV is a foreign corp under the law of
lowed by the SEC if the pro- Netherlands, although not engaged in
posed name is identical or de- business in the Phils. It is the registered
ceptively or confusingly similar owner of the Philips trademark, and owns
to that of any existing corpora- two local companies with the name Philips
tion or to any other name also.
already protected by law or is PEBV asked the cancellation of the word
patently deceptive, confusing or Philips from Standard Philips, a local
contrary to existing laws. (§18) manufacturer, alleging infringement of its
• A corporate name is essential to exclusive right to use the same. SEC and CA
the corporation’s acquisition of ruled for Std Philips, saying there was no
juridical personality confusion (unlike in Converse case).
• Change of corporate name shall
require the approval of the SEC. Held:
SEC will issue amended certific- Corp’s right to use its corp and trade name is
ate of incorporation under the a property right, a right in rem.
amended name (Ibid)
• A change in corporate name in- General Rule: Corp must have a name by
volves an amendment of the which it is to sue and be sued and do all
Articles, which requires a ma- legal acts.
jority vote of the board and the
Accdg to Corp Code, no corp name may be
vote or written assent of stock-
allowed
holders holding 2/3 of the out-
standing capital stock (§16) 1) if complainant corp acquired a prior
right over name and
1
Sec. 3.10, The Securities Regulation Code (RA 8799)

8
2) proposed name is ness his money is to be
a) identical or risked
b) deceptively or confusingly o so that management will
similar or know what lines of business it
c) patently deceptive, confus- is authorized to act
ing or contrary to existing o so that anyone who transacts
law with the corporation may as-
PEBV’s local companies were incorporated 26 certain whether a transaction
yrs before Std Philips. he is entering is one with the
general authority of the man-
TEST OF CONFUSING SIMILARITY IN CORP agement
NAMES: Whether similarity is such as to • Under Sec 14(2) a corporation
mislead a person using ordinary care and can have as many purposes as it
discrimination wants provided:
o AOI specify the corporation’s
Philips is the dominant word. No need to
primary and secondary pur-
prove that there was actual confusion, as
poses which need not be re-
long as probable or likely to occur. Std
lated to each other
Philips’ purpose, as per its articles of incorp
o Corporation for which special
also includes sale and manufacture of
provisions are made can only
electrical products, which is PEBV’s line of
have the purpose peculiar to
business. Even if SEC guidelines mandate
them
that a corp could add 2 other words to
o Purposes must be lawful
proposed name, only one word “Std” was
• If purpose is lawful, SEC is not
added. “Corp” not counted.
authorized to inquire whether cor-
Note: A prior user can consent to the use of poration has hidden motives and
its name mandamus will lie to compel it to
issue certificate
2. PURPOSE CLAUSE • PD 902-A, Sec 6(h) gives SEC,
• Where a corporation has more after consultation with BOI,
than 1 purpose, the AOI shall NEDA, or other appropriate gov-
state which is the primary pur- ernment agency, the power to re-
pose and which is secondary fuse or deny the application for
(§14(2)) registration of any corporation if
• A non-stock corporation may its establishment, organization,
not include those which contra- operation will not be consistent
dict or change its nature (Ibid) with the declared national eco-
• SEC can reject or disapprove nomic policies
the AOI if the stated purpose is • A corporation may not be formed
patently unconstitutional, illegal, for the purpose of practicing a
immoral, contrary to govern- profession
ment rules and regulations.(§17
(2)) 3. PRINCIPAL OFFICE
• Purpose clause confers as well • Must be within the Philippines
as limits the powers which a (§14 (3))
corporation may exercise • AOI must specify both province or
• A corporation only has such city or town where it is located
powers as are expressly granted • Important in (1) determining ven-
to it by law and by its AOI, ue in an action by or against the
those which may be incidental corporation (2) determining the
to such conferred powers (§45), province where a chattel mort-
those reasonably necessary to gage of shares should be re-
accomplish its purposes, and gistered (Chua Gan v Samahang
those which may be incident to Magsasaka)
its existence (§2). • The statement of the principal of-
• Reasons for purpose clause: fice establishes the residence of
o so that a stockholder con- the corporation
templating an investment
will know what lines of busi- 4. TERM OF EXISTENCE

9
• When a corporation is organ- • In nationalized industries, aliens
ized, the maximum life that can may be directors of a corporation
be stipulated in the AOI is 50 only in such number as may be
years. But during the life of the proportional to their allowable
corporation, the life or term can ownership of shares,2 e.g. if the
be extended to another 50 articles provide for 10 directors,
years at any one instance (§11) and alien ownership is limited to
• But such extension of the life a 40% of the capital, then aliens
corporation cannot be made may occupy a maximum of 4
earlier than 5 years before the board seats.
end of its original term. Excep-
tion: where there are justifiable 6. CAPITAL STOCK; SUBSCRIPTION;
reasons for an earlier extension PAYMENT
as may be determined by the
SEC. (Ibid) Capital stock
• Exception: Condominium cor- o Capital stock is the amount fixed
porations can be organized for a in the AOI, to be subscribed and
period of 200 years paid in or secured to be paid in by
• Extension involves an amend- the shareholders of a corporation,
ment of the AOI. Thus, the re- either in money or property, labor
quisites under §16 must be or services, at the organization of
complied with. Any dissenting the corporation or afterwards and
stockholder may exercise his upon which is to conduct its oper-
appraisal right (§37). ation.
o The capital stock limits the max-
5. INCORPORATORS AND DIRECTORS; imum amount or number of
NUMBER AND QUALIFICATIONS shares that may be issued by the
• “Directors” is used for stock corporation without formal
corporations, while “trustees” is amendment of the AOI. It re-
used for stock corporations. mains the same even though the
• GENERAL RULE: not less than 5 actual value of the shares as de-
but not more than 15 termined by the assets of the cor-
EXCEPTIONS: poration is diminished or in-
i) Non-stock corporations – creased.
articles or by-laws may
provide for more than 15 Authorized capital stock
trustees (§92). o ACS is synonymous with capital
• Exception: Educational stock where the shares of the
non-stock corporations corporation have par value. If
– trustees may not the shares of stock have no par
exceed 15. However, value, the corporation has no
the number of trustees ACS, but it has capital stock the
shall be in multiples of amount of which is not specified
5 (§108) in the AOI as it cannot be de-
termined until all the shares have
ii) Merger of banks – new been issued. In this case, the
board is allowed to have two terms are not synonymous
such number of directors as (De Leon)
is equivalent to the total o State the authorized capital stock
number of directors of the in lawful money of the Philippines,
merging banks, though it the number of shares into which
may exceed fifteen (General the ACS is divided, and the par
Banking Act, as amended). value of each par value shares
• Incorporators and directors of a (§14(8), §15(7))
stock corporation must own at o Stock corporations are not re-
least one share of stock of the quired to have any minimum au-
corporation. In a non-stock thorized capital stock except
corporation, a trustee must be a
member thereof. 2
Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD
716.

10
when special laws provide oth- o 25% of subscribed capital stock
erwise (§12) must be paid-up for the purpose
of incorporation, but in no case
Subscribed capital stock shall be less than P 5000 (§13)
o It is the amount of the capital o Portion of the authorized capital
stock subscribed whether fully stock which has been subscribed
paid or not. It connotes an ori- and paid. Not all funds or assets
ginal subscription contract for received by the corporation can
the acquisition by a subscriber be considered paid-up capital, for
of unissued shares in a corpora- this term has a technical significa-
tion (§60,61) tion in corporation law. Such
o At least 25% of authorized cap- must from part of the authorized
ital stock must be subscribed capital stock of the corporation,
(§13) subscribed and then actually paid-
up. [MSCI-NACUSIP Local
o Subscription – mutual agree-
Chapter v. National Wages and
ment of the subscribers to take
Productivity Commission]
and pay for the stock of a cor-
poration o Must be in the form of (a) cash
deposited in a bank or (b) prop-
o Pre-incorporation subscription –
erty which may be used or actu-
amount which each incorporator
ally needed by the corporation in
or stockholder agrees to con-
its operations
tribute to a proposed corpora-
tion o Capital can’t consist or be inves-
ted in money market placement
Outstanding capital stock o Corporations with more stringent
capital requirements:
o It is the portion of the capital
stock which is issued and held
 Insurance corporations –
by persons other than the cor- must have paid-up capital
poration itself. Under §137, it stock of at least P 5 M (Insur-
is the total shares of stock is- ance Code, Sec 188)
sued under the binding sub-  Banks – monetary board fixes
scription agreements to sub- minimum paid-up capital re-
scribers or stockholders, wheth- quirements for the different
er or not fully or partially paid, classes of banks (Central
except treasury shares. It is Bank Act and General Bank-
thus broader than “subscribed” ing Act).
capital stock
o The terms “subscribed capital Unissued capital stock
stock” and “issued” or “out- o It is that portion of the capital
standing” capital stock are used stock that is not issued or sub-
synonymously since subscribed scribed. It does not vote and
capital stock, as distinguished draws no dividends
from the certificate of stock, can
be issued even if not fully paid. Legal capital
But while every subscribed o It is the amount equal to the ag-
share (assuming there is a bind- gregate par vale and/or issued
ing subscription agreement) is value of the outstanding capital
“outstanding,” an issued share stock. When par value shares are
may not have the status of out- issued above par, the premium or
standing share (as in the case excess is not to be considered as
of treasury shares) part of the legal capital (Cf§43).
o Pre-incorporation subscription – In the case of no par value
amount which each incorporator shares, the entire consideration
or stockholder agrees to con- received forms part of legal capit-
tribute to a proposed corpora- al and shall not be available for
tion distribution of dividends (§6, par
3)
Paid-up capital
Capital

11
o It is used broadly to indicate the • Corporations governed by special laws
entire property or assets of the have to submit a recommendation
corporation. It includes the from the appropriate government
amount invested by the stock- agency to the effect that such articles
holders plus the undistributed are in accordance with law.
earnings less losses and ex- a) banks, banking and quasi-banking
penses. institutions,
o In the strict sense, it refers to b) building and loan associations,
that portion of the net assets c) trust companies and other finan-
paid by the stockholders as con- cial intermediaries,
sideration for the shares issued d) insurance companies,
to them, which is utilized for the e) public utilities,
prosecution of the business of f) educational institutions, and
the corporation (De Leon) g) other corporations governed by
special laws
7. TREASURER-IN TRUST • Non-stock corporations that intend to
The person elected by the solicit gifts, donations, and
subscribers as Treasurer of the contributions from the public at large
corporation at the time of the for the benefit of an indefinite number
incorporation, who is named as such of persons must secure a Certificate
in the AOI and who has been of Registration from the Insurance
authorized to receive for and in the Commissioner.
name and for the benefit of the • Failure to file AOI will prevent due in-
corporation, all subscriptions, fees, corporation of the proposed corpora-
contributions or donations paid or tion and will not give rise to its jur-
given by the subscribers or idical personality (§19). It will not
members even be a de facto corporation (§20)
8. TREASURER’S AFFIDAVIT D. EXAMINATION OF ARTICLES BY SEC;

The sworn statement of the APPROVAL OR REJECTION
Treasurer elected by the subscribers
stating at least 25% of the • The SEC may reject any AOI thereto if
authorized capital stock of the the same is not in compliance with the
corporation has been subscribed and requirements of this Code (§17)
that at least 25% of the total • The SEC shall give the incorporators a
subscription has been fully paid to reasonable time within which to cor-
him in actual cash and/or property, rect or modify the objectionable por-
the fair valuation of which is equal tions of the articles or amendment.
to at least 25% of the said
subscription, such paid-up capital
being not less than 5,000.00 (§14) Grounds for disapproving
articles of incorporation
9. OTHER MATTERS (§17)
• Classes of shares, as well as the
preferences or restrictions on a) AOI does not substantially the form
any such class (§6) prescribed
• Denial or restriction of pre- b) Purpose is patently unconstitutional,
emptive right (§39) illegal, immoral, contrary to govern-
ment rules and regulations
• Prohibition against transfer of
c) Treasurer’s Affidavit is false
stock which would reduce stock
d) Percentage requirement of ownership
ownership to less than the
as required by the Constitution not
required minimum in the case of
complied with.
a nationalized business or
• After consulting with BOI, NEDA, ap-
activity (§15(11))
propriate government agency, SEC
may deny registration of any corpora-
C. FILING OF ARTICLES AND PAYMENT OF
tion if its establishment will not be
FEES
consistent with declared national
policies

12
• Certificate of authority required of
the following: Municipality of Malabang vs. Benito (27
a) Insurance Companies- In- SCRA 533)
surance Commission The municipality of Balabagan was created
b) Banks, Building and Loan by EO 386 of President Garcia out of barrios
Associations, Finance Com- and sitios of Malabang. The petitioners seek
panies- Monetary Board to nullify the EO. They rely on the Pelaez
c) Educational Institutions- ruling that the President’s power to create
Secretary of Education municipalities under Sec. 68 of the
d) Public Utilities- Board of Administrative Code is unconstitutional.
Power, Board of Transporta- Respondents argue that the Pelaez ruling is
tion, National Telecommu- inapplicable because Balabagan is a de facto
nication Commission, etc.. corporation.
• Remedy in case of rejection of AOI:
by petition for review in accordance HELD: The Municipality of Balabagan was
with the Rules of Court (§6, last not a de facto corporation. The color of
par., PD 902-A) authority requisite to a de facto municipal
corporation may be an unconstitutional law,
E. ISSUANCE OF CERTIFICATE OF valid on its face, which has either:
INCORPORATION a. Been upheld for a time by the
courts; or
• A private corporation formed or or- b. Not yet been declared void;
ganized under this Code commences provided that a warrant for its
to have corporate existence and jur- creation can be found in some
idical personality and is deemed in- other valid law or in the
corporated from the date the Secur- recognition of its potential
ities and Exchange Commission is- existence in the general
sues a certificate of incorporation constitution of the state.
under its official seal (§19) The mere fact that Balabagan was organized
• Thereupon the incorporators, stock- before the statute was invalidated cannot
holders/members and their suc- make it a de facto corporation because,
cessors shall constitute a body polit- independently of the Administrative Code,
ic and corporate under the name there is no other valid statute to give color of
stated in the articles of incorporation authority to its creation. This doesn’t mean
for the period of time mentioned that the acts done by Balabagan in the
therein, unless said period is exten- exercise of its corporate powers are a nullity.
ded or the corporation is sooner dis- The existence of EO 386 is an “operative fact
solved in accordance with law. (Ibid) which cannot be justly ignored.”
• If incorporators are found guilty of
fraud in procuring Certificate of In-
corporation, SEC may revoke the
same after proper notice and hear- b) User of corporate powers – there has
ing (§6(I), PD 902-A) been some user of corporate powers,
the transaction of business in some
way as if it were a corporation
Defective Attempts to Incorporate • not necessary that dealings
between the parties should have
A. DE FACTO CORPORATIONS – a been on a corporate basis
• election of directors and officers
corporation where there exists a flaw in
would not be user of corporate
its incorporation
powers since these acts are just
indicative of a mere association
Requisites of a de facto corporation
• taking subscriptions to and issu-
ing shares of stock, buying lot,
a) Valid statute – there is an appar- constructing, and leasing a build-
ently valid statue under which the ing on it will constitute sufficient
corporation with its purposes may user of corporate powers to con-
be formed. There can be no de facto stitute a de facto corporation
corporation under a statue sub-
sequently declared unconstitutional

13
c) Colorable compliance - there has knowing it to be without authority.
been colorable compliance with legal Such persons shall be liable as gener-
requirements in GOOD FAITH al partners for all debts, liabilities and
• while the corporation is still in damages incurred or arising as a res-
the process of incorporation, it ult thereof. (§21)
is quite clear that there can be • When such ostensible corporation is
no substantial or colorable com- sued on any transaction entered by it
pliance and therefore it cannot as a corporation or any act committed
be at such a stage a de facto by it as such, it shall not be allowed to
corporation use as a defense as lack of corporate
• A corporation which has not yet personality (§21)
been issued a certificate of • One who assumes an obligation to an
incorporation cannot claim “in ostensible corporation as such, cannot
good faith” to be a corporation. resist performance thereof on the
Thus, it cannot be a de facto ground that there was in fact no cor-
corporation [Hall v. Piccio 86 poration (§21)
Phil 603] • Note that an unincorporated corpora-
tion is not barred from transacting
Compliance with the above conditions would business before the commencement
make the corporation de facto whose of corporate existence. Limit: per-
incorporation cannot be attacked collaterally. sonal liability. Complication: when the
It may only be attacked directly by the State corporation did not come about
in a quo warranto proceeding • Against whom will estoppel lie? Who
• Compliance with the above condi- committed the active misrepresenta-
tions would make the corporation de tion?
facto whose incorporation cannot be • Where a person convinces other
attacked collaterally. It may only be parties to invest money for the forma-
attacked directly by the State in a tion of a corporation, but which has
quo warranto proceeding (§20) never duly incorporated, there can be
• De facto doctrine grew out of the no resulting partnership among them,
necessity to promote the security of and the mere passive investors can-
business transactions and to elimin- not be held liable to share in the
ate quibbling over irregularities losses suffered by the business enter-
• The de facto doctrine is the excep- prise (Pioneer Surety v CA, 1989)
tion to the general rule that when • When applicable:
there is no corp entity to talk about, 1. Persons assuming to act as corp
it is the natural persons who are li- are liable as gen partners;
able
• Where corporations are neither de
2. 3rd party who had dealt with an
unincorporated association as a
jure or de facto, associates may be
corp may be precluded from
held liable as partners unless estop-
denying its corporate existence
pel applies
on a suit brought by the alleged
• No articles and no by-laws: no de
corp – person deemed to have
facto corp. There’s no colorable
admitted the existence of the
compliance at all
corp
• De facto corp is like a de jure corp,
3. alleged corp that has entered into
has all the powers and liabilities of
a contract by virtue of which it
de facto corp
has received advantages and be-
• THE ONLY DIFF: its incorporation
nefits
can be attacked by State in quo
warranto action • However, if business associates fraud-
Ratio: Only State can give it ulently misrepresent the existence of
legal existence, so only the a corp, 3rd party can sue them as gen
State is wronged partners. 3rd party is not estopped
from asserting their liability because
he had recognized the corporation’s
B. CORPORATION BY ESTOPPEL existence. Ratio: They cannot profit
by their own misrepresentation.
• It is a status acquired by persons
who assume to act as a corporation

14
• Hence, if associates did not know of its incorporation, such 3rd party may
thee defective incorp, they can’t be sue associates as general partners.
personally held liable by innocent 3 rd Where both the associates and the 3 rd
party (Cf Salvaierra v Garlitos, party were ignorant of the defective
1958) incoroporation, 3rd party cant hold the
• But if 3rd party knew of defects of associates liable since they were in
good faith. If 3rd party knew of defects
incorp, he is estopped from recover-
in incorporation and still dealt with the
ing from individual associates, but
corporation, he must be deemed to
must recover only from corp assets
have chosen to deal with the corpora-
tion as such and should be limited in
Lozano vs. delos Santos (1997) his recovery to the corporate assets.
This case involved two incorporated drivers’
associations that decided to unite and elect
one set of officers to be given authority to
Internal Organization of the Corporation
collect the daily dues of the drivers who are
members of the consolidated association.
A. APPROVAL OF BY-LAWS
HELD: Doctrine of estoppel applies when
persons assume to form a corporation and
exercise corporate functions and enter into 1. Definition of by-laws
business relations with third persons. Where • These are regulations, ordin-
there are no third persons involved and the ances, rules or laws adopted by
conflict arises only among those assuming to an association or corporation or
form a corporation, who therefore know that the like for its internal gov-
it has not been registered, there is no ernance. By- laws define the
corporation by estoppel. rights and obligations of various
officers, persons or groups within
International Express Travel v. CA the corporate structure and
The doctrine of corporation by estoppel may provide rules for routine matters
apply to: such as calling meetings.
• Every corporation under this code
o a third party - a 3 rd party
shall have the power and capa-
who had dealt with an unincorporated
city: to adopt by-laws not con-
association as a corporation may be
trary to law, morals, or public
precluded from denying its corporate
policy, and to amend or repeal
existence on a suit brought by the al-
the same in accordance with this
leged corporation on the contract even
code (§36)
if he did not know of the defective in-
• These are subordinate to the AOI,
corporation. 3rd party is considered to
Corp Code, and other statutes
have admitted the existence of a cor-
poration by the fact that he dealt with
2. When to adopt by-laws (§46)
it as a corporation
• Every corporation formed under
o the alleged corporation - this code must within 1 month
when a third person has entered into a after receipt of official notice of
contract with an association which rep- the issuance of its certificate of
resented itself to be a corporation, the incorporation by the SEC adopt a
association is estopped from denying code of by-laws for its govern-
its corporate capacity in a suit against ment not inconsistent with this
it by such 3rd person. It cannot allege code.
lack of personality to be sued to evade • May be adopted and filed prior to
responsibility on a contract it has incorporation, in such case, shall
entered into and by virtue of which it be approved and signed by all in-
has received advantages and benefits corporators submitted to SEC to-
o associates as partners - gether with AOI
when business associates fraudulently
misrepresents the existence of a cor-
poration and the 3rd party contacts with
the association as a corporation
without knowing the serious defects in

15
special corporations governed by
special laws must be accompan-
ied by a certificate of the appro-
priate gov’t agency to the effect
Failure to file By-laws on time: that such by-laws are in accord-
ance with law
Loyola Grand Villas Homeowners Assn • Cannot bind stockholders or cor-
v. CA poration pending approval
The Supreme Court held that although the • By-laws, like AOI are contracts of
Corporation Code requires the filing of by- adhesion. They will bind the cor-
laws within one month after the issuance of poration and stockholders includ-
the Certificate of Incorporation, it does not ing those who vote against as
expressly provide for the consequences of well as those who became mem-
non-filing within the said period. Failure to bers after approval
file the by-laws within that period does not • Contracts entered into without
imply the "demise" of the corporation. By- strict compliance with by-laws
laws may be required by law for an orderly may be binding on the corpora-
governance and management of corporations tion due to long acquiescence and
but they are not essential to corporate birth. usage
Therefore, failure to file them within the • By-laws are mere internal rules
period required by law by no means tolls the among stockholders and cannot
automatic dissolution of a corporation. affect or prejudice 3rd persons
who deal with the corporation un-
3. How filed (§46) less they have knowledge of the
same (China Banking Corp v CA,
• Must be approved by the affirm- 1997)
ative vote of the stockholders
representing the majority of the 6. Contents (§47)
outstanding capital stock or ma- • Subject to the provisions of the
jority of members (if filed prior Constitution, this Code, other
to incorporation, must be ap- special laws, and the articles of
proved and signed by all in- incorporation, a private corpora-
corporators) tion may provide in its by-laws
• Must be signed by the stock- for:
holders or members voting for it a) The time, place and manner
• Must be filed with the SEC certi- of calling and conducting reg-
fied by the majority of ular or special meetings of
directors/trustees and counter- the directors or trustees;
signed by the secretary of the b) The time and manner of call-
corporation which shall be at- ing and conducting regular or
tached to original AOI special meetings of the stock-
holders or members;
4. Where kept (§46) c) The required quorum in
• Must be kept in the principal of- meetings of stockholders or
fice of the corporation; subject members and the manner of
to inspection of stockholder or voting therein;
member during office hours (Cf d) The form for proxies of stock-
§74) holders and members and the
manner of voting them;
5. Effectivity of by-laws e) The qualifications, duties and
• Effective only from the issuance compensation of directors or
of SEC of certification that bylaw trustees, officers and employ-
are not inconsistent with the ees;
Code f) The time for holding the an-
• By-laws or any amendment nual election of directors of
thereto of any bank, banking in- trustees and the mode or
stitution, building and loan as- manner of giving notice
sociation, trust company, insur- thereof;
ance company, public utility, g) The manner of election or ap-
educational institution or other pointment and the term of of-

16
fice of all officers other than of directors or trustees and cor-
directors or trustees; porate officer
h) The penalties for violation of • Commencement of business –
the by-laws; may take the form of contracting
i) In the case of stock corpor- for lease or sale of properties to
ations, the manner of issu- be used as business site of the
ing stock certificates; and corporation and other preparatory
j) Such other matters as may acts geared towards fulfillment of
be necessary for the proper the purpose for which the corpor-
or convenient transaction of ation was established
its corporate business and 2. Non-user for 5 years (continuous in-
affairs. operation)- when the corporation has
• The contents may be subdivided commenced the transaction of its
into two major headings: business but subsequently becomes
a) Management and control of continuously inoperative for a period
the corporate entity; and of at least 5 years. The same shall be
b) Rights and obligations of a ground for the suspension or revoc-
stockholders ation of its corporate franchise or Cer-
tificate of Incorporation (not auto-
7. Amendment or repeal (§48) matic). Notice and hearing is re-
• Majority vote of the members of quired.
the Board and majority vote of 3. Exception: cause or non-use or opera-
the outstanding capital stock or tion was due to causes beyond the
majority of members, in a control of the corporation as determ-
meeting duly called for the pur- ined by SEC (ex. Mineral lands to be
pose; or developed by the corporation as per
• 2/3 of the outstanding capital its purpose are the object of court lit-
stock or members may delegate igation and a court injunction against
to the BOD the power to amend the corporate activities has been is-
or repeal any by-laws or adopt sued)
new by-laws (such power may
be revoked by majority vote ANNUAL FINANCIAL STATEMENTS – filed with
only) SEC annually
• In all other respects, the pro-
cedure for adopting the original
by-laws shall be the same in
amending or repealing by-laws Chapter IV
or adoption of a new set of by-
laws
THE CORPORATE ENTITY
B. ELECTION OF DIRECTORS – discussed in Doctrine of separate juridical

Chapter VII personality
C. COMMENCEMENT OF BUSINESS • A corporation has a personality separate

and distinct from that of its stockholders
and members and is not affected by the
Effects of non-use of personal rights, obligations, and transac-
charter/continuous inoperation tions of the latter. Since corporate prop-
erty is owned by the corporation as a jur-
1. Non-user for 2 years (non-use of idical person, the stockholders have no
charter)- when the corporation does claim on it as owners, but have merely an
not formally organize and com- expectancy or inchoate right to the same
mence the transaction of its busi- should any of it remain upon dissolution of
ness or the construction of its works the corporation after all corporate credit-
within 2 years from the date of its ors have been paid. Such right is limited
incorporation. Its corporate powers only to their equity interest.
cease and the corporation shall be • Although stockholder’s interest in the corp
deemed dissolved (automatic) may be attached by his personal creditor,
• Formal organization – may con- corp property cannot be used to satisfy
sist in the election of new board his claim

17
• General Rule: Separate personality is pleaded. Mere allegation that a cor-
poration is the alter ego of the indi-
vested to a corporate entity when it is
vidual stockholders is insufficient.
issued the certificate of incorporation by
The presumption is that the stock-
the SEC. The exceptions are:
holders or officers are distinct entities.
a. de facto corporation
The burden of proving otherwise is on
b. corporation by estoppel
the party seeking to have the court
• As a separate juridical personality, a
pierce the veil of corporate entity.
corporation can be held liable for torts
[Ramoso v. VA]
committed by its officers for corporate
• Piercing the veil of corporate entity is
purpose (PNB v CA, 1978)
merely an equitable remedy, and may
• It can’t be held criminally liable for a
be awarded only in cases when the
crime committed by its officers (People
corporate fiction is used to defeat
v Tan Boon Kong, 1930)
public convenience, justify wrong,
• Corporate entities are entitled to the fol-
protect fraud or defend crime or
lowing constitutional rights: due pro-
where the corporation is a mere alter
cess, equal protection, and protection
ego or business conduit of a person.
against unreasonable searches and
• When it comes to applying the doc-
seizures. However, a corp is not en-
trine, the first point to consider is the
titled to the privilege against self-incrim-
liability of obligation of the individual
ination (Bataan Shipyard & Eng’g Co. v
(the one who is being sought to be li-
PCGG, 1987)
able). Without such liability,
• A corporation is not entitled to moral
everything would have been in com-
damages (LBC Express, Inc v CA)
pliance with statutes.
• Juridical personality of the corporation
• In case of wholly-owned corporations,
ends when liquidation ends (payment of
corporations with common stockhold-
debts and distribution of assets) and in-
ers, or corporations having a par-
choate rights or expectancies of stock-
ent-subsidiary relationship, the fol-
holders are realized. Until such convey-
lowing are the “inevitable con-
ance is made, title over the assets re-
sequences”:
mains with the corporation
a) Control and management of the cor-
poration;
b) Interlocking directors;
Piercing the veil of corporate
fiction c) Common access to the use of re-
sources, services, and 3rd-party pro-
1. Nature of the piercing doctrine viders; and
d) Intra-corporate dealings.
• Piercing the veil of corporate entity
In the above consequences, there is no
requires the court to see through
necessity for applying the doctrine of
the protective shroud which ex-
piercing the corporate veil unless there is
empts its stockholders from liabilit-
a particular act by the corporation,
ies that ordinarily they could be sub-
stockholder, or BOD that gives rise to a
ject to, or distinguishes one corpora-
liability. If there’s a liability to speak of,
tion from a seemingly separate one,
such consequences may be considered as
were it not for the existing corporate
a means of evading such thus the need for
fiction [Lim v. CA, 2000]. But to do
the piercing.
this, the court must be sure that the
corporate fiction was misused, to • In applying the doctrine, determine
such an extent that injustice, fraud first the rights and obligations of the
or crime was committed upon an- parties. Then, determine the possibil-
other, disregarding, their, his, her or ity of non-enforcement of such rights
its rights. It is the protection of the and obligations because of the shield
interests of innocent third persons or veil. Lastly, look into the circum-
dealing with the corporate entity stances and underlying purpose of
which the law seeks to protect by putting up the corporation
this doctrine. [Traders Royal Bank v.
CA]
2. Extent of the legal effects of piercing
• Whether the existence of the corpor-
ation should be pierced depends on
• The application of the piercing doc-
questions of facts, appropriately trine to a particular case does not

18
deny the corporation of legal per- corporation or no assets except
sonality for any and all purposes, those conveyed to or by the par-
but only for the particular transac- ent corporation
tion or instance for which the doc- h) In the papers of the parent cor-
trine was applied. [Koppel Phil. Inc. poration or in the statements of
v. Yatco] its officers, the subsidiary is de-
• Piercing is not allowed unless the scribed as a department or divi-
remedy sought is to make the of- sion of the parent corporation or
ficer or another corporation pecuni- its business or financial respons-
arily liable for corporate debts ibility is referred to as the parent
corporation’s own
3. Illustrative Cases where piercing the veil i) The parent corporation uses the
is allowed property of the subsidiary as its
• If done to defraud the government own
of taxes due it j) The directors or executives of the
• If done to evade payment of civil li- subsidiary do not act independ-
ability ently in the interest of the subsi-
• If done by a corporation which is diary but take their orders from
merely a conduit or alter ego of an- the parent corporation in the lat-
other corporation ter’s interest
• If done to evade compliance with k) The formal ledger requirements of
contractual obligations the subsidiary are not observed
• If done to evade financial obligation (PNB v Ritratto Group, 2001).
to its employees • The subsidiary cannot be considered a
mere instrumentality of the parent
4. Parent-subsidiary relationship corporation just by the combination of
• The mere fact that a corporation the 11 signs listed above. For the veil
owns all or substantially all of the of corporate entity of the subsidiary to
stocks of another corporation is not be pierced so that it is considered just
sufficient to justify their being an instrumentality, the act questioned
treated as one entity. If used to must have an illegal or unfair purpose
perform legitimate functions, the which results to prejudice to third per-
subsidiary’s separate existence may sons who may seek redress from the
be respected. However, to prevent corporate entity
abuses of the separate entity priv-
ilege, the court will pierce the veil of De Leon vs. NLRC, GR 112661, May 30,
corporate entity and regard the two 2001
corporations as one.
FACTS: FISI contracted with FTC for security
• Circumstances which if present in
services. Subsequently, the stockholders of
the proper combination renders the
FISI sold all their participation in the
subsidiary an instrumentality:
corporation to a new set of stockholders which
a) The parent corporation owns all
renamed the corporation MISI. Afterwards,
or most of the subsidiary’s cap-
FTC preterminated its contract of security
ital stock
services with MISI causing petitioner security
b) The parent and subsidiary cor-
guards to lose their employment and file ULP
porations have common direct-
case against FTC, FISI and MISI.
ors or officers
c) The parent corporation finances HELD: There was ER-EE relationship between
the subsidiary FTC and petitioners. It was shown that FISI
d) The parent corporation sub- was a mere adjunct of FTC. Records show that
scribes to all the capital stock of FISI and FTC have the same owners and
the subsidiary or otherwise business address, and FISI provided security
causes its incorporation services only to FTC. The purported sale of
e) The subsidiary has grossly inad- the shares of the former stockholders to a new
equate capital set of stockholders who changed the name of
f) The parent corporation pays the the corporation to MISI appears to be part of a
salaries and other expenses or scheme to terminate the services of FISI's
losses of the subsidiary security guards posted at the premises of FTC
g) The subsidiary has substantially and bust their newly-organized union which
no business except with parent was then beginning to become active in

19
demanding the company's compliance with izens of the Philippines or to corpora-
Labor Standards laws. Under these tions or associations organized under
circumstances, the Court cannot allow FTC to the laws of the Philippines at least
use its separate corporate personality to 60% of whose capital is owned by
shield itself from liability for illegal acts such citizens. “
committed against its employees. • War-time Test - If the controlling
stockholders are enemies, then the
Francisco vs. Mejia, GR 141617, Aug 14, nationality of the corporation will be
2001 base on the citizenship of the majority
With specific regard to corporate officers, the stockholders in times of war (Filipinas
general rule is that the officer cannot be held Compania de Seguros v Christian
personally liable with the corporation, Huenfeld, 1951) .
whether civilly or otherwise, for the • Investment Test - Sec. 3(a) and (b),
consequences of his acts, if he acted for and Foreign Investments Act of 1991
in behalf of the corporation, within the scope (RA7042). It considers for purpose of
of his authority and in good faith. In such investment a “Philippine National” as
cases, the officer's acts are properly a corporation organized under the
attributed to the corporation. However, if it laws of the Philippines of which at
is proven that the officer has used the least 60% of the capital stock out-
corporate fiction to defraud a third party, or standing and entitled to vote is owned
that he has acted negligently, maliciously or and held by citizens of the Philippines,
in bad faith, then the corporate veil shall be or a trustee of the funds for pension
lifted and he shall be held personally liable or other employee retirement or sep-
for the particular corporate obligation aration benefits, where the trustee is
involved. a Philippine national and at least 60%
of the fund will accrue to the benefit
of Philippine nationals.
Nationality of the
corporation 3. Grandfather rule
Used to determine the nationality of a
1. The corporation is a national of the corporation by which the percentage of
country under whose laws it is organized Filipino equity in corporations engaged in
or incorporated: the place of incorpora- nationalized and/or partly nationalized
tion test (§123) . areas of activities, provided for under the
• Domestic corporations – organized constitution and other nationalization
and governed under and by Philip- laws, is computed, in cases where
pine laws corporate shareholders are present in the
• Foreign corporations – organized situation, by attributing the nationality of
under laws other than those of the the second or even subsequent tier of
Philippines an can operate only in ownership to determine the nationality of
the territory of the state under the corporate stockholder.
whose laws it was formed.
However, they may be licensed to
do business here. • SEC formula:
“Shares belonging to corporations or
partnerships at least 60% of the
2. Nationality of the Corporation as de-
capital of which is owned by Filipino
termined by the “Control Test”
citizens shall be considered as of
• Exploitation of Natural Resources - Philippine nationality, but if the
Section 2, Art. XII CONST. “only percentage of Filipino ownership in
Filipino Citizens or Corporations the corporation or partnership is less
whose capital stock are at least 60% than 60% only the number of shares
owed by Filipinos can qualify to ex- corresponding to such percentage
ploit natural resources.” shall be considered as of Philippine
• Public Utilities - Sec. 11, Art XII, nationality.”
CONST. “xxx no franchise, certific-
ate or any other form of authoriza-
tion for the operation of a public
utility shall be granted except to cit-

20
• Implied from the acts of respons-
ible officers of the corp.
* The corp. cannot adopt only the part
of the contract which may be
Chapter V beneficial to it & then discard the part
that is burdensome.
PROMOTERS’ CONTRACTS
PRIOR TO INCORPORATION * The contract to be capable of adoption
or ratification, must be one within the
powers of the corp. to enter.
b. Acceptance of benefits under the con-
Functions of Promoters
tract with knowledge of the terms
• Organize and establish corporation thereof
• Solicit or pool capital contributions
• Exercise/identify/consummate opportun-
ities Personal Liability of Promoter on Pre-
• Make available capital contributions/in- Incorporation Contracts
vestments (underwrite)
• Manage/control
• Note: may be done prior or after incor- There are three possible situations intended
poration. Complications arise if per- by the promoter and the other party in pre-
formed prior to incorporation. For incorp. contracts:
whom was the promoter acting in behalf
of? (no juridical entity yet) 1. Promoter takes a continuing OFFER on be-
half of the corp, which if accepted by the
corp. becomes a contract  Promoter
does not assume any personal liability,
What are Promoter’s Contracts? whether or not the offer is accepted by
the corp.
• Contracts prior to existence of corpora- 2. Promoter makes a contract at the time
tion thus the corporation could not have binding himself with the UNDERSTANDING
been a party to it. that if the corp., once formed, accepts or
• However, the corporation may make the adopts the contract, the promoter will be
contracts its own and may become relieved of all responsibilities
bound on such contracts if after incor- 3. Promoter binds himself PERSONALLY & as-
poration, it accepts or ratifies the same, sumes the responsibility of looking to the
or accepts its benefits with knowledge of proposed corp. for reimbursement
the terms thereof.
• Ratification may be express by board
resolution or implied by acts of the In the absence of any express or implied
board or acceptance of benefits agreement to the contrary, the 3 rd situation
will be presumed and the promoter will be
considered personally liable for the contracts.
Thus, the corp.’s adoption or ratification of the
contract will not release the promoter from
Liability of Corporation for Promoter’s
personal liability unless a novation was
Contracts
intended. Exception: Quaker v Hill case. In
Rules on the liability of the corp. on this case, Quaker looked to the uincorporated
promoters’ contracts: entity when making the contract. Thus, the
promoter was not liable.
1. Gen. Rule: Corp. is not bound by the
contract – Since the corp. did not yet
exist at the time of the contract, it could
not have had an agent who could legally Compensation of Promoters
bind it.
2. Exception: Corp. may be bound by the Gen rule – the corporation is not liable to pay
contract if it makes the contract its own: compensation because this would be an
How? imposition on innocent investors.
a. Adoption or ratification
• By express resolution Exceptions:

21
• if after it is formed, corporation ex- the corporation if it be a non-stock corpor-
pressly promises to do so ation;
• Services done partly before and partly 7. To purchase, receive, take or grant, hold,
after incorporation and the corporation convey, sell, lease, pledge, mortgage and
takes the benefits thereof otherwise deal with such real and personal
property, including securities and bonds of
The Corp. Code does not contain any other corporations, as the transaction of
provision as to the compensation of the lawful business of the corporation may
promoters. But the Securities Act authorizes reasonably and necessarily require, sub-
a promotion fee IF it is provided for in the ject to the limitations prescribed by law
registration statement of the securities and the Constitution;
involved. 8. To enter into merger or consolidation with
other corporations as provided in this
Code;
Fiduciary Relationship between 9. To make reasonable donations, including
Corporation & Promoter those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, That no cor-
The promoters, being responsible for the poration, domestic or foreign, shall give
financing & organization of the corp., are donations in aid of any political party or
under duty to exercise good faith & fairness candidate or for purposes of partisan
in all their acts & transactions. political activity;
10. To establish pension, retirement, and oth-
Example: Promoters often have to take er plans for the benefit of its directors,
options or title to property in their name but trustees, officers and employees; and
for the benefit of the corp. In such cases, 11. To exercise such other powers as may be
they should not make secret profits in essential or necessary to carry out its pur-
passing title to the corp. If they do, they pose or purposes as stated in the articles
would have to account for all such profits to of incorporation. (in the purpose clause)
the corp. when formed.
• Sources of power (repositories)

o Section 36 (Corp Code and other ap-
plicable statutes)
Chapter VI o Purpose clause (AOI, supplemented
CORPORATE POWERS by by-laws)
• Sec 38 par 11 grants such power as are
essential or necessary to carry out its pur-
General powers of corporations (§36) pose or purposes as stated in the AOI. A
corporation is presumed to act within its
1. To sue and be sued in its corporate powers and when a contract is not on its
name; face necessarily beyond its authority, it
2. Succession by its corporate name for the will, in the absence of proof to the con-
period of time stated in the articles of in- trary, presumed valid
corporation and the certificate of incor- • The general powers are to be exercised by
poration; the BOD. However, the power to amend
3. To adopt and use a corporate seal; AOI is to be exercised by the stockholders
4. To amend its articles of incorporation in or members
accordance with the provisions of this • 2 general restrictions on the power of the
Code; corporation to acquire and hold proper-
5. To adopt by-laws, not contrary to law, ties:
morals, or public policy, and to amend o that the property must be reasonably
or repeal the same in accordance with and necessarily required by the trans-
this Code; actions of its lawful business
6. In case of stock corporations, to issue or o that the power shall be subject to the
sell stocks to subscribers and to sell limitations prescribed by other special
stocks to subscribers and to sell treasury laws and the constitution (corporation
stocks in accordance with the provisions may not acquire more than 30% of
of this Code; and to admit members to voting stocks of a bank; corporations
are restricted from acquiring public

22
lands except by lease of not more Rule – No Corporation under this Code shall
than 1000 hectares) possess or exercise any corporate powers
except those conferred by this Code or by its
articles of incorporation and except such as
Specific Powers - TCB PDA IDM (DIP CAB are necessary or incidental to the exercise of
MDT) the powers so conferred.
• Extend or shorten the corporate Term An ultra vires act, if not illegal, can be
remedied (by ratification)
• Increase or decrease Capital stock
• Incur, create or increase Bonded in- Atrium v. CA
debtedness Atrium Management Corporation filed with
• Deny Preemptive right RTC an action for collection of the 4
postdated checks issued by the Hi-cement
• Sell or otherwise Dispose of substantially Corporation, though its signatories de Leon,
all its assets treasurer, and delas Alas, chairman of the
• Acquire its own shares corporation to a certain ET Henry, and Co,
which the latter endorsed to Atrium for
• Invest in another corporation or busi-
rediscounting.
ness
• Declare dividends HELD: The act of issuing was well within the
• Enter into Management contracts ambit of a valid corporate act, for it was
for securing a loan to finance the
activities of the corporation, hence, not
an ultra vires act. An ultra vires act is
distinguished from illegal act, the former
being voidable which may be enforced
Implied Powers
by performance, ratification, or estoppel,
while the latter is void and cannot be
These implied powers are deemed to exist
validated. SC however, held de Leon
because of the following provisions:
negligent.
1. except such as are necessary or incid-
ental to the exercise of the powers so
conferred (§36) Republic of the Philippines vs. Acoje
2. such powers as are essential or neces- Mining Co.
sary to carry out its purpose or purposes Acoje Mining requested the Director of Posts
as stated in the AOI – catch-all phrase to open a post office in its mining camp for
(§45) the benefit of its employee and their
families. In a resolution, Acoje agreed to be
Remember: directly responsible for the “dishonesty,
1. A corporation is presumed to act carelessness, or negligence of the employee
within its powers. it assigns”. Acoje’s employee, Sanchez, was
2. When a contract, entered into designated as the postmaster but he later
by the corporation, is not on its face ne- disappeared with 13K of post office funds.
cessarily beyond its authority, it will be Acoje denied liability on the ground that the
presumed valid. resolution was ultra vires-BOD had no
authority to act on the matter.
The Ultra Vires Doctrine (§45) HELD: The company is estopped from
denying liability on the ground that the
Definition – These are acts which a board resolution is ultra vires. Assuming
corporation is not empowered to do or arguendo that the resolution is an ultra vires
perform because they are not based on the act, the same is not void for it was approved
powers conferred by its AOI or by the not in contravention of law, customs, public
Corporation Code on corporations in general, order and public policy. The term ultra vires
or because they are not necessary or should be distinguished from an illegal act
incidental to the exercise of the powers so for the former is merely voidable which may
conferred. be enforced while the latter is void and
cannot be validated.

23
NAPOCOR v Vera (1989) and the interest payable to the children, both
NAPOCOR has a pier at its coal plant in amounts to be paid to the children after debt
Batangas. It did not renew its stevedoring to NDC paid, and later, when company is in
contract at the plant, but instead, took over position to meet obligations. Mrs. Pirovano
the services itself. RTC Judge issued formally accepted the donation. BOD later
preliminary injunction against NAPOCOR, approved release of some funds held in trust
saying that it was not empowered by its for Mrs. Pirovano to buy house in NY. SHs
Charter to engage in stevedoring and formally ratified the donation.
arrastre services.
SEC later gave opinion that donation was
Held: void bec it was beyond the scope of the
corp’s powers. SHs later voted to revoke the
Under its Charter, NAPOCOR can exercise
donation to the Pirovano children.
powers as may be reasonably necessary to
carry out its business of constructing, Held:
operating and maintaining power plants, or
1) Donation was remunerative- for services
which, from time to time, may be declared
rendered by Enrico Pirovano.
by the Board to be necessary, useful,
2) Donation was already perfected. Ratified
incidental or auxiliary to accomplish said
by SHs, and agreed to by NDC, the only
purpose.
creditor.
If act is lawful, and not prohibited, and for 3) Donation is within scope of the AOI. It is
the purpose of serving corporate ends, and provided that corp can invest and deal
reasonably contributes to the promotion of with moneys not immediately required,
those ends in a substantial sense, it may be in such manner as from time to time
considered within the corporation’s charter may be determined, and that corp can
powers. aid in any other manner any person of
which any obligation or in which any in-
Stevedoring services are incidental and
terest is held by this corp, or in the af-
indispensable to unload the coal shipments.
fairs of prosperity of which this corp has
a lawful interest.
Corp has given donations to EEs in the
Pirovano v De la Rama Steamship past, and to political campaigns.
(1954)
Assuming donation was ultra vires,
Stocks are owned by Don de la Rama, his 2 donation was ratified, making the act
daughters, and their EEs with nominal valid and enforceable.
shares. One of the daughters was married to
the company president, Enrico Pirovano. Ultra vires act: outside scope of powers
While the business grew, the father granted to it by its articles of incorp. Not
distributed his stocks among his 5 daughters necessarily illegal, because ultra vires
and his wife. NDC was also represented in acts can become valid by ratification and
the BoD because the corp had a debt to it. estoppel.
To secure the debt, all assets were
mortgaged to NDC. Debt was later converted
to stock, such that NDC now held 4 of 9 General consequences of ultra vires acts
seats in BoD. Such conversion released the a) Corporation may be dissolved under a quo
mortgaged assets. warranto proceeding but in most cases,
the court merely enjoins the corporation
Enrico Pirovano died, so the BOD passed a from commission of the ultra vires acts
resolution converting insurance proceeds on b) Certificate of Registration may be suspen-
his life to stocks for each of his minor ded or revoked by SEC
children. Approved by SHs. c) Parties to the ultra vires contract, if ex-
However, the other SHs realized that they ecutory on both sides, neither party can
would actually be donating 1.44 M. instead ask for specific performance. Will be left
of the 400K they intended (since the value of as they are if the contract has been fully
the stocks increased), and that Mrs. Pirovano executed on both sides. If one party has
would now have 2x voting power as her performed his part, the contract will be
sisters. enforced provided it is not illegal
d) Contract proceeding from an ultra vires
BOD later changed donation into cash, but act is voidable
would be retained by the company as a loan,

24
e) Any stockholder may bring either an in- • The board of directors or trustees
dividual or derivative suit to enjoin a are responsible for corporate
threatened ultra vires act or contract. If policies and general management
act or contract has already been per- of the business affairs of the cor-
formed, a derivative suit for damages poration
may be filed against the directors, but • Directors have a fiduciary duty to
their liability will depend on whether the corp and to the SHs
they acted in good faith and with reas- • General Rule: once elected, SHs
onable diligence in entering into con- have no right to interfere with the
tracts. When based on tort, cannot set- BOD. Exceptions: removal of dir-
up the defense of ultra vires against in- ector (§28), amendments of AOI
jured party who had no knowledge that (§16), fundamental changes (§6),
such was ultra vires declaration of stock dividends
May become binding by the ratification of all (§43), entering into management
stockholders unless third parties are contracts (§44), fixing of consid-
prejudiced thereby or unless the acts are eration of no-par shares (§62),
illegal and fixing of compensation of dir-
ectors (§30)
• Unless otherwise provided in the
Corp Code, the Board of Directors
Chapter VII control and exercise:
CONTROL AND MANAGEMENT OF o the corporate powers of
corporation
CORPORATIONS
o all business conducted,
o all property of such cor-
poration (§23)
Allocation of power and control
• The board exercises almost all
3 levels of control in the corporate hierarchy: corporate powers, lays down all
business policies and is respons-
1. the Board of Directors or Trustees ible for the efficiency of manage-
- responsible for corporate policies ment. The stockholders have no
and the general management of the right to interfere with the board’s
business and affairs of the corpora- exercise of its powers and func-
tion tions except where the law ex-
pressly gives them the final say,
2. the Officers like in cases of removal of a dir-
- in theory, execute the policies laid ector, amendment of articles of
down by the board incorporation, and other major
- in practice, often have wide latitude changes (Cf §6, 42, 43).
in determining the course of busi- • Limitations on the BOD’s author-
ness operations ity or powers:
1. Action by SHs in order to
elect a BOD
2. Certain act of the corp that
3. The stockholders or members require joint action of the
- have residual power of fundamental SHs and BOD
corporate changes • Their resolutions on matters other
than the exceptions are legally
NOTE: BOD can delegate its function to the not effective nor binding and may
officers and also to committees appointed by be treated as merely advisory or
it may be totally disregarded.
• “Unless Otherwise Provided” –
may pertain to instances where a
Who Exercises Corporate Powers management contract is entered
hence corporate powers are exer-
A. BOARD OF DIRECTORS cised by the managing company
and not the board
1. Authority; repository of corporate • Authority of BOD can be deleg-
powers ated to agents/ officers/ commit-

25
tees (AOI, statutes, by-laws, o When the Corp Code ex-
resolutions) (YU Chuck v Kong pressly provides otherwise;
Li Po, 46 Phil 608). Delegation o When the directors or of-
may be explicit, implicit, or ficers acted with fraud,
based on exigencies of the busi- gross negligence or in bad
ness (cf. Board of Liquidators v faith; and
Kalaw) o When directors or officers
• The BOD may delegate its cor- act against the corp in con-
porate powers to either an ex- flict-of-interest situation
ecutive committee or officials or
contracted managers. The del- 2. Requirements
egation, except for the execut-
ive committee, must be for spe-
• Qualifying share (§23)- Every dir-
cific purposes. The delegation ector must own at least one (1)
makes the officers agents of the share of the capital stock of the
corporation. For such officers to corporation of which he is a dir-
be deemed fully clothed by the ector, which share shall stand in
corporation to exercise a power his name on the books of the cor-
of the BOD, the latter must spe- poration. Any director who ceases
cially authorize them to do so. to be the owner of at least one
(ABS-CBN Broadcasting Corp v (1) share of the capital stock of
CA, 1999) the corporation of which he is a
• The directors or trustees shall director shall thereby cease to be
not act individually nor separ- a director.
ately but as a body in a lawful
meeting. Contracts entered into Lee vs. CA
without a formal board resolu- Summons was served upon Lee and Lacdao,
tion does not bind the corpora- president and vice president of ALFA. The
tion except when majority of the two, however contended that they are no
board has knowledge of the longer corporate officers of the corporation
contract and the contract be- because of the voting trust agreement
nefited the corporation. executed to DBP, hence, not authorized to
• Directors owe their duties to receive summons. Summons must be
corporation as a whole rather served upon DBP
than to individual shareholders
of classes of shareholders HELD:
• Business Judgment Rule Execution of a voting trust creates a
- Sec 23 embodies the essence dichotomy between equitable or beneficial
of the “business judgment rule,” ownership of the corporate shares of a
that unless otherwise provided stockholder and legal title thereto. The
in the Code, all corp powers and change from the old code to the new code
prerogatives are vested directly with respect to qualifying shares of directors
in the BOD. Consequently, the is the omission of the phrase “in his own
rule has two consequences: right” pertaining to beneficial ownership of
a) The resolution, contracts shares. In the new corpo code, persons may
and transactions of the be directors if they are stockholders although
BOD, cannot be overturned not “in their own right” hence includes
or set aside by the SHs or trustees. There is clear indication that to be
members and not even by a director, what is material is legal title and
the courts under the prin- not beneficial ownership. With the execution
ciple that the business of of the voting trust agreement, Lee and
the corp has been left to Lacdao were divested of their legal title to
the hands of the BOD; and their shares hence can no longer be directors
b) Directors and duly author- and are no longer corporate officers.
ized officers cannot be held Because of this, they are not authorized to
personally liable for acts or receive summons
contracts done with the ex-
ercise of their business • Requirements/Disqualifications:
judgment. o Residence (§23) - a majority
Exceptions: of the directors or trustees of

26
all corporations organized 3. How elected (§24)
under this Code must be • Manner of election:
residents of the Philippines o There must be present in per-
o Nationality – no require- son or by representative ma-
ment for citizenship of a dir- jority of the outstanding cap-
ector or trustee so even an ital stock / member
alien may be elected as o In any form; or must be by
such excepts in business ballot when requested by any
activities totally closed to voting stock holder or mem-
aliens ber
o Disqualification of directors, o Voting may be in person or
trustees or officers (§27): by proxy
 Convicted by final judg- • At all elections of directors or
ment of an offense pun- trustees, there must be present
ishable by imprison- owners of a majority of the out-
ment for a period ex- standing capital stock, or if there
ceeding six (6) years, be no capital stock, a majority of
or the members entitled to vote.
 Violation of this Code • Every stockholder entitled to vote
committed within five shall have the right to vote the
(5) years prior to the number of shares of stock out-
date of his election or standing, at the time fixed in the
appointment by-laws, in his own name on the
 By-laws may provide stock books of the corporation, or
for additional qualifica- where the by-laws are silent, at
tions/disqualifications the time of the election
as long as such addi- • Time to determine voting right
tional qualifications/dis- o As per share standing in one’s
qualifications shall not name at the time fixed by the
modify requirements as By-Laws
prescribed in the cor- o Where By-laws silent, at time
poration code or be in of election
conflict with such pre- • Cumulative voting – A system of
scribed requirements voting designed to increase the
(§47(5)) voting power of minority stock-
o Note: To sit on the BOD is holders in the election of corpor-
not a vested right. Owner- ate directors when more than one
ship of shares does not director is to be elected.
automatically equate to a o A stockholder shall have as
seat in the BOD many votes as he has num-
o In widely-held corporations, ber of shares times the num-
SEC mandates the presence ber of directors up for elec-
of at least 2 or 20% of its tion
board size, whichever is o Cumulative voting is allowed
lesser, independent direct- for election of members of
ors (Securities Regulation the Board in a stock corpora-
Code, §38 and Guidelines tion. Members of the Board
on the Nomination and in a Non-stock Corporation
Election of Independent Dir- shall not be voted cumulat-
ectors, Memo Circ No. 16, ively unless specifically
2002) provided for in the By-laws.
o The total number of votes
• Term: Directors shall hold office cast by a stockholder shall
for 1 year. However, incumbent not exceed the number of
directors shall continue to be shares owned by him as
directors/trustees as long as shown in the books of the
their successors have not been corporation multiplied by the
elected and qualified (§23) whole number of directors to
be elected

27
o Gives the minority an op- 4. How Removed (§28)
portunity to elect a repres- • Any director or trustee of a cor-
entative to the BOD. Can- poration may be removed from
not itself give the minority office by a vote of the stockhold-
control of corporate affairs ers holding or representing 2/3 of
but may affect and limit the the outstanding capital stock, or if
extent of majority’s control the corporation be a Non-stock
o Theoretically, this allows Corporation, by a vote of 2/3 of
the minority block to dom- the members entitled to vote
inate the election of BOD. (with or without cause).
However, the minority still • Note: Such removal shall take
needs the majority in order place either at a regular meeting
to constitute a quorum. or at a special meeting called for
o By-laws cannot provide the purpose of removal of Direct-
against cumulative voting ors or Trustees, with previous no-
since this right is mandated tice of the time and place of such
in §24 (mandatory in a meeting, as well as the intention
stock corporation – stat- to propose such removal. If the
utory right of SHs) officers refuse to call a meeting to
o In determining how many consider the removal of the Dir-
shares are needed to vote ector, it may be called at the in-
for the desired # of direct- stance of any stockholder or
ors (necessary when one member, but with due notice.
campaigns for proxies), the • A director elected because of the
following formula may be vote of minority stockholders who
followed: [ (outstanding united in cumulative voting can-
shares) x (desired # of dir- not be removed without cause
ectors) + 1 ] / [ (total # of • The board cannot remove a dir-
directors) + 1 ] ector or trustee as member of the
o Unless otherwise provided board
in the AOI or in the by-laws,
members of corporations Roxas v Dela Rosa (1926)
which have no capital stock Binalbagan Estate Inc is engaged in the mfg
may cast as many votes as of raw sugar from canes. Possessors of
there are trustees to be majority of shares formed a voting trust
elected but may not cast composed of 3 trustees. Trustees now
more than one vote for one controlled 3,000 out of 5,500 shares.
candidate.
• Candidates receiving the highest Voting trust was able to vote BOD, without
number of votes shall be de- opposition from minority.
clared elected.
Trustees soon wanted to remove the
• Any meeting of the stockholders
directors they had elected, even if their
or members called for an elec-
terms had not yet expired. Voting trust
tion may adjourn from day to
caused SEC to issue notice for a special gen
day or from time to time but not
mtg to elect a new BOD.
sine die or indefinitely if:
o For any reason, no election Held: Under the law, directors can only be
is held, or removed by vote of SHs representing at least
o If there are SHs not present 2/3 of the subscribed capital stock entitled to
or represented by proxy at vote. When the purpose is to remove
the meeting, the owners of directors, it must be stated in call for
a majority of the outstand- meeting. But vacancies in BOD can be filled
ing capital stock, or if there by mere majority vote.
be no capital stock, a ma-
jority of the member en- Trust does not have clear 2/3 majority.
titled to vote. Voting trust should have stated in notice that
purpose was to remove present BOD.
• Since the provision requires
Meeting called by trustees enjoined.
presence, meeting of stockhold-
ers is required In this case, removal was sought to be done

28
by replacing directors ing capital stock at a regular or
special stockholder’s meeting.
BUT can’t remove thru election of new • Limit: In no case shall the total
officers bec directors have fixed term of yearly compensation of directors,
office as such directors, exceed 10% of
the net income before income tax
of the corporation during the pre-
Note: §28 need not be resorted to in all ceding year.
instances. If removal is for cause
(mismanagement or abuse of powers, the Western Institute of Technology v Salas
remedy of SHs shall be: In a meeting of the Board of Trustees of
a) Receivership; Western Institute of Technology, a resolution
b) Injunction if the act has not yet was passed granting monthly compensation
been done; to officers respondents who are members of
c) Dissolution if abuse amounts to a the Board. The resolution is valid. The
ground for quo warranto but Sol prohibition with respect to granting
Gen refuses to act; compensation to corporate directors/trustees
d) Derivative suit or complaint filed under Section 30 of the Corporation Code is
with the RTC; not violated since the compensation is being
e) Criminal action given to private respondents in their capacity
as officers of WIT and not as board
5. Vacancies (§29) members.
Vacancies in the Board of Directors
or Trustees MAY be filled by a vote
of at least a majority of the
7. How corporate powers exercised –
Board must act as a body in a meet-
remaining directors or trustees; if
ing
still constituting a quorum
Requisites of board meetings
In the following cases, the
• Meeting of the Board duly as-
stockholders or members shall fill
sembled
the vacancy (REAQ):
• Existence of quorum
a. When the re-
• Decision of the majority of the
maining directors or trustees do
quorum duly assembled (EXCEP-
not constitute a quorum;
TION: Election of directors – re-
b. If the va-
quires a vote of majority of all the
cancy is caused by the removal
members of the board)
of a director or trustee
c. If the va-
WHEN? (§53)
cancy is caused by the expira-
tion of term; and • Regular meetings of directors or
d. In case of in- trustees shall be held monthly,
crease in the number of direct- unless the by-laws provide other-
ors or trustees as a result of an wise.
amendment of the articles au- • Special meetings of the board of
thorizing such increase directors or trustees may be held
at any time upon the call of the
president or as provided in the
6. Compensation (§30) by-laws.
• In the absence of any provision
in the By-laws fixing their com- WHERE? (§53)
pensation, the directors shall Meetings of directors or trustees of
not receive any compensation, corporations may be held anywhere in
except for reasonable per or outside of the Philippines, unless
diems. the by-laws provide otherwise.
• Any such compensation (other
than per diems) may be granted WHO MAY ATTEND?
to the directors by the vote of The members of the Board
the stockholders representing at themselves; directors in Board
least a majority of the outstand- meetings cannot be represented or
voted by proxies.

29
one shall act as president and
secretary or as president and
treasurer at the same time.
WHO PRESIDES? (§54) • Additional qualifications of officers
The president shall preside at all may be provided for in the by-
meetings of the directors or trustee, laws (§47(5))
unless the by-laws provide
otherwise
Ongkingco v. NLRC
NOTICE REQUIREMENTS (§53) Where the By-laws of the condominium
• Notice of regular or special corporation specifically includes the position
meetings stating the date, time of “Superintendent/Administrator” in a roster
and place of the meeting must of corporate officers, then such position is
be sent to every director or clearly a corporate officer position and issues
trustee at least one (1) day pri- of reinstatement would be within the
or to the scheduled meeting, jurisdiction of the SEC and not the NLRC.
unless otherwise provided by
the by-laws.
• A director or trustee may Tabaug v. NLRC
waive this requirement, either When the By-laws of the corporation provide
expressly or impliedly that one of the powers of the Board of
Trustees is “to appoint a Medical Director,
QUORUM REQUIREMENTS (§25) Comptroller/Administration, Chief of
Unless the articles of incorporation Services, and such other officers as it may
or the by-laws provide for a greater deem necessary and prescribe their powers
majority, a majority of the number and duties” then such specifically designated
of directors or trustees as fixed in positions should be considered “corporate
the articles of incorporation shall officers” positions….
constitute a quorum for the
transaction of corporate business,
and every decision of at least a 2. Disqualifications (§27)
majority of the directors or trustees No person convicted by final judgment
present at a meeting at which there of an offense punishable by
is a quorum shall be valid as a imprisonment for a period exceeding
corporate act, except for the six (6) years, or a violation of this
election of officers which shall Code committed within five (5) years
require the vote of a majority of all prior to the date of his election or
the members of the board. appointment, shall qualify as a
director, trustee or officer of any
B. CORPORATE OFFICERS AND AGENTS corporation.
1. Minimum set of officers and 3. Authority of corporate officers

Qualification (§25) • The authority of corporate officers
• Immediately after their election, to bind the corporation is usually
the directors of a corporation not considered inherent in their
must formally organize the elec- office but is derived from law, the
tion of: corporate by-laws or by delega-
a. A president, who shall be a tion from the BOD either ex-
director pressly or impliedly by habit, cus-
b. A treasurer who may or tom, or acquiescence in the gen-
may not be a director eral course of business
c. A secretary who shall be a • Gen rule: A person dealing with a
resident and citizen of the corporate officer is put on inquiry
Philippines, and as to the scope of the latter’s au-
d. Such other officers as may thority but an innocent person
be provided for in the By- cannot be prejudiced if he had the
laws right to presume under the cir-
• Any two (2) or more positions cumstances the authority of the
may be held concurrently by the acting officers.
same person, except that no

30
a majority vote of the board, except
with respect to:
People’s Aircargo vs. CA o Approval of any action for which
Corporate President Punsalan solicited a shareholders' approval is also re-
proposal from respondent Sano for the quired;
preparation of a feasibility study. Sano o The filling of vacancies in the
prepared feasibility study and was paid for it. board;
Another proposal for the preparation of o The amendment or repeal of by-
operations manual was solicited from Sano laws or the adoption of new by-
and was accepted by Punsalan. Manual was laws;
prepared and approved by Commissioner of o The amendment or repeal of any
Bureau of Customs, seminar-workshops resolution of the board which by
conducted but payment was not made its express terms is not so
amendable or repealable; and
HELD: Corporation is liable to Sano for o A distribution of cash dividends to
services rendered. General rule is that the shareholders.
absent the authority from the Board of • Cannot go as far as to render the
Directors, no person, not even its officers, BOD powerless and free from all re-
can bind the corporation. However, acts of sponsibilities imposed on it by law
person in behalf of the corporation may be • Must be provided in the by-laws
ratified. When corporation previously and must be composed of not less
allowed First Contract, it gave president than 3 members of the board
apparent authority to execute in its behalf • Essential the executive committee
the other contract, and is estopped from acts by majority vote of all the mem-
denying such authority. Corporation bers
accepted operations manual and the
seminars and have already benefited from D. STOCKHOLDERS OR MEMBERS
the contract. This ratifies the act of the
president and makes it binding upon the Stockholders action is needed in major
corporation. President is presumed to have changes(§6) in the corporation which
authority to act within the domain of the would affect their contract with the
general objectives of the corporation corporation and although such action is
usually initiated by the board, it is not
Rural Bank of Milaor vs. Ocfemia, GR sufficient to give them effect.
137686, Feb 8, 2000 Stockholders or members approval
When a bank, by its acts and failure to act, expressed in a meeting duly called and
has clearly clothed its manager with held for the purpose is still necessary.
apparent authority to sell an acquired asset Exception:
in the normal course of business, it is legally • Corporations may be bound
obliged to confirm the transaction by issuing by unanimous agreement of its stock-
a board resolution to enable the buyers to holders although expressed elsewhere
register the property in their names. It has a than at a meeting
duty to perform necessary and lawful acts to
enable the other parties to enjoy all benefits 1. Requirements of stockholders’ or
of the contract which it had authorized. members meeting (notice and
quorum)
WHEN? (§50)
Regular meetings of stockholders or
C. BOARD COMMITTEES members shall be held annually on a
• The by-laws of a corporation date fixed in the by-laws, or if not so
may create an executive committee, fixed, on any date in April of every
composed of not less than three year as determined by the board of
members of the board, to be ap- directors or trustees
pointed by the board. (§35)
• Said committee may act, by WHERE?
majority vote of all its members, on • Stockholder's or member's
such specific matters within the meetings, whether regular or spe-
competence of the board, as may be cial, shall be held in the city or
delegated to it in the by-laws or on municipality where the principal

31
office of the corporation is loc- been issued and fully paid for
ated, and if practicable in the but subsequently re-acquired
principal office of the corpora- by the issuing corporation by
tion: Provided, That Metro Ma- purchase, redemption, dona-
nila shall, for purposes of this tion or through some other
section, be considered a city or lawful means. Such shares
municipality. (§51) may again be disposed of for
• Members of non-stock cor- a reasonable price fixed by
porations may provide in by- the BOD.
laws that meetings may be held • Treasury shares shall have no
any place even outside the place voting rights as long as such
where the principal office is loc- shares remain in the Treas-
ated provided proper notice is ury. (§57)
sent and that it is within the
Philippines (§93)
WHO MAY ATTEND AND VOTE? WHO PRESIDES?

Stockholders may attend and vote in • The president shall preside at all
person, or by proxy. meetings of of the stockholders or
a. Pledgors, mortagors, executors, members, unless the by-laws
receivers and administrators provide otherwise.
(§55) • When there is no person author-
• In case of pledged or mort- ized to call a meeting, the SEC,
gaged shares in stock cor- upon petition of a stockholder or
porations, the pledgor or member on a showing of good
mortgagor shall have the cause therefor, may issue an or-
right to attend and vote at der to the petitioning stockholder
meetings of stockholders or member directing him to call a
• UNLESS,
the pledgee or mort- meeting of the corporation by
gagee is expressly given by giving proper notice required by
the pledgor or mortgagor this Code or by the by-laws.
such right in writing which • The petitioning stockholder or
is recorded on the appropri- member shall preside thereat un-
ate corporate books. til at least a majority of the stock-
• Executors, administrators, holders or members present have
receivers, and other legal been chosen one of their number
representatives duly ap- as presiding officer. (§54)
pointed by the court may
attend and vote in behalf of NOTICE REQUIREMENTS (§50)
the stockholders or mem- • Written notice of regular
bers without need of any meetings shall be sent to all
written proxy. stockholders or members of re-
b. Joint owner of stocks (§56) cord at least two (2) weeks prior
The consent of all the co-owners to the meeting, unless a different
shall be necessary in order to period is required by the by-laws
vote, UNLESS there is a written • Written notice of special
proxy, signed by all the co- meetings shall be sent at least
owners, authorizing one or one (1) week prior to the meet-
some of them or any other ing, unless otherwise provided in
person to vote such share or the by-laws.
shares PROVIDED, That when the • Notice of any meeting may be
shares are owned in an "and/or" waived, expressly or impliedly, by
capacity by the holders thereof, any stockholder or member
any one of the joint owners can • Failure to give notice would
vote said shares or appoint a render a meeting voidable.
proxy therefor. • Attendance to a meeting des-
pite want of notice will be deemed
c. Treasury shares (Cf §41, 57.
implied waiver
68) • All proceedings had and any
• Definition (§9): These are business transacted at any meet-
shares of stock which have

32
ing of the stockholders or mem-
bers, if within the powers or au- d. IN
thority of the corporation, shall CURRING, CREATING OR IN-
be valid even if the meeting be CREASING BONDED INDEBTED-
improperly held or called, NESS – discussed in Chapter XI
provided all the stockholders or
members of the corporation are e. SA
present or duly represented at LE, LEASE, MORTGAGE OR OTHER
the meeting. (§51) DISPOSITION OF SUBSTANTIALLY
ALL CORPORATE ASSETS – dis-
QUORUM REQUIREMENTS (§52) cussed in Chapter XVII
• Unless otherwise provided
for in the Code or in the by- f. IN
laws, a quorum shall consist of VESTMENT OF FUNDS IN ANOTH-
the stockholders representing a ER CORPORATION OR BUSINESS
majority of the outstanding cap- (§42)
ital stock or a majority of the • A private corporation
members in the case of non- may invest its funds in any
stock corporations. other corporation or business
• By-laws may provide for a or for any purpose other than
the primary purpose for which
greater or lesser quorum
it was organized
(§47(3))
• Approval, voting and
• Where quorum is present at notice requirement
the start of a lawful meeting, 1) Majority of the board of
stockholders present cannot directors or trustees and
without justifiable cause break 2) Ratified by the stockhold-
the quorum by walking out from ers representing at least
said meeting so as to defeat the two-thirds (2/3) of the
validity of any act proposed and outstanding capital stock,
approved by the majority (John- or by at least two thirds
ston v Johnston, 1965 CA de- (2/3) of the members in
cision) the case of non-stock
corporations, at a stock-
WHY ATTEND MEETINGS? holder's or member's
• To make substantial changes meeting duly called for
• To exercise control the purpose.
• To be apprised of events 3) Written notice of the pro-
• To elect BOD posed investment and the
• To confirm actions requiring time and place of the
confirmation meeting shall be ad-
dressed to each stock-
2. Corporate Acts Requiring Ap- holder or member at his
proval of ALL Stockholders (in- place of residence as
cluding non-voting shares) shown on the books of
the corporation and de-
a. A posited to the addressee
MENDMENT OF ARTICLES OF in the post office with
INCORPORATION – discussed in postage prepaid, or
Chapter XIV served personally
• Appraisal right - any
b. E dissenting stockholder shall
XTEND OR SHORTEN CORPOR- have appraisal right
ATE TERM – discussed in • When SH approval
Chapter XIV not necessary- where the in-
vestment by the corporation
c. I is reasonably necessary to
NCREASE OR DECREASE OF accomplish its primary pur-
CAPITAL STOCK – discussed in pose as stated in the AOI.
Chapter XIV Rules in case a corporation

33
will invest its funds in an- trustees the power to amend
other corporation or repeal any by-laws or ad-
o If it is the same pur- opt new by-laws
pose or incidental or re- • Revocation of the delegation
lated to its primary pur- of power to amend: Any
pose, the board can in- power delegated to the board
vest the corporate fund of directors or trustees to
without the consent of amend or repeal any by-laws
the stockholders. What or adopt new by-laws shall be
is required is only the considered as revoked
vote of the majority of whenever stockholders own-
the BOD. No appraisal ing or representing a majority
right of the outstanding capital
o If the investment is in stock or a majority of the
another corporation of members in non-stock cor-
different business or porations, shall so vote at a
purpose, the affirmative regular or special meeting
vote of majority of the • Whenever any amendment or
board consented by 2/3 new by-laws are adopted,
OS capital stock is re- such amendment or new by-
quired laws shall be attached to the
o Apparent conflict: original by-laws in the office
§35(7) limits corp of the corporation, and a copy
powers to those reas- thereof, duly certified under
onably and necessarily oath by the corporate secret-
required. But §42 im- ary and a majority of the dir-
plies that can invest in ectors or trustees, shall be
another business as filed with the SEC the same
long as there’s 2/3 to be attached to the original
vote. articles of incorporation and
o Accdg to Campos, if original by-laws.
articles of incorp • The amended or new by-laws
provide that can invest shall only be effective upon
in another business, the issuance by the Securities
only 2/3 vote needed. and Exchange Commission of
Otherwise, should a certification that the same
amend articles first. are not inconsistent with this
Code.
g. A
DOPTION, AMENDMENT AND h. ME
REPEAL OF BY-LAWS (§48) RGER AND CONSOLIDATION –
• Voting Requirement: BOD discussed in Chapter XVII
or BOT by a majority vote
and the owners of at least a i. DI
majority of the outstanding SSOLUTION OF THE CORPORA-
capital stock, or majority of TION – discussed in Chapter XVI
the members of a non-stock
corporation, at a regular or 3. Other instances requiring stock-
special meeting duly called holders’ action (voting shares only)
for the purpose, may
amend or repeal any by- a.
laws or adopt new by-laws DECLARATION OF STOCK DIVIDENDS
• Delegation of power to – discussed in Chapter XIII
amend the BOD: The own-
ers of two-thirds (2/3) of b.
the outstanding capital MANAGEMENT CONTRACTS (§44) –
stock or two-thirds (2/3) of any contract whereby a corpora-
the members in a non-stock tion undertakes to manage or op-
corporation may delegate to erate all or substantially all of the
the board of directors or business of another corporation,

34
whether such contracts are least a majority of the outstand-
called service contracts, operating capital stock at a regular or
ing agreements or otherwise special stockholder’s meeting.
Approval and Voting 4. Appraisal right

Requirement: One of the ways to get out of the
• Approval by the corporation. The other way is to sell the
board of directors, and shares of stock.
• Approval by stock-
holders owning at least the
a. Definition (§81)
majority of the outstanding
This is a remedy available to a
capital stock, or by at least
stockholder who dissented and
a majority of the members
voted against certain
of both the managing and
extraordinary matters to withdraw
the managed corporation
or get out of the corporation by
• 2/3 vote required
demanding payment of the value
when:
of his shares
o Where a stockholder or
stockholders represent-
b. Instances of appraisal right (§81)
ing the same interest of
both the managing and a) In case any amendment to
the managed corpora- the articles of incorporation
tions own or control which has the effect of (cf
more than one-third §16):
(1/3) of the total out- b) changing or restricting the
standing capital stock rights of any stockholder or
entitled to vote of the class of shares, or
managing corporation; c) authorizing preferences in
or any respect superior to those
o Where a majority of the of outstanding shares of any
members of the BOD of class, or
the managing corpora- d) extending or shortening the
tion also constitute a term of corporate existence
majority of the mem- (cf §37)
bers of the BOD of the
managed corporation
e) In case of sale, lease, ex-
change, transfer, mortgage,
Term of management contract:
pledge or other disposition of
five years
all or substantially all of the
corporate property and assets
c. as provided in the Code (cf
FIXING CONSIDERATION OF NO- §40); and
PAR SHARES (§62) – The issued f) In case of merger or consolid-
price of no-par value shares ation
may be fixed in the AOI or by g) In case of investment of cor-
the BOD pursuant to authority porate funds in another cor-
conferred upon it by the AOI or poration or business or for
the by-laws, or in the absence any other purpose (§42)
thereof, by the stockholders
representing at least a majority c. What are the requirements for the
of the outstanding capital stock successful exercise of appraisal
at a meeting duly called for the right? (Section 82 and 86)
purpose. • By making a written demand
on the corporation within
d. thirty (30) days after the date
FIXING COMPENSATION OF DIRECT- on which the vote was taken
ORS (§30) – Any such com- for payment of the fair value
pensation (other than per of his shares
diems) may be granted to the o Failure to make the de-
directors by the vote of the mand within such period
stockholders representing at

35
shall be deemed a (1) the abandonment of the
waiver of the appraisal corporate action involved or (2)
right. the purchase of the said shares
• By surrendering the certific- by the corporation, all rights
accruing to such shares, including
ate or certificates of stock,
voting and dividend rights, shall
the corporation shall pay
be suspended, EXCEPT the right of
the fair value thereof as of
such stockholder to receive
the day prior to the date on
payment of the fair value thereof,
which the vote was taken,
PROVIDED, if the dissenting
excluding any appreciation
stockholder is not paid the value
or depreciation in anticipa-
of his shares within 30 days after
tion of such corporate ac-
the award, his voting and
tion (provided that the pro-
dividend rights shall immediately
posed corp action is imple-
be restored.
mented or affected).
• If within a period of sixty
e. When right to payment ceases
(60) days from the date the
(§84)
corporate action was ap-
proved by the stockholders,
• No demand for payment may
the withdrawing stockholder
be withdrawn unless the cor-
and the corporation cannot
poration consents thereto.
agree on the fair value of
the shares, it shall be de- • Instances when right to pay-
termined and appraised by ment ceases:
three (3) disinterested per- 1) If such demand for pay-
sons ment is withdrawn with
the consent of the cor-
o One of whom shall be
poration
named by the stock-
2) If the proposed corporate
holder, another by the
action is abandoned or
corporation, and the
rescinded by the corpora-
third by the two thus
tion
chosen
3) If the proposed corporate
• The findings of the majority
action disapproved by the
of the appraisers shall be fi-
SEC where such approval
nal
is necessary,
• The award shall be paid by
4) If the SEC determines
the corporation within thirty
that such stockholder is
(30) days after such award
not entitled to the ap-
is made
praisal right
• No payment shall be made • In such instances, his status
to any dissenting stockhold- as a stockholder shall be re-
er unless the corporation stored, and all dividend distri-
has unrestricted retained butions which would have ac-
earnings in its books to cov- crued on his shares shall be
er such payment (Cf §41). paid to him.
Ratio: to protect the credit-
ors and the remaining SHs f. Who bears costs of appraisal
• Upon payment by the cor-
(§85)
poration of the agreed or
• Generally, it shall be borne by
awarded price, the stock-
the corporation
holder shall forthwith trans-
• Exception: by the SH, when
fer his shares to the corpor-
the fair value ascertained by
ation.
the appraisers is approxim-
ately the same as the price
d. Effect of demand and termina-
which the corporation may
tion of right (§83)
have offered to pay the SH,
From the time of demand for
• In the case of an action to re-
payment of the fair value of a
cover such fair value, all costs
stockholder's shares until either
and expenses shall be as-

36
sessed against the corpora- b. Signed by the stockholder or
tion, unless the refusal of member
the SH to receive payment c. Filed before the scheduled
was unjustified. meeting with the corporate sec-
retary
g. Notation on certificates; rights • By-laws can also impose additional
of transferee (§86) requirements (ex. Must be notarized)
• Within ten (10) days after • Unless otherwise provided in the
demanding payment for his proxy, it shall be valid only for the
shares, a dissenting SH meeting for which it is intended. No
shall submit the certificates proxy shall be valid and effective for a
of stock representing his period longer than five (5) years at
shares to the corporation any one time (continuing proxy).
for notation thereon that • Right of proxy can be waived only for
such shares are dissenting close corporations (§89)
shares. • Meaning of proxy:
• His failure to do so shall, at a. Person duly authorized by
the option of the corpora- stockholder or member to vote in
tion, terminate his rights. his behalf in a SHs’ or members’
• Effect of transfer of certific- meeting. Proxy is an agent for a
ates bearing notation: special purpose thus the general
1) The rights of the trans- rules of agency would normally
feror as a dissenting apply to the relationship created
stockholder shall cease; by proxy
2) The transferee shall b. Formal authority given by the
have all the rights of a holder of the stock who has the
regular stockholder; right to vote it to another to exer-
and cise the voting rights of the
3) All dividend distribu- former
tions which would have c. Instrument or document
accrued on such shares which evidences the authority of
shall be paid to the the agent
transferee. • Failure to comply with requirements
will render proxy void and ineffective.
Note: right to vote: only if subscription
is not delinquent (§71)
• To what extent does the proxy holder
exercise his discretion? Extent of au-
thority given by the SH
• Proxy is revocable even when it is ex-
Devices Affecting Control
pressly provided to be irrevocable un-
less it is coupled with an interest
General Rule: Extent of control is
• Revocation may be made orally, in
proportional to the number of shares owned
writing or implied:
by the SH
a. Appearance of the stockhold-
Exceptions: proxy device, voting trust
er at the meeting will terminate
agreements, pooling and voting agreements,
the proxy
cumulative voting, classification of shares,
b. Death of the stockholder will
restriction on transfer of shares, additional
also terminate the proxy
qualifications for directors, founder’s shares,
management contracts, and unusual quorum
and voting requirements 2. VOTING
TRUST(§59)
1. PROXY • Definition: An arrangement cre-
(§58, cf §20, Sec Regulation Code) ated by one or more stockholders for
the purpose of conferring upon a
• Stockholders and members may
trustee or trustees the right to vote
vote in person or by proxy in all
and other rights pertaining to the
meetings of stockholders or mem-
shares for a period not exceeding five
bers.
(5) years at any time. The arrange-
• Requirements of proxies:
ment is embodied in a document
a. In writing (oral proxies are
called a voting trust agreement (VTA)
not valid)

37
• A voting trust, which is specific- • Restriction: No VTA shall be
ally required as a condition in a loan entered into for the purpose of cir-
agreement, may be for a period ex- cumventing the law against monopol-
ceeding five (5) years but shall ies and illegal combinations in re-
automatically expire upon full pay- straint of trade or used for purposes
ment of the loan of fraud.
• Essence: separation of owner- • Automatic expiration of rights un-
ship and voting rts der the VTA: Unless expressly re-
• Requirements of a VTA: newed, all rights granted in a voting
a. In writing trust agreement shall automatically
b. Notarized expire at the end of the agreed peri-
c. Shall specify the terms and con- od. The voting trust certificates as
ditions thereof well as the certificates of stock in the
d. Certified copy of such agree- name of the trustee or trustees shall
ment shall be filed with the cor- thereby be deemed cancelled and new
poration and with the SEC certificates of stock shall be reissued
o OTHERWISE, said agreement is in the name of the transferors.
• The voting trustee or trustees
ineffective and unenforce-
may vote by proxy unless the agree-
able
ment provides otherwise.
• Procedure:
• Purpose – to make possible a uni-
a. The certificate or certificates
fied control of the affairs of the cor-
of stock covered by the voting
poration and consistent policy; to
trust agreement shall be can-
make possible for a majority group of
celled and new ones shall be is-
shareholders to dispose of a beneficial
sued in the name of the trustee
interest in a large proportion of their
or trustees stating that they are
shares and still retain control of the
issued pursuant to said agree-
corporation through the voting trustee
ment.
b. In the books of the corpora- • No principal-agent relationship
tion, it shall be noted that the • The trustee has unlimited author-
transfer in the name of the ity. The only limitation is that he
trustee or trustees is made pur- should act for the benefit of the SH
suant to said voting trust agree- (fiduciary obligation)
ment. • Voting trust certificates – issued
c. The trustee or trustees shall by the trustees (not the corp). These
execute and deliver to the certificates confirm (1) that a trustee
transferors voting trust certific- has been constituted, (2) the extent
ates, which shall be transferable of shares, and (3) the participation of
in the same manner and with the SH in the VTA
the same effect as certificates of • The trustee can’t dispose of the
stock. block of shares/ receive dividends.
• Right to inspect VTA: The voting Can only vote
trust agreement filed with the cor- • The SH can revoke the VTA on
poration shall be subject to examin- the ground of breach of fiduciary ob-
ation by any stockholder in the ligations
same manner as any other corpor- • Status of transferee and transfer-
ate book or record. The transferor or:
and the trustee or trustees may ex- a. Voting trustee is only a share
ercise the right of inspection of all owner vested with apparent legal
corporate books and records in ac- title for the sole purpose of voting
cordance with the provisions of this upon stocks that he does not own
Code. b. Transferring stockholder re-
• Any other stockholder may tains the right of inspection of
transfer his shares to the same corporate books which he can ex-
trustee or trustees upon the terms ercise concurrently with the vot-
and conditions stated in the voting ing trustee
trust agreement, and thereupon
shall be bound by all the provisions • Powers and rights of voting trust-
of said agreement. ees:

38
a. Right to vote and other rights Proxy VTA
pertaining to the shares in their he is also a SH of Considered as the
names subject to terms and record (owns SH of record in
conditions of and for the period other shares) the books of the
specified in the agreement corp
b. Vote in person or by proxy un- Subject Voting rights Shares + voting
less agreement provides other- Matter rights
wise Duration Usually shorter Usually longer but
c. Rights of inspection of corporate but can’t exceed 5 can’t exceed 5
books and records years years except in
d. Legal title holder – qualified to loan agreements
be a director
• Limitations on voting trust
agreements:
a. should not exceed 5 years Natl Investment & Dev’t Corp v Aquino
except if a condition in a loan (1988)
agreement, shall automatically Batjak, a Fil-Am corp, owed money to PNB.
expire upon full payment of the Its oil mills were also mortgaged to other
loan banks. They further borrowed money from
b. must not be for purposes of NIDC, a wholly owned subsidiary of PNB, to
circumventing the law against pay off the mortgages. In return, NIDC got
monopolies and illegal combina- preferred shares, convertible into common
tions in restraint of trade shares. Batjak executed a 1st mortgage on all
c. must not be used for pur- its properties to PNB in exchange for a credit
poses of fraud facility etc.
d. must be in writing, notar- Next, a Voting Trust Agreement was
ized, specify the terms and con- executed in favor of NIDC by SHs
ditions thereof representing 60% of Batjak. Period of 5
e. certified copy must be filed years, irrevocable. During this time, all
with corporation and SEC other- dividends to be paid to SHs. When Batjak
wise unenforceable became insolvent, PNB foreclosed the
f. agreement is subject to ex- mortgaged properties. When Batjak failed to
amination by stockholder redeem, it transferred ownership to NIDC.
g. shall automatically expire at Batjak later sued NIDC, asking for the turn-
the end of the agreed period over of all the assets and in the alternative,
h. vote in person or by proxy asked for receivership.
unless agreement provides oth- Held:
erwise *Receiver is appointed if applicant has
i. rights of inspection of cor- interest in property. But title of properties is
porate books and records now with NIDC. *Batjak did not impugn
validity of the foreclosure sales. Also, no
Distinction between proxy and voting trust evidence that prop is in danger of loss,
removal or material injury if receiver not
appointed.
Proxy VTA
Legal title What was assigned to NIDC was only power
No legal title Acquires legal title
Revocability
to vote shares of stock of Batjak. Such
Revocable unless Irrevocable if
power includes authority to execute any
coupled with validly executed
agreement or doc necessary to express
interest BUT SH can
consent or assent to any matter by SHs.
revoke if there’s a
Voting trust did not provide for transfer of
breach of fiduciary
assets. What was stipulated to be returned
obli
were only certifs of stock. Voting trust
Extent of Can only act at a Not limited to any
power transfers only voting or other rights
specified particular meeting
pertaining to shares or control over the
stockholder’s or
stock.
member’s
meeting
When to Absence of the Even when owner
vote owner is present 3. POOLING
Capacity to Can’t be voted as Can be voted as a AND VOTING AGREEEMENTS
be a a director, unless director.
director

39
• Agreement between 2 or more effect is to make them partners
stockholders to vote their shares in among themselves.
the same way o A written agreement among
• There must be a valuable considera- some or all of the stockholders in
tion for each party a close corporation shall not be
• Usually relate to election of directors invalidated on the ground that it
• Parties often provide for arbitration so relates to the conduct of the
business and affairs of the corpor-
in case of disagreement. Note: ar-
ation as to restrict or interfere
bitrator is not like a trustee. The
with the discretion or powers of
former has no voting rights
the board of directors: Provided,
• Valid as long as they do not limit the That such agreement shall impose
discretion of the BOD in the man- on the stockholders who are
agement of corporate affairs or work parties thereto the liabilities for
any fraud against stockholders not managerial acts imposed by this
party to the contract. Thus, it is Code on directors.
void if it provides that directors, o To the extent that the stock-
once elected, should vote for certain holders are actively engaged in
persons as officers. EXCEPTION: Close the management or operation of
corps may provide that a VTA can the business and affairs of a close
interfere with discretion of the BOD corporation, the stockholders
• Does not involve a transfer of stocks shall be held to strict fiduciary du-
but is merely a private agreement ties to each other and among
• No transfer of ownership and voting themselves. Said stockholders
rights shall be personally liable for cor-
• Agreements by stockholders (§100): porate torts unless the corpora-
o Agreements by and among tion has obtained reasonably ad-
stockholders executed before equate liability insurance.
the formation and organization
of a close corporation, signed by PROXY TRUSTEE POOLING
all stockholders, shall survive AND VOTING
the incorporation of such cor- AGREEMENTS
poration and shall continue to Principal – Trustee- Consensual
be valid and binding between agent beneficiary
and among such stockholders, if
such be their intent, to the ex- Proxy can’t The only Merely an
tent that such agreements are exceed limit to his agreement to
not inconsistent with the articles delegated authority: vote in the
of incorporation, irrespective of authority must be for same way
where the provisions of such benefit of
agreements are contained, ex- trustee
cept those required by this Title (fiduciary
to be embodied in said articles obligation)
of incorporation.
Must be in Must be in No formalities
o An agreement between two
writing writing and required
or more stockholders, if in writ-
notarized
ing and signed by the parties
thereto, may provide that in ex- Copy must Copy must Merely a
ercising any voting rights, the be filed be filed with contract
shares held by them shall be with corp SEC between SHs
voted as therein provided, or as sec
they may agree, or as determ-
ined in accordance with a pro- Transfer of
cedure agreed upon by them. legal title to
o No provision in any written trustee
agreement signed by the stock-
holders, relating to any phase of
the corporate affairs, shall be
invalidated as between the
parties on the ground that its

40
Regular Absolute Owner still of the corporation
voting voting exercises
rights rights, voting rights
subj only Loyalty - Acquire any personal
Another or pecuniary interest in
to
person conflict with their duty
fiduciary
exercises as such directors or
duty
voting trustees
rights only Another
for a person
specific exercises • Extent of liability: Directors or trust-
mtg voting ees shall be liable solidarily for all
(unless rights damages resulting therefrom suffered
otherwise continuous by the corporation, its stockholders,
provided) ly or members and other persons
• Directors act as a body in formulating
Proxy Trustee can corp policies and exercise all powers
cannot be be director of management. Hence, they are fi-
director duciaries of the corp. It does not
Revocable Irrevocable, Revocable by matter who elected them. Once elec-
at will, in as long as no consent or ted, they must represent the interests
any misconduct mutual of all SHs and of the corp as a whole.
manner or fraud termination. If • Directors must act only within the
unilateral corp powers. If not, they will be li-
EXC if able for damages, unless they acted
termination,
coupled in GF and with due diligence
liable for
with an
damages
interest 2. Duty of diligence
Max of 5 Max of 5 yrs
• What are required and expected
yrs at a at a time
of directors:
time (unless
o To possess at least ordinary
coterminus
knowledge and skill to enable
with loan)
them to make sound business de-
SEC can pass on validity cision
o To attend directors meetings with
reasonable regularity
o To exercise reasonable care in the
management of the corporation
o To keep themselves sufficiently
Chapter VIII informed about the general condi-
DUTIES OF DIRECTORS AND tion of the business
• The degree of care and diligence re-
CONTROLLING STOCKHOLDERS quired is usually that which men
prompted by self-interest, generally
exercise in their own affairs. In de-
Duties and Liabilities of Directors termining whether reasonable dili-
gence has been exercised, the partic-
1. Duties In General ular circumstances of each case must
be considered. The nature of the
Duty Violation under §31 business is an important factor.
Obedience - Willfully and
Business judgment rule
knowingly vote for or
GEN RULE: Directors cannot be held liable
assent to patently
for mistakes or errors in the exercise of
unlawful acts of the
their business judgment if they acted in
corporation
good faith, with due care & prudence.
Diligence - Guilty of gross Contracts intra vires entered into by the
negligence or bad faith board of directors are binding upon the
in directing the affairs corp. & courts will not interfere.

41
EXCEPTION: If the contracts are so declare dividends to SHs when corp is
unconscionable & oppressive as to insolvent.
amount to a wanton destruction of the
rights of the minority. Directors held liable.
• Stock purchases and dividends
Board of Directors has authority to
were funded out of remaining as-
modify the proposed terms of the
sets. But assets < liabilities.
contracts of the corporation for the
purpose of making the terms more • Ganzon et al were favored bec
acceptable to the other contracting they were able to get money
parties…The test to be applied is ahead of creditors
whether the act in question is the direct • Recipients of dividends can be
and immediate furtherance of the held liable by receiver. Ratio: SHs
corporation’s business, fairly incidental are accessories. Remember, they
to the express powers and reasonably were the ones who chose direct-
necessary to their exercise. If so, the ors.
corporation has the power to do it;
otherwise not. [Montelibano v. Bacolod 3. Duty of loyalty
Murcia Milling Co.]
The determination as to whether, in a
Steinberg vs. Velasco given case, the duty of loyalty has been
Steinberg is the receiver of Sibugay Trading. violated has ultimately to be decided by
Velasco (Pres) and other directors, approved the court on the case’s own merits. The ff.
and authorized unlawful purchases of are more common situations involving
company’s stock from Ganzon et al. Accdg to such conflict of interests:
Steinbeg, this diverted funds supposed to be
paid to creditors. a. Self-dealing director (§32)
• A contract of the corporation with
Ganzon et al resigned as directors before the one or more of its directors or
BoD approved the purchase of stocks from trustees is voidable, at the option
them, worth 3,300. At that time, corp owed of such corporation, unless all the
13K. The corp also declared dividends in favor following conditions are present:
of SHs, to be paid in installments so as “not to o That the presence of such dir-
affect financial condition of the corp.” A/R’s ector or trustee in the board
which appeared on books were worthless, meeting in which the contract
because receiver could not collect them. was approved was not neces-
sary to constitute a quorum
HELD: If directors dispose of corp prop or pay for such meeting;
away its money without authority, they will be o That the vote of such director
required to make good the loss out of their or trustee was nor necessary
private estates. for the approval of the con-
tract;
Directors are not liable for loss to corp from o That the contract is fair and
want of knowledge, or for mistakes of reasonable under the circum-
judgment, provided they were honest and stances; and
fairly within the scope of the powers and o That in case of an officer, the
discretion confided to mgt. contract has been previously
But acceptance of office of director implies a authorized by the board of
competent knowledge of the duties assumed, directors.
and directors cannot excuse imprudence bec of • Where any of the first two condi-
their ignorance or inexperience. If they tions set forth in the preceding
commit error of judgment through mere paragraph is absent, in the case
recklessness or want of ordinary prudence or of a contract with a director or
skill, they may be held liable for trustee, such contract may be rat-
consequences. ified by the vote of the stockhold-
ers representing at least two-
Creditors of corp have right to assume that so thirds (2/3) of the outstanding
long as there are outstanding debts and capital stock or of at least two-
liabilities, BoD will not use assets of corp to thirds (2/3) of the members in a
purchase its own stock, and that it will not meeting called for the purpose

42
• Full disclosure of the adverse in- Also, there was no valid consideration bec
terest of the directors or trust- the past services were rendered
ees involved must be made at gratuitously.
such meeting
• The contract is voidable whether
the corporation suffered dam-
ages or not
• The burden of proving fairness
is on the director
b. Fixing compensation of directors

and officers (§30)
• General rule: Directors are only c. Interlocking directors (§33)
entitled to per diems • A contract between two or more
• Exception: When AOI, by-laws, corporations having interlocking
or an advance contract provides directors shall not be invalidated
for compensation on that ground alone, except
• Assuming compensation is in- cases of fraud.
tended, only SHs can fix the • The contract is fair and reason-
amount. In fact, the SHs able under the circumstances.
should approve the granting of • If the interest of the interlocking
compensation because this en- director in one corporation is sub-
tails a reduction of the amount stantial and his interest in the
that could be distributed to other corporation or corporations
them as dividends is merely nominal, he shall be
• SH’s resolution to grant com- subject to the provisions of the
pensation can only refer to fu- preceding section (§32) insofar as
ture services the latter corporation or corpora-
tions are concerned.
• Stockholdings exceeding twenty
Barreto v La Previsora Filipina
(20%) percent of the outstanding
Barreto, et al. are directors of La Previsora
capital stock shall be considered
Filipina, a mutual building and loan assoc.
substantial for purposes of inter-
By-laws provide compensation of 1% of
locking directors.
profits to each director. Compensation to
• Requisites of a valid contract
apply retroactively.
between the corporation and one
Held: By-laws do not create a legal obl to or more of its directors, trustees
pay life gratuity or pension out of its net or officers:
profits => beyond powers of mutual bldg 1) That the presence of such
and loan assoc. director or trustee in the
Board meeting in which
Corp Law authorizes compensation only for
the contract was approved
future services, and cannot authorize
was not necessary to con-
continuous compensation to particular
stitute a quorum for such
directors after their employment has
meeting
terminated for past services rendered
2) That the vote of such director
gratuitously by them to the corp.
or trustee was not necessary
Building and loan associations are founded for the approval of the con-
on strict mutuality and equality of benefits tract
and obligations. Any contract or by-law in 3) That the contract is fair and
contravention of a statute is ultra vires and reasonable under the circum-
void. There is an implied contract with stances
members that it shall not divert funds or 4) That in case of an officer, the
powers to purposes other than for which it contract with the officer has
was created. All members must participate been previously authorized by
equally in profits and bear losses. Any the Board of Directors
diversion of funds to unauthorized purposes
violates principle of mutuality between d. Seizing corporate opportunity; Disloy-
members. alty

43
• Where a director, by virtue of the corporation was in need of
his office, acquires for himself a the particular business opportun-
business opportunity which ity to the knowledge of the direct-
should belong to the corpora- ors, or (c) the business opportun-
tion, thereby obtaining profits to ity was seized and developed at
the prejudice of such corpora- the expense and with the facilities
tion, he must account to the lat- of the corporation. (Litwin v Al-
ter for all such profits by refund- len)
ing the same (§34)
o UNLESS his act has been rati- e. Using inside information (Cf §3.8,
fied by a vote of the stock- 23.2, 27, 61, 71.2, Securities Regula-
holders owning or repres- tion Code)
enting at least two-thirds • The fiduciary position of insiders3,
(2/3) of the outstanding directors, and officers prohibits
capital stock. them from using confidential in-
o Hence, a majority SH can formation relating to the business
actually compete with the of the corporation to benefit
corporation if he owns 2/3 themselves or any competitor
of the OCS corporation in which they may
o This provision shall be ap- have a mere substantial interest.
plicable, notwithstanding
• The liability of a director or officer
the fact that the director
guilty of using inside information
risked his own funds in the
is to the corporation and not to
venture.
any individual stockholder
o Requires prejudice. If
• Since loss and prejudice to the
there’s no prejudice to the
corporation is not a requirement
corporation, the director or
for liability, the corporation has a
officer can still be held li-
cause of action as long as there is
able under §31.
unfair use of inside information
o §34 covers only directors.
• It is inside information if it is not
However, according to
generally available to others and
Campos, officers can be
is acquired because of the close
held liable under §31.
relationship of the director or of-
• When a director, trustee or of-
ficer of the corporation
ficer attempts to acquire or ac-
• General rule: (Majority view) Dir-
quires, in violation of his duty,
ectors owe no fiduciary duty to
any interest adverse to the cor-
stockholders but they may deal
poration in respect of any mat-
with them at arm’s length. No
ter which has been reposed in
duty to disclose facts known to
him in confidence, as to which
the director or officer
equity imposes a liability upon
him to deal in his own behalf, he • Special facts doctrine (Strong v
shall be liable as a trustee for Repide) – Conceding the absence
the corporation and must ac- of a fiduciary relationship in the
count for the profits which oth- ordinary case, courts nevertheless
erwise would have accrued to hold that where special circum-
the corporation. (§31) stances or facts are present which
• The last paragraph of Section 31 make it inequitable for the direct-
and Section 34 contain the doc- or to withhold information from
trine of corporate opportunity.
In case of such conflict of in- 3
“Insider” means: (a) the issuer; (b) a director or officer (or
terests, and the director acts person performing similar functions) of, or a person con-
against the good of the corpora- trolling the issuer; (c) a person whose relationship or former
tion, he shall be accountable for relationship to the issuer gives or gave him access to materi-
the profits he obtained, even if al information about the issuer or the security that is not gen-
erally available to the public; (d) a government employee, or
he had risked his own funds. director, or officer of an exchange, clearing agency and/or
• Corporate right , opportunity or self-regulatory organization who has access to material in-
expectancy arises only when: formation about an issuer or a security that is not generally
(a) directors were negotiating available to the public; or (e) a person who learns such in-
on behalf of the corporation; (b) formation by a communication from any of the foregoing in-
siders (§3.8, Sec Regulations Code)

44
the stockholder, the duty to dis-
close arises and concealment is HELD: While the general rule is that
fraud. obligations incurred by a corporation, acting
through its directors, officers and employees,
Duties and Liabilities of Officers – the are its sole liabilities, there are times when
provisions on seizing corporate opportunity solidary liabilities may be incurred such as in
and disloyalty (§31¶1 and §34) shall also this case where it is undisputed that
apply to corporate officers petitioners had a direct hand in the illegal
dismissal of respondent employees. They
Note: Members of the BOD who are also were the ones, who as high-ranking officers
officers are held to a more stringent liability and directors of Crispa, signed he Board
because they are in-charge of day-to-day resolution retrenching the private
activities. respondents on the feigned ground of serious
business losses that had no basis apart from
an unsigned and unaudited profit and loss
Duty of controlling interest statement which had no evidentiary value
• A majority stockholder is sub- whatsoever. This is indicative of bad faith on
ject to the duty of good faith when he the part of petitioners for which they can be
acts by voting at a stockholders’ meet- held jointly and severally liable with Crispa
ing with respect to a matter in which he for all the money claims of the illegally
has a personal interest terminated respondent employees.
• Controlling stockholders may
dispose of their shares at any time and Tramat Mercantile, Inc. vs. CA
at such price as they choose provided Personal liability of a corporate director,
they do not pervert these prerogatives trustee or officer along (although not
by transferring office to persons who are necessarily) with the corporation may so
known as intending to raid the corporate validly attach, as a rule, only when:
treasury or otherwise improperly benefit o He assents (a) to a patently unlawful
themselves. act of the corporation, or (b) for bad
• It is fraudulent for a stockholder faith or gross negligence in directing
to buy from another stockholder without its affairs, or (c) for conflict of in-
disclosing his identity terest, resulting in damages to the
• Principal stockholders are like- corporation, its stockholders or other
wise prohibited from using inside inform- persons;
ation in the purchase and sale of equity o He consents to the issuance of
security watered stocks or who, having
knowledge thereof, does not forth-
with file with the corporate secretary
Remedies in case of mismanagement his written objection thereto;
o He agrees to hold himself personally
• Receivership and soidarily liable with the corpora-
• Injunction if the act has not tion; or
been done He is made, by a specific provision of law, to
• Dissolution if the abuse amounts personally answer for his corporate action.
to a ground for quo warranto but the So-
licitor General refuses to act
• Derivative suit a complaint filed
with the RTC
Chapter IX
Uichico, et al. vs. NLRC
The petitioners, who are officers and THE RIGHT OF INSPECTION
directors of Crispa, Inc., assailed the
decision of the NLRC holding them solidarily Basis of right
liable with Crispa for the payment of
separation pay and backwages to the private Reason of the law for granting stockholders
respondents. It was the contention of the the right to inspect the records of the
petitioners that the award of separation pay corporation: As the beneficial owners of the
and backwages is a corporate obligation and business, the stockholders have the right to
must therefore be assumed by Crispa alone. know

45
1. The financial condition of the corpora- case all the rules and regulations im-
tion; and posed on stock transfer agents, ex-
2. How the corporate affairs are being cept the payment of a license fee
managed by their elected directors. herein provided, shall be applicable.
So that if they find the conditions • Financial statements (§75)

unsatisfactory, they may be able to take
o Within ten (10) days from receipt of a
necessary measures to protect their
written request of any stockholder or
investment.
member, the corporation shall furnish
to him its most recent financial state-
The right of inspection is
ment, which shall include a balance
sheet as of the end of the last taxable
1. Preventive – to a limited extent may year and a profit or loss statement for
serve as a deterrent to an ill-inten- said taxable year, showing in reason-
tioned management to know that its able detail its assets and liabilities and
acts may be scrutinized the result of its operations
o At the regular meeting of stockholders
2. Remedial – a dissatisfied stockholder or members, the BOD or BOT shall
may resort to the right of inspection present to such stockholders or mem-
as a preliminary step to seeking more bers a financial report of the opera-
direct remedies against abuses com- tions of the corporation for the pre-
mitted by management (removal of ceding year, which shall include finan-
directors or a derivative suit). cial statements, duly signed and certi-
fied by an independent certified public
The right of inspection goes hand-in-hand accountant. However, if the paid-up
with the right to vote. Through the former, capital of the corporation is less than
the SH can gather information on how to P50,000.00, the financial statements
vote. may be certified under oath by the
treasurer or any responsible officer of
the corporation.
What records covered; records required
to be kept by corporation (§74) Torres et al v CA
It is the corporate secretary's duty and
• Books that record all business transac- obligation to register valid transfers of stocks
tions of the corporation which shall in- and if said corporate officer refuses to
clude contract, memoranda, journals, comply, the transferor-stockholder may
ledgers, etc; rightfully bring suit to compel performance.
• Minute book for meetings of the
SHs/members;
• Minute book for meetings of the board;
Extent of and limitations on right
• Stock and transfer book.
Minutes of meetings without the signature of 1. Limitations as to time and place

the corporate secretary have no probative
value (NATU v Sec of Labor, 1981)
a. Only at reasonable hours on business
What is a stock transfer agent? days
o A stock transfer agent is one  By-laws cannot limit inspection to
engaged principally in the business merely a few days during the year
of registering transfers of stocks in chosen by the directors [Pardo vs.
behalf of a stock corporation. No Hercules Lumber]
stock transfer agent shall be allowed  By-laws cannot provide that the
to operate in the Philippines unless inspection shall only be upon au-
he secures a license from the SEC thority of the President of the cor-
and pays a fee as may be fixed by poration previously obtained in
the Commission, which shall be re- each case
newable annually  However, inspection should be
o A stock corporation is not pre- made in such a manner as not to
cluded from performing or making impede the efficient operations of
transfer of its own stocks, in which the corporation

46
 By-laws can adopt policies with o The right to inspect corporate books
respect to right to inspect may be done with the assistance of
(§47(10)) technical men (e.g., lawyers and
accountants) and it may be deleg-
ated. The right includes the right to
b. Inspection shall be done in the place
copy or to take notes. (W.G. Phil-
where the corporation keep all its
potts v Phililppine Mfg Co., 1919)
records, which, as enjoined by law,
• The transferor of shares and the voting
is in the principal office
trustee, in accordance with Section 59
 Stockholder cannot demand that • Stockholders of a parent corporation with
he be allowed to take the cor- respect to subsidiary:
porate books outs of the corpor- o If two are legally separate
ation’s principal office for the and independent entity, no right of in-
purpose of inspecting them. spection. However, the SH of the
parent corp can look at the books of
2. Limitation as to purpose the latter with respect to its invest-
ments to the subsidiary.
o If they are practically one and
Is the stockholder’s purpose material? – the same in so far as management
YES. There is however a presumption and control and inspection is deman-
that his purpose is a proper one and the ded because of gross management of
corporation cannot refuse to grant him subsidiary by the parent’s directors
the right on its mere belief that his who are also directors of subsidiary,
motive is improper. there can be inspection
 Otherwise, such refusal may open
its guilty officers or directors to li-
ability for damages, UNLESS they
can successfully prove in their de- Remedies available if inspection refused
fense that the stockholder was not • Mandamus
acting in good faith nor for a legit- • Injunction
imate purpose in making his de-
mand. • Action for damages – any officer
 Burden of proving that the pur- or agent of the corporation who shall re-
pose is improper or illegal is on fuse to allow any director, trustees, stock-
corporation and its officers. holder or member of the corporation to
 Good purposes: to investigate examine and copy excerpts from its re-
acts of management; to investig- cords or minutes, in accordance with the
ate financial conditions; fix value provisions of this Code, shall be liable to
of shares; mailing list for proxies; such director, trustee, stockholder or
information for litigation member for damages
 Not good and honest purposes: • File an action to impose a penal
obtain corporate secrets (e.g., offense by fine and/or imprisonment
formula); nuisance suit; to em- o Any officer or agent of the
barrass the company corporation who shall refuse to allow
How does one determine whether the any director, trustees, stockholder or
purpose as proved by the corporation or member of the corporation to exam-
as admitted by the stockholder is a ine and copy excerpts from its records
legitimate one or not? – A legitimate or minutes, in accordance with the
purpose is one which is germane to the provisions of this Code x x x and in
interests of the stockholder as such and addition, shall be guilty of an offense
not contrary to the interests of the which shall be punishable under Sec-
corporation. tion 144 of the Corporation Code
o If such refusal is made pursu-
ant to a resolution or order of the
board of directors or trustees, the li-
Who may exercise right ability under this section for such ac-
tion shall be imposed upon the direct-
• Director, trustee, stockholder, member,
ors or trustees who voted for such re-
personally or through an agent
fusal

47
o It shall be a defense to any such demand. Note: demand is not ne-
action that the person demanding to cessary if it will be futile)
examine and copy has improperly 2. The stockholder or member must have
used any information secured been one at the time the transaction or
through any prior examination of act complained of took place, or in the
the records, or is not acting in good case of a stockholder, the shares must
faith or for a legitimate purpose in have devolved upon him since by opera-
making his demand tion of law, unless such transaction or act
o Other valid grounds for continues and is injurious to the stock-
denying access to books or records: holder
immediately prior to the annual SHs’ The number of shares owned by the SH is
meeting; holder of books is unavail- immaterial.
able; the books are being audited; Heirs of a SH can bring a derivative suit
on-going inventory count; compu- provided that the transaction took place
terization; moving out or change of during the lifetime of the SH
business address 3. Any benefit recovered by the stockholder
or member as a result of bringing the suit,
whether by final judgment, by judicial
compromise or by extra-judicial settle-
Chapter X ment, must be accounted for to the cor-
poration, who is the real party in interest
DERIVATIVE SUITS 4. If the suit is successful, the plaintiff is en-
titled to reimbursement from the corpora-
tion for the reasonable expenses of litiga-
Definition tion, including attorney’s fees
Derivative suit – suits of stockholders based

on wrongful or fraudulent acts of directors or Bitong v CA
other persons In the absence of a special authority from
the board of directors to institute a
derivative suit for and in its behalf, the
Nature and basis/distinguish from other managing officer is disqualified by law to sue
suits: in her own name. The power to sue and be
sued in any court by a corporation even as a
• INDIVIDUAL suit if stockholder is lodged in the BOD that
wrong done is personal to SH exercises its corporate powers and not in the
• CLASS suit if wrong president or officer thereof. But where
done is to a group of SH corporate directors are guilty of a breach of
trust, not of mere error of judgment or
• DERIVATIVE suit if
abuse of discretion, and intra-corporate
wrong done is to the corporation itself
remedy is futile or useless, a SH may
o In a derivative suit,
institute a derivative suit in behalf of himself
the cause of action belongs to the
and other SHs and for the benefit of the
corporation and not the stockholders
corporation, to bring about a redress of the
but since the directors who are
wrong inflicted directly upon the corporation
charged with mismanagement are
and indirectly upon the stockholders.
the ones who will be sued or may
not be willing to sue, then the cor-
poration is left without redress, Lim vs. Lim-Yu, GR 138343, Feb 19, 2001
hence, SH is given the right to sue The suit of respondent cannot be
on behalf of the corporation characterized as derivative, because she was
complaining only of the violation of her
preemptive right under Section 39 of the
Requirements relating to derivative suit Corporation Code. She was merely praying
that she be allowed to subscribe to the
1. The stockholder or member bringing the additional issuances of stocks in proportion to
suit must have exhausted his remedies her shareholdings to enable her to preserve
within the corporation (ex. He has made her percentage of ownership in the
a demand on the directors or trustees corporation. She was therefore not acting for
and they have failed or refused to act on the benefit of the corporation. Quite the
contrary, she was suing on her own behalf,

48
out of a desire to protect and preserve her • There shall always be a
preemptive rights class/series of shares which have a COM-
PLETE VOTING RIGHTS
• EACH SHARE SHALL BE EQUAL IN
Requirements under the Interim Rules ALL RESPECTS TO EVERY OTHER SHARE,
of Procedure for Intra-Corporate except as otherwise provided in the AOI
Controversies (Rule 8)
1. Common
1. He was a stockholder or member at the • A stockholder, owner of at least
time the acts or transactions subject of one common share, has the following
the action occurred and the time the rights:
action was filed; o right to vote at meetings
2. He exerted all reasonable efforts, and o right to dividends
alleges the same with particularity in the o right to examine corporate books
complaint, to exhaust all remedies • Most commonly issued
available under the AOI, by-laws, laws • Entitles owner to equal pro-rata
or rules governing the corporation or division of profits after preference
partnership to obtain the relief he
desires. 2. Preferred
3. No appraisal rights are available for the • Stocks which are given preference by
act(s) complained of; and the issuing corporation in the distribu-
4. The suit is not a nuisance or harassment tion of assets of the corporation in
suit. case of liquidation and in the distribu-
tion of dividends, or such other pref-
Derivative suits are within the jurisdiction of erences as may be stated in the AOI
the RTC (§5.2, Securities Regulation Code) which are not violative of the Corpora-
tion Code. (§6)
• Limitations on preferred shares:
o Preferred shares can only be
issued with par value
Chapter XI o Preferred shares must be:
FINANCING THE CORPORATION, a. Stated in the Articles of In-
corporation or
CAPITAL STRUCTURE
b. May be fixed by the BOD
where authorized by the AOI,
provided: such terms and
Sources of Financing conditions shall be effective
upon filing of a certificate
3 main sources: thereof with the SEC.
1. Contributions by stockhold-
• Entitles holder to some pref-
ers (Equity)
erences in dividends, distribution of
2. Loans or advances from
assets upon liquidation or both:
creditors (Borrrowing)
o preference as to di-
3. Profits that the business
vidends – dividends are payable
may earn
only when profits are earned and
as a general rule, even if there
are existing profits, BOD has dis-
Classification of Shares (§6)
cretion to declare dividends or not
a. Participating – after
• Shares of stock of stock corpor- getting their fixed dividend
ations may be divided into classes or preference ahead of CS, they
series of shares or both share with the CS the rest of
• Each class or series of shares the dividends
may have rights, privileges, restrictions, UNLESS expressly provided,
stated in the AOI they are non-participating
• No share may be deprived of b. Cumulative – di-
voting rights, except: vidends in arrears accrue,
o Preferred or must be paid first before
o Redeemable shares, common stock dividends are
unless otherwise provided by the Code paid.

49
c. Non cumulative – and shall not be available for distribu-
contract makes dividends tion as dividends (Ibid)
depend upon existence of • Cannot be issued as Preferred
profits for the year Shares (Ibid)
o as • AOI must state the fact that corp
to voting rights – usually does issues no-par shares and the number
not have voting rights; but un- of shares
less clearly withheld, PS would • Three ways of determining value
have right to vote of no par value shares (§62):
Note: even if deprived of voting o By majority vote of the outstand-
rights, PS holders are entitled to ing shares (issued shares) in a
vote on the matters meeting called for the purpose
enumerated under §6 o By BOD pursuant to authority
o preference upon liquidation – in conferred upon it by the AOI
the absence of provision, parti- o By amendment of the AOI
cipate pro rata with common • Corporations which cannot issue
stock no-par value shares:
o not a creditor; there’s no assur- o Banks
ance that you will get back in- o Insurance Companies
vestments but if the corporation
o Trust Companies
profits, you participate in the
o Building and Loan Associations
profits
o Public utilities
3. Par value
• These are shares with a 5. Founder‘s
stated value set out in the AOI. This • Those shares, classi-
remains the same regardless of the fied as such in the AOI, which are giv-
profitability of the corporation. This en certain rights and privileges not
gives rise to financial stability and is enjoyed by the owners of other
the reason why banks, trust corpor- stocks. (§7)
ations, insurance companies and • Where exclusive right
building and loan associations must to vote and be voted for in the elec-
always be organized with par value tion of directors is granted, such right
shares. must be for a limited period not to ex-
• One in the certificate of ceed 5 years subject to approval by
stock of which appears an amount in SEC. 5 year period shall commence
pesos as the nominal value of the from date of approval by SEC. (Ibid)
shares
6. Redeemable
• Can’t be issued at less than • Those shares, expressly so provided
par value. Otherwise, it would be- in the AOI, which may be purchased
come a watered stock (§65, dis- or taken up by the corporation upon
cussed in Chapter XII) the expiration of a fixed period re-
• Par value is minimum issue gardless of the existence of unrestric-
price of such share in the AOI which ted retained earnings in the books of
must be stated in the certificate the corporation and upon such terms
and conditions stated in the AOI and
4. No-par value in the certificate of stock (§8)
• These are shares without a • Redemption is repurchase, a reac-
stated value. The Corporation upon quisition of stock by a corporation
their issuance will set their value, which issued the stock in exchange
which shall not be less than P5. for property, whether or not the ac-
• Shall be deemed fully paid and quired stock is cancelled, retired or
non-assessable and the holders of held in the treasury. Essentially, the
such shares shall not be liable to the corporation gets back some of its
corporation or to its creditors in re- stock, distributes cash or property to
spect thereto (§6) the shareholder in payment for the
• Entire consideration received by stock, and continues in business as
the corporation for its no-par value before. The redemption of stock di-
shares shall be treated as capital vidends previously issued is used as a

50
veil for the constructive distribution o Merger and consolidation
of cash dividends. (CIR v CA, 1999) o Investment of corporate funds in
• While redeemable shares may be another corporation or business
redeemed regardless of the exist- o Dissolution of the corporation
ence of unrestricted retained earn-
ings, this is subject to the condition CLASSES OF SHARES
that the corporation has, after such
redemption, assets in its books to A. Common
cover debts and liabilities inclusive
of capital stock. Redemption, there-
fore, may not be made where the No-par Par
corporation is insolvent or if such
redemption will cause insolvency or
inability of the corporation to meet Multiple par value Single par value
its debts as they mature. (Republic
Planters Bank v Agana, 1997)
B. Preferred
7. Treasury
• These are shares of stock which
have been issued and fully paid for, Liquidation Dividends
but subsequently re-acquired by the
issuing corporation by purchase, re-
demption, donation or through some Cumulative/non-cumulative Participating/non-
other lawful means. Such shares participating
may again be disposed of for a reas-
onable price fixed by the BOD. (§9)
• Note: delinquent stocks, which C. Redeemable
are stocks that have not been fully
paid, may become treasury stocks
upon bid of the corporation in ab- With floating coupon rate With guaranteed
sence of other bidders (§68) coupon rate
• May be sold at less than par, re-
garded as corporate property D. Convertibles
• In this manner, stocks can be
retired gradually, even those which E. Combo of B+C+D
aren’t redeemable
• No limit as to how many shares F. Founder’s shares
can be retired
G. Treasury Shares
8. Convertible – A type of pre-
ferred stock that the holder can ex-
change for a predetermined number of Nature of Subscription Contract
the corporation’s common shares at a
specified time 1. Subscription Contract
• Any contract for the acquisition of
9. Non-voting shares (§6) unissued stock in an existing or a cor-
poration still to be formed shall be
• Shares which have, generally, deemed a subscription contract, not-
no voting rights; except in the fol- withstanding the fact that the parties
lowing circumstances: may refer to it as a purchase or some
o Amendment of the AOI other contract. (§60)
o Adoption and amendment of by- • Transfer for consideration of
laws treasury shares is a sale by the cor-
o Sale, lease, exchange, other poration (not subscription). A trans-
disposition of all or substantially fer of fully paid shares by a stockhold-
all of the corporate property er to a third person is a sale. But it
o Incurring, creating or increasing seems that assignment by a sub-
scriber of his unpaid subscription
bonded indebtedness
would require that the requisites for
o Increase or decrease of capital
stock

51
valid release from subscription must proportion to their respective share-
be complied with holdings, unless such right is denied
• Shareholders are not creditors by the AOI or an amendment thereto
of the corporation with respect to • This is to prevent dilution in share-
their shareholdings thereto and the holding
principle of compensation or set-off • Includes not only new shares in pur-
has no application suance of an increase of capital stock
• Not necessarily required to be in but would cover the issue of previ-
writing ously unissued shares which form part
• Once subscription contract is of the existing capital stock as well as
perfected, SH becomes the debtor treasury shares
of the corporation. He is liable to • Where the shares are issued in ex-
pay any unpaid portion of the sub- change for property needed for cor-
scription. He can also be made per- porate purposes or for debt previously
sonally liable to the creditors of the granted, SH cannot demand his pre-
corporation to the extent of his un- emptive right for right may prejudice
paid subscription corporate interest (§39)
• General Rule: SH is not liable
to pay interest on his unpaid sub- 2. Limitation to exercise of pre-
scription. Exception: if required by emptive right (§39):
the by-laws (§66) a. Such pre-empt-
ive right shall not extend to shares to
2. Pre-incorporation subscription be issued in compliance with laws re-
(§61) quiring stock offerings or minimum
• Pre-incorporation subscription is a stock ownership by the public;
subscription for shares of stock of a b. Not extend to
corporation still to be formed. shares to be issued in good faith with
• It shall be irrevocable for a period of the approval of the stockholders rep-
at least six (6) months from the resenting two-thirds (2/3) of the out-
date of subscription. standing capital stock, in exchange for
• It can only be revoked, when: property needed for corporate pur-
poses or in payment of a previously
o when all of the other subscribers
contracted debt
consent to the revocation, or
c. Shall not take ef-
o when the incorporation of the
fect if denied in the AOI or an amend-
corporation fails to materialize
ment thereto.
within six (6) months or within a
longer period as my be stipu-
3. Remedies in case of unwarranted
lated in the contract of subscrip-
denial:
tion.
a. Injunction
• After the submission of the AOI to
b. Mandamus
the SEC, no pre-incorporation sub-
• in any case, the suit should be in-
scription may be revoked.
dividual and not derivative because
the wrong done is to the stockholders
individually
Pre-emptive Right to Shares (Cf §39,
c. SEC can cancel shares if the third party
102)
is not innocent
1. Definition of pre-emptive rights CAPITAL CONTRIBUTIONS

– option privilege of an existing stock- (Money + Proprietary rights)
holder to subscribe to a proportionate +
part of shares subsequently issued by LOAN ACCOMMODATIONS
the corp before the same can be dis-
posed of in favor of the others; includes
all issues and disposition of shares of CORPORATION
any class
• All stockholders of a stock cor-
poration shall enjoy pre-emptive PROPERTY/ASSETS A
right to subscribe to all issues or a
disposition of shares of any class, in

52
LIABILITY: o Note: Property should not be
encumbered. Otherwise, it would
Obligation to pay: impair the consideration
• Principal + Interest c) Labor performed for or ser-
• Security Interest over Property and vices actually rendered to the corpor-
Assets ation (must be capable of being valu-
• Preferences vis-à-vis SH ated);
d) Previously incurred indebted-
A ness of the corporation;
a e) Amounts transferred from un-
restricted retained earnings to stated
EQUITY INTEREST capital (issuance of stock dividends);
(Shares of Stock, Inchoate Rights) and
Return of Equity Interest: f) Outstanding shares ex-
• Dividends changed for stocks in the event of re-
classification or conversion.
• Proceeds realized from sale of
shares • Prohibited consideration: Shares of stock
• Liquidity dividends shall not be issued in exchange for
promissory notes or future service (be-
cause realization is uncertain)
• Future service may be used as considera-
tion provided that certificates of stock will
CONTROL ECON BENEFITS CLASSIFICATION OF be issued only after the performance of
SHARES such services.
• Same consideration applies for the issu-
ance of bonds by the corporation.
• Fixing of issued price of no-par value
shares: The issued price of no-par value
Chapter XII shares may be fixed:
CONSIDERATION FOR ISSUANCE a) in the AOI or
b) by the BOD pursuant to authority con-
OF SHARES ferred upon it by the AOI or the by-
laws, or
c) in the absence thereof, by the SHs
Form of consideration (§62) representing at least a majority of the
outstanding capital stock at a meeting
• Stocks shall not be issued for a duly called for the purpose.
consideration less than the par or issued • The value of the consideration
price thereof. received must be equal to the issue price
• Consideration for the issuance of the shares of stocks which in no case
of stock may be any or a combination of shall be less than par
any two or more of the following:
a) Actual cash paid to the cor-
poration; Liability on watered stocks
b) Property, tangible or intan-
gible, actually received by the cor- Watered stock – shares issued as fully paid-up
poration and necessary or conveni- when in fact the consideration agreed to and
ent for its use and lawful purposes accepted by the directors of the corporation
at a fair valuation equal to the par was something known to be much less than
or issued value of the stock issued the par value or issued value of the shares.
o Valuation of consideration
other than actual cash, or con- Water in stock refers to the difference
sists of intangible property such between the fair market value at the time of
as patents of copyrights – ini- the issuance and the par or issued value of
tially be determined by the in- said stock. Subsequent increase in the value
corporators or the board of dir- of the property used in paying the stock does
ectors, subject to approval by not do away with the water in the stock. The
the SEC. existence of such water is determined at the
time of issuance of the stock.

53
• Despite the fact that
• Evils: deprives corp of needed capital; the subscription is partially paid,
dilutes proportionate interest of existing the entire subscription becomes
and future SH; injures present and fu- delinquent
ture creditors because it reduces value • Subscriber is not
of corp assets barred from paying the balance
plus the expenses incurred by the
• Any director or officer of a cor- corp before the date of the delin-
poration consenting to the issuance of quency sale
stocks or who, having knowledge there-
of, does not forthwith express his objec- b. Procedure for delinquency sale (§68)
tion in writing and file the same with the • The BOD must make a call by
corporate secretary resolution demanding the pay-
o for a consideration less than its par ment of the balance of the sub-
or issued value or scription ("notice of call").
o for a consideration in any form other • The notice of call shall be
than cash, valued in excess of its served on each stockholder either
fair value, personally or by registered mail.
At this point, there is no need for
• shall be solidarily liable with the publication.
stockholder concerned to the corpora- • If the stockholder does not
tion and its creditors for the difference pay the amount on the date des-
between the fair value received at the ignated in the notice, the Board
time of issuance of the stock and the par shall issue, by resolution, a "no-
or issued value of the same. tice of delinquency."
• Notice of delinquency shall be
served on the non-paying sub-
How Payment of Shares Enforced scriber either personally or by re-
gistered mail, PLUS publication in
2. Delinquency sale a newspaper of general circulation
in the province or city where the
principal office of the corporation
a. is located, once a week for two
How do shares become delinquent (§67) (2) consecutive weeks. The no-
• Payment of any un- tice shall state the amount due on
paid subscription or any per- each subscription plus accrued in-
centage thereof, together with terest, and the date, time and
the interest accrued, if any, place of the sale which shall not
shall be made on the date spe- be less than 30 days nor more
cified in the contract of sub- than 60 days from the date the
scription or on the date stated stocks become delinquent.
in the call made by the board. • The amount due in the notice
• Failure to pay on must include all expenses: public-
such date shall render the entire ation, legal, etc.
balance due and payable and o Note: the notices are jurisdic-
shall make the stockholder li- tional.
able for interest at the legal rate • In the public auction, the
on such balance, unless a differ- highest bidder is one who is will-
ent rate of interest is provided ing to pay the balance of the sub-
in the by-laws, computed from scription for the least number of
such date until full payment. shares. The corporation will give
• If within thirty (30) the highest bidder the certificate
days from the said date no pay- of stock in the number of his bid;
ment is made, all stocks the remaining number will be is-
covered by said subscription sued a certificate of stock in favor
shall thereupon become delin- of the subscriber as fully paid. If
quent and shall be subject to there are no bidders, the corpora-
sale as hereinafter provided, un- tion must bid for the whole num-
less the BOD orders otherwise. ber of shares regardless of how
much the SH has paid. Such

54
stocks will pertain to the corpor- 1. the subscription contract specifies a
ation as fully paid treasury date of payment
stocks. 2. the corp. has become insolvent  all
unpaid subscriptions are immediately
c. When sale may recoverable in a court action by the
be questioned assignee in insolvency [Velasco vs.
• No action to recov- Poizat]
er delinquent stock sold can be As a defense to a court action, the SH
sustained upon the ground of ir- may contend that the subscription was
regularity or defect in the notice induced by fraudulent misrepresentation,
of sale, or in the sale itself of provided he is not barred by ratification,
the delinquent stock, unless the or guilty of laches.
party seeking to maintain such
action first pays or tenders to
the party holding the stock the
sum for which the same was Effect of Delinquency
sold, with interest from the date
of sale at the legal rate; and
a) Any cash dividends due on
• No such action shall
delinquent stock shall first be applied to
be maintained unless it is com-
the unpaid balance on the subscription
menced by the filing of a com-
plus costs and expenses, while stock di-
plaint within six (6) months
vidends shall be withheld from the delin-
from the date of sale.
quent stockholder until his unpaid sub-
scription is fully paid. (§43)
• Issuance of Certificate – Once full
b) No delinquent stock shall be:
payment for the stocks have been
o voted for or
tendered to the corporation in any of
o be entitled to vote or to
the valid forms of consideration for
o representation at any stock-
the issuance of stocks, the pur-
holder's meeting, nor shall the holder
chaser or the subscribers entitled to
thereof be entitled
be issued the corresponding certific-
o to any of the rights of a
ate of stock which evidences their
stockholder (§71)
ownership of shares in a particular
 Except the right to dividends in
corporation
accordance with the provisions of
this Code, until and unless he
Apocada v NLRC pays the amount due on his sub-
Apocada was employed in Intans Phil scription with accrued interest,
wherein he subscribed to 1500 shares. He and the costs and expenses of ad-
subsequently resigned and instituted a vertisement, if any.
complaint with NLRC against corporation for  Note that the provision on di-
payment of unpaid wages, COLA, balance of vidends pertain to delinquent
gasoline and representation expenses, stock hence a call must have
bonus. Corporation applied what is due to been made
Apocada the balance of his unpaid  Stock dividends on delinquent
subscription. shares are not applied but are in-
HELD: Set-off is not proper. Unpaid cluded in delinquency sale
subscriptions are not yet due and payable. wherein it is liquidated
They become due and payable when a call is
made by the corporation. There is no such
call yet. Set-off against wages is not valid Rights and Obligations of Holders of
under labor code. Unpaid But Non-Delinquent Stock
• Holders of subscribed shares not fully paid
2. Co which are not delinquent shall have ALL
urt Action (§70) the rights of a stockholder. (§72)
• Subscribers for stock shall pay to the cor-
Gen. Rule A valid call is a prerequisite to poration INTEREST on all unpaid subscrip-
liability where court action is the remedy tions from the date of subscription, if so
chosen. required by, and at the rate of interest
Exceptions: fixed in the by-laws. If no rate of interest

55
is fixed in the by-laws, such rate shall be subscribed. (Nava v Peers Mktg Corp and Fua
deemed to be the legal rate. (§66) Gen- Cun v Summers).
eral rule: unpaid subscriptions can not
be charged with interest. Exception:
when required by the by-laws. Exception: in the Baltazar v Lingayen Gulf
• No certificate of stock shall be issued to Electric Power Co case, it was the practice of
a subscriber until the full amount of his the corp to issue certificates of stock to its
subscription, together with the interest individual SHs for unpaid shares of stock and
and expenses (in case of delinquent to give full voting power to shares fully paid.
shares) if any is due, has been paid.
(§64)
• No shares of stock against which the
corporation holds any unpaid claim shall
be transferable in the books of the cor-
poration (§63).
Lost or Destroyed Certificate (§73)
• Attributes of a subscription contract:
unconditional (obligation to pay must Procedure for re-issuance in case of loss,
not be subject to any contingencies) and stolen or destroyed certificates:
indivisible (as to the amount and trans- 1. The registered owner of certificates of
ferability) stock or his legal representative shall file with
the corporation an affidavit setting forth:
a) the circumstances as to how the cer-
Issuance of Certificate
tificates were lost, stolen or des-
A certificate of stock is the best evidence of troyed;
the rights and status of a SH (although not a b) the number of shares represented by
condition precedent to the acquisition of each certificate, the serial numbers of
such rights), and is convenient for the the certificates;
purposes of transfer. c) the name of the corp which issued the
same;
d) such other information and evidence
Contents of a certificate: which he may deem necessary.
2. The corp shall publish a notice in a
- certifies that the person named is a newspaper of general circulation published in
holder or owner of a stated number the place where the corp has its principal
of shares office, once a week for 3 consecutive weeks at
- kind of shares issued the expense of the owner.
- date of issuance 3. After the expiration of one (1) year from
- par value, if par value shares the date of the last publication and if no
- signed by the proper officer of the contest has been presented, the corp shall
corp. (usually the pres., and the cancel in its books the certificate of stock and
sec.) issue in lieu thereof new certificates of stock.
- bears the corporate seal The right to make such contest shall be barred
after the expiration of the one-year period.
4. Even before the one year period expires,
Over-issue of shares occurs when certificates
the new certificates may be issued if the
are issued for more than the number of
registered owner files a bond or other
shares authorized by the articles. Any share
security, running for a period of one (1) year
certificate w/c represents an over-issue
for a sum and in such form and with such
would be void. No rights or liabilities can
sureties as may be satisfactory to the BOD.
arise therefrom in favor or against the
Provided, that if there is a pending contest
holders and bona fide purchasers would have
regarding the ownership of said certificates,
the right to damages for misrepresentation
the issuance of new certificates shall be
against the corp. but can’t acquire the rights
suspended until the final decision of the court.
of stockholders.
o Note: Except in cases of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no action
General rule: entire subscription must be
may be brought against the corp
paid first before the certificates of stock can
which shall have issued certificates of
be issued. Partial payments are to be
stock in lieu of those lost, stolen or
applied pro rata to each share of stock

56
destroyed pursuant to the above “Unrestricted retained earnings” (URE)
procedure. (definition by the SEC) the undistributed
earnings of the corp. w/c have not been
allocated for any managerial, contractual or
legal purposes and which are free for
distribution to the SHs as dividends.
 The only fund out of w/c dividends can be
legally paid.
 Should there be any capital deficit,
subsequent profits, if any, during succeeding
periods must 1st be applied to cover the
deficit, and only the profits remaining after
eliminating the deficit, can be considered as
URE.
Dividends can not be declared out of increase

in valuation of existing assets. This is subject
Chapter XIII
to fluctuation and is not yet realized.
DIVIDENDS AND PURCHASE OF
CORPORATION OF ITS OWN How Dividends are declared
SHARES
Approval & voting requirement:
a) Approval of BOD
Form of Dividends (§43) b) In case of stock dividend: must be ap-
proved by SHs representing not less than
1. CA two-thirds (2/3) of the outstanding capital
SH – most common form. stock at a regular or special meeting duly
2. ST called for the purpose.
OCK – a distribution to the stockholders
of the company’s own stock. The corpor-
ate profits are transferred to capital
stock and shares of stock representing Dividend Declaration Discretionary with
the increase in capitalization are distrib- the Board
uted.
These do not represent income on the Gen. Rule WON there should be a distribution
part of the SH. Investment and of dividends to the SHs in any given year &
proportional interest in the corp remain the form of such dividends are matters
the same addressed to the business judgment of the
BOD
• Limitation on the issue of
stock dividends: Exceptions:
o there must be unissued 1. When the decision is tainted w/ bad faith,
shares of the corporation. If fraud or gross negligence
there are none, there must be 2. If the court finds, upon complaint of a SH,
an increase in capital stock first, that a surplus was unreasonably accumu-
which requires an amendment lated (profits accumulated in excess of
of the AOI 100% of the corp’s paid-in capital stock),
o there must be unres- it may order the corp. to distribute di-
tricted retained earnings vidends
o cannot be issued to Exceptions:
non-stockholders even for ser- a. when justified
vices rendered by definite corporate expansion pro-
3. PR jects or programs approved by the
OPERTY – Although the corp. may have board of directors; or
a big amount of earnings available for b. when the cor-
dividends, they may not all be in cash. poration is prohibited under any loan
agreement with any financial institu-
tion or creditor, whether local or for-
Source of Dividends (§43)
eign, from declaring dividends without
its/his consent, and such consent has
not yet been secured; or

57
c. when it can poses (treasury shares) provided, that the
be clearly shown that such retention corporation has unrestricted retained
is necessary under special circum- earnings in its books to cover the shares
stances obtaining in the corporation, to be purchased or acquired
such as when there is need for spe- • Treasury shares are shares of stocks
cial reserve for probable contingen- which have been issued and fully paid for,
cies. (§43) but subsequently reacquired y the issuing
corporation by purchase, redemption,
donation or through some other lawful
means (§9)
When Right to Dividends Vests • Treasury shares have no voting rights
(§57)
• General rule: as soon as the
• May be issued as property dividends
same have been lawfully declared by the provided that the retained earnings has
BOD, becomes a debt owing to the SH. not been subsequently impaired by losses
No revocation can be made
• Trust Fund doctrine – the requirement of
• Exceptions:
unrestricted retained earnings is because
o not yet announced or subscription to the capital of a corporation
communicated to the public, revoc- constitute a fund to which creditors have a
able before announcement to SHs right to look for the satisfaction of their
o when stock dividends claims
are declared since these are not dis- • Legitimate purpose includes:
tributions but merely represent a) To eliminate fractional shares arising
changes in the capital structure, out of stock dividends;
may be revoked prior to actual issu- b) To collect or compromise an indebted-
ance ness to the corporation, arising out of
• Rights of transferee to di- unpaid subscription, in a delinquency
vidends – Right to dividends vests upon sale, and to purchase delinquent
declaration so whoever owns the stock shares sold during said sale; and
at time or stockholders of record also c) To pay dissenting or withdrawing
owns the dividend. Subsequent transfer stockholders entitled to payment for
of stock would not carry with it right to their shares under the provisions of
dividends UNLESS agreed upon by the this Code (appraisal right, Cf §81).
parties • Improper purpose includes: raising of
price of stock by making it appear that it
is being actively traded (prohibited under
Sec 24 of the Securities Regulations
Liability for Illegal Dividends Code) and preferring some SHs to the
prejudice of other SHs and creditors (may
Directors not liable  if unintentionally
be viewed as early liquidation of the in-
declare illegal dividends, such as when the
vestment of some of the SHs)
directors, in declaring dividends:
• Remedies in case of improper purchase:
- rely on financial statements pre-
a) Creditors prejudiced by the
pared by a dishonest EE whom they
repurchase can go after the selling
had no reason to suspect
SHs to recover what was paid to them
- rely on advice of legal counsel
b) Directors who were negligent or in BF
for approving the repurchase can also
Directors liable under §31 if found
be held personally responsible
negligent or in bad faith to the (1) corp; or
c) Prejudiced SH can also go after BOD
(2) its creditors, if insolvent
who approved purchase (when their
dividends are reduced, remaining
assets can’t cover debts, etc)
• A corporation must have unres-
Purchase by the Corporation of its Own
tricted retained earnings in acquiring own
Shares (§41)
shares except:
• A stock corporation shall have the power a) shares are acquired in the redemption
to purchase or acquire its own shares for of redeemable shares (§8)
a legitimate corporate purpose or pur-

58
b) shares are re-acquired to effect a • The SEC may disapprove any amendment
decrease in capital stock approved thereto if the same is not in compliance
by the SEC (§38) with the requirements of this Code
shares are reacquired by a close corporation • The SEC shall give the incorporators a
pursuant to the order of the SEC acting to reasonable time within which to correct or
arbitrate a deadlock (§104) modify the objectionable portions of the
articles or amendment.
• The following are grounds for such disap-
proval:
a) Amendment is not substan-
Chapter XIV
tially with the form prescribed
AMENDMENTS OF CHARTER b) Purpose is patently unconsti-
tutional, illegal, immoral, contrary to
government rules and regulations
Procedure for amendment of
c) Treasurer’s Affidavit is false
articles of incorporation
d) Percentage requirement of
(§16)
ownership as required by the Consti-
tution not complied with
a) The amendment must be for a legitimate
purpose; and must be approved by a
majority vote of the Board; and vote (in
Special Amendments
a meeting) or mere written assent (no
meeting) of 2/3 of the outstanding
stock, or in case of a non-stock corpora- 1. Increase or decrease of capital stock
tion, by the members of the corporation. (§38)
• Once the amendment is
approved, dissenting stockholders Approval and Voting Requirement
may exercise their rights of apprais- a) Approved by a majority vote
al if it involved diminishing of sub- of the board of directors
stantial rights previously granted or b) Two-thirds (2/3) of the out-
creating a new set of shares with standing capital stock shall favor the
priority rights. increase or diminution of the capital
b) The original and amended articles to- stock
gether shall contain all provisions re-
quired by law to be set out in the art- Certificate of Filing
icles of incorporation. Such articles, as • A certificate in duplicate must
amended shall be indicated by under- be signed by a majority of the direct-
scoring the change or changes made ors of the corporation and counter-
c) A copy thereof duly certified under oath signed by the chairman and the sec-
by the corporate secretary and a major- retary of the stockholders' meeting,
ity of the directors or trustees stating setting forth:
the fact that said amendment or amend- a) That the requirements of vot-
ments have been duly approved by the ing and notice have been com-
required vote of the stockholders or plied with;
members, shall be submitted to the Se- b) The amount of the increase or
curities and Exchange Commission. diminution of the capital stock;
d) The amendment of the Articles of Incor- c) If an increase of the capital
poration will be effective only upon ap- stock, the amount of capital stock
proval of the SEC; but should no action or number of shares of no-par
be taken by the SEC within 6 months stock thereof actually subscribed,
from the date of filing, then automatic- the names, nationalities and res-
ally, the amendment is deemed effect- idences of the persons subscrib-
ive, provided that delay is not attributing, the amount of capital stock
able to the corporation. or number of no-par stock sub-
scribed by each, and the amount
paid by each on his subscription
Grounds for disapproving in cash or property, or the
amendment (§17) amount of capital stock or num-
ber of shares of no-par stock al-
lotted to each stock-holder if such
increase is for the purpose of

59
making effective stock dividend
therefor authorized; Note: Proposing amendments is a way of
d) The amount of stock repres- easing out the minority stockholders
ented at the meeting; and because it compels them to exercise their
e) The vote authorizing the in- appraisal rights
crease or diminution of the cap-
ital stock
2. Change in corporate term (§37)
• One of the duplicate certific-
ates shall be kept on file in the office
of the corporation and the other Approval and Voting Requirement
shall be filed with the Securities and a) Approved by a majority vote of the
Exchange Commission and attached board of directors or trustees and
to the original articles of incorpora- b) Ratified at a meeting by the stock-
tion. holders representing at least two-
thirds (2/3) of the outstanding capital
Approval of SEC stock or by at least two-thirds (2/3) of
• An the members in case of non-stock
y increase or decrease in the capital corporations.
shall require prior approval of the
Securities and Exchange Commis- Appraisal right
sion. YES for extension of corporate term
• De (§37)
crease of capital stock: No decrease YES for shortening and extension (§81)
of the capital stock shall be ap-
proved by the Commission if its ef-
fect shall prejudice the rights of cor-
porate creditors
Chapter XV
Effectivity
From and after approval by the TRANSFER OF SHARES
Securities and Exchange Commission
and the issuance by the Commission of 1. Manner and Effectivity of
its certificate of filing, the capital stock Transfer
shall stand increased or decreased
Indorsement and delivery
Treasurer’s Affidavit: • Shares of stock
The Securities and Exchange may be transferred as follows (§63):
Commission shall not accept for filing a) delivery of the certificate or
any certificate of increase of capital certificates and
stock unless accompanied by the sworn b) indorsed by the owner or his
statement of the treasurer of the attorney-in-fact or other person
corporation lawfully holding office at the legally authorized to make the
time of the filing of the certificate, transfer
showing that at least twenty-five (25%)
percent of such increased capital stock Rural Bank of Salinas v CA
has been subscribed and that at least Clemente, President of Rural Bank of Salinas
twenty-five (25%) percent of the and owner of shares in said corporation
amount subscribed has been paid either executed a Special Power of Attorney to his
in actual cash to the corporation or that wife Melania giving her full power to sell or
there has been transferred to the otherwise dispose of shares of stock of the
corporation property the valuation of Bank. Before death of Clemente, Melania,
which is equal to twenty-five (25%) pursuant to said SPA, executed deed of
percent of the subscription Assignment of former’s shares. After death
of Clemente, Melania presented to bank deed
Appraisal right (§81¶1) of assignment for registration which the
Appraisal right may be exercised where bank refused. Mandamus filed by Melania to
the increase in capital stock results in compel bank to register the transfer.
the creation of shares with preferences
superior to those of existing ones. HELD: Transfer before death valid, stock not

60
yet part of estate. Shares of stock are delivery of certificate no. 2. Later on,
personal property and may be transferred by Alfonso Tan elected to withdraw from the
delivery. Registration in corporate books is corporation. In exchange for his shares, he
not necessary. The transfer effected in this received stocks in trade. Certificate No. 8
case is valid. The corporation may not was later on cancelled due to above. After
impose any restriction on such transfer. The several years, Alfonso Tan filed a case with
right of transferee/assignee to have stocks Cebu SEC questioning the cancellation of his
transferred to his name is inherent right, stock certificates despite non-endorsement
duty of the corporation to register the and lack of delivery
transfer is ministerial.
HELD: Delivery and endorsement under
Razon v IAC Section 63 of the corporation code is not
Chudian was issued 1,500 shares at E Razon mandatory because of the use of the word
Inc with the corresponding stock certificate may. Delivery is not essential where it
no 3. Said stock certificates were delivered appears that the persons sought to be held
to Enrique Razon allegedly because it was as stockholders are officers of the
the latter who paid for all the subscription on corporation and have custody of the stock
the shares of stock in defendant corporation book as in this case. To hold that
with the understanding that has was the cancellation of certificate of stock of Alfonso
owner of said shares of stock and was to is null and void because of lack of delivery
have possession until such time as he was and endorsement of mother certificate of
paid by other nominal stock no. 2 which was deliberately withheld
incorporators/stockholders. Later on, parties is to prescribe restrictions on the transfer of
delivered it for deposit with bank under the stock in violation of corporation law
joint custody of the parties. Administrator of
the estate of Chudian filed a complaint Registration
against Enrique Razon et al praying that the
• Purpose of registration
said stock certificates be delivered to estate
a) enable the
of Chudian along with all cash and stock
transferee to exercise all the
dividends and pre-emptive rights accruing
rights of a stockholder
thereto.
b) to inform the
corporation of any change in
HELD: Chudian is still owner
share ownership so that it can as-
a) Shares of stock is transferred by de-
certain the persons (a) entitled to
livery and endorsement of the stock
the rights (b) subject to the liabil-
certificate
ities of a SH
b) Such mode of transfer is not com-
c) until regis-
plied with in this case
tration is accomplished, the trans-
c) In the books of the corporation,
fer, though valid between the
Chudian is still the owner of the
parties, cannot be effective
stocks. He was even elected mem-
against the corporation
ber of the board which proves that
• Effect of lack of registration:
he is a stockholder
a) transferee cannot vote
d) One who claims ownership should
b) transferee cannot be voted
show that the same was transferred
for
to him in accord with the valid mode
c) an outsider
of transfer. This petitioner failed to
d) cannot prevail over rights of a
show
subsequent attaching creditor
Endorsement is a mandatory requirement of
e) not entitled to dividends
law for an effective transfer
f) stockholder on record has the
right to participate in meetings.
Tan v SEC
Alfonso Tan is owner of 400 shares in
No registration of transfer of unpaid
Visayan Educational Supply Corp evidenced
shares
by certificate No. 2. Alfonso transferred 50
shares to Angel. Certificate No. 2 was • If there is any un-
cancelled and Certificate No. 6 was issued to paid balance on the stockholder’s sub-
Angel and Certificate No. 8 was issued to scription there can be no stock certi-
Alfonso. However, Alfonso did not make the ficate on which indorsement can be
proper endorsement and did not make made. The shares are thus not trans-

61
ferable on the corporate books. Rivera v Florendo (1986)
(§63)
• However, the Rivera is the registered owner of 4899
stockholder can still transfer his in- shares of stock of Fujiyama Hotel &
terest in the corporation by way of a Restaurant Inc. It is alleged that one
deed of assignment. Akasako is the real owner of the 4899 shares
under Rivera’s name, and as such owner he
sold 2550 shares to Milagros. Rivera refused
Sunset View Condominium Corp v
to indorse the certificates to Milagros despite
Campos
the assurance he gave to Milagros before the
Sunset View Condominium corporation filed
sale was consummated. The other
suit against Aguilar-Bernares Realty and Lim
incorporators also sold their shares to
Siu Leng for collection of assessments levied
Milagros and one Jureidini. As regards these
on their respective condominium units which
transfers, the certificates were properly
they bought on installments and had not yet
indorsed by their respective owners.
fully paid
Milagros and Jureidini attempted to have all
the certificates registered in their names but
HELD: Respondents not shareholders of
the corporation refused to do so.
condominium corporation because they are
not yet fully paid
a) Sec 5 Condominium Act – shareholding
in a condominium corporation will be HELD: Mandamus will not lie where the
conveyed only in a proper case shares of stock are not even indorsed by the
b) Sec 4 of Condominium Act leaves to registered owner Rivera who is specifically
Master Deed the determination of when resisting the registration thereof in the books
shareholding will be transferred to pur- of the corp. Even the shares of stock sold by
chaser of a unit the other incorporators cannot be also the
c) Master Deed provides that only owner of subject of mandamus on the strength of the
unit is a shareholder and that ownership mere indorsement of the supposed owners of
of unit is acquired by purchaser subject said shares in the absence of express
to conditions and terms of the instru- instructions from them. The right of the
ment conveying the unit to such pur- parties will have to be threshed out in an
chaser. ordinary action.
d) Deed of Conveyance provide that owner-
ship is conveyed only upon full payment
of purchase price 2. Restrictions on Transfer;
e) Sec 10 Condominium Act – Membership Close Corporations
in Condominium corporation shall not be
transferable separately from condomini-
um unit of which it is an appurtenance General Rule: Free transferability of
shares
Remedy if registration refused – Shares are personal property – Shares of
Transferee may petition the court for a stock so issued are personal property and
writ of mandamus to compel the may be transferred (§63)
corporation to do so
Exception: In close corporations
Considering the special circumstances
attending a close corporation (e.g. formed
by persons who know each other well,
thus they would want to choose the
persons who will be allowed in their
group), it is justifiable and even
imperative for its stockholders to protect
themselves from future conflicts by
placing restrictions on the right of each
one of them to transfer his shares to an
outsider.

62
Validity of restrictions on transfer of shares as against a bonafide pur-
shares (§98) chaser. This is called the theory of
quasi-negotiability
• Restrictions on the right to b. forged trans-
transfer shares must appear in the fers – if the corporation should issue a
articles of incorporation and in the new certificate pursuant to a forged
by-laws as well as in the certificate transfer, it incurs no liability to the
of stock; otherwise, the same shall person in whose favor it issued it and
not be binding on any purchaser may demand its return for cancella-
thereof in good faith. tion. It is the duty of the purchaser to
• Restrictions shall not be determine that the indorsement was
more onerous than granting the ex- genuine. But with respect to a sub-
isting stockholders or the corpora- sequent purchaser in good faith and
tion the option to purchase the for value, the corporation is estopped
shares of the transferring stockhold- from denying the validity of the newly
er with such reasonable terms, con- issued certificate because by issuing
ditions or period stated therein. If such, it has represented that the per-
upon the expiration of said period, son named therein is a stockholder of
the existing stockholders or the cor- the corporation. Except where recog-
poration fails to exercise the option nition of the original and new sub-
to purchase, the transferring stock- scriber will result to an overissue of
holder may sell his shares to any shares. The new SH would now have
third person. right to damages against the corpora-
• Presumptions: tion and the latter against those who
a. If the stock certificate CON- made false representations.
SPICUOUSLY shows the restric-
tion, the purchaser or transferee 4. Collateral Transfers
is conclusively presumed to
have notice of the restriction, • Subject to collateral transfers:
provided this appears in the Shares of stock being personal prop-
AOI. He cannot prove that he erty, may be the subject matter of
acted in good faith. a. pledge or
Where a conclusive presumption b. chattel mortgage.
of notice arises, the corporation • Registration in corporate books
may, at its option, refuse to not necessary: Such collateral trans-
register the transfer, unless fers are not covered by Sec. 63 of the
(1) all the stockholders have Code since such provision applies only
consented to the transfer, to absolute transfer. Thus, the regis-
or tration in the corporate books of
(2) the AOI have been properly pledges and chattel mortgages of
amended to remove the re- shares CANNOT have any legal effect.
striction.
b. If it appears in the certificate,
but NOT CONSPICUOUSLY, then Lim Tay v CA
although he may be presumed Sy Guiok and Sy Lim pledged their shares in
to have notice of the restriction, Go Fay and Co to Lim Tay. They endorsed
he can prove the contrary. their respective share in blank and delivered
the same to Lim Tay. Sy Guiok and Sy Lim
failed to pay hence Lim Tay went to the
corporate secretary to ask the registration of
3. Unauthorized transfers the shares in his name. Corporate secretary
refused. Lim Tay instituted an action for
a. certificates mandamus at SEC to compel corporate
indorsed in blank – where the stock- secretary to register.
holder indorses his certificate in
blank in such a manner as to clothe HELD: Corporate’s secretary cannot be
whoever may be in possession of it compelled to record transfer. The duty of a
with apparent authority to deal with corporate secretary to record transfers of
the shares as the latter’s own, he stocks is ministerial. However, he cannot be
will be estopped from claiming the compelled to do so when the transferees title

63
to said shares has no prima facie validity or a. Expiration of ori-
is uncertain. Mandamus will not issue to ginal, extended or shortened term
establish a right but only to enforce one • The
already established. Lim Tay failed to term within which the corporation
establish a legal right to have the shares is to exist (which cannot be more
registered in his name. Lim Tay failed to than 50 years) must be stated in
establish a legal right. He is not owner of its AOI. Once such period expires,
the shares without foreclosure and purchase the corporation is automatically
at auction. He is merely a pledgee. dissolved without any other pro-
ceeding and it cannot thereafter
be considered a de facto corpora-
tion.
• A
voluntary dissolution may be ef-
fected by amending the articles of
incorporation to shorten the cor-
porate term pursuant to the pro-
visions of the Code. Upon approv-
al of the amended articles of in-
Attachment of shares corporation or the expiration of
the shortened term, as the case
Garcia vs. Jomouad, GR 133969, Jan 26, may be, the corporation shall be
2000 deemed dissolved without any
FACTS: Dico lost a collection case and the further proceedings (§120)
Proprietary Ownership Certificate (POC) in
the Cebu Country Club in his name was b. Voluntary dissolu-
levied on and scheduled for public auction.
tion when no creditors are affected
Garcia claimed ownership over the certificate
(§118)
and filed the action for injunction to enjoin
• Dis-
the auction. Dico had executed a Deed of
solution may be effected by ma-
Transfer in favor of petitioner which was
jority vote of the board of direct-
furnished to The Club but the transfer was
ors or trustees, and by a resolu-
not recorded in the books of the Club
tion duly adopted by the affirmat-
because petitioner failed to present proof of
ive vote of the stockholders own-
payment of the requisite capital gains tax.
ing at least two-thirds (2/3) of
HELD: The transfer of the subject certificate the outstanding capital stock or of
made by Dico to petitioner was not valid as at least two-thirds (2/3) of the
to the judgment creditors, as the same still members.
stood in the name of Dico, the judgment • Meet
debtor, at the time of the levy on execution. ing to be held upon call of the dir-
In addition, as correctly ruled by the CA, the ectors or trustees after publica-
entry in the minutes of the meeting of the tion of the notice of time, place
Club's board of directors noting the and object of the meeting for
resignation of Dico as proprietary member three (3) consecutive weeks in a
thereof does not constitute compliance with newspaper published in the place
Section 63 of the Corporation Code. Said where the principal office of said
provision of law strictly requires the corporation is located; and if no
recording of the transfer in the books of the newspaper is published in such
corporation, and not elsewhere, to be valid place, then in a newspaper of
as against third parties. general circulation in the Philip-
pines, after sending such notice
to each stockholder or member
either by registered mail or by
Chapter XVI personal delivery at least thirty
(30) days prior to said meeting.
DISSOLUTION
• A
copy of the resolution authorizing
1. Causes of
the dissolution shall be certified
dissolution
by a majority of the board of dir-
ectors or trustees and counter-

64
signed by the secretary of the to file objections as fixed in the
corporation. The Securities and order has expired, the Commis-
Exchange Commission shall sion shall proceed to hear the pe-
thereupon issue the certificate tition and try any issue made by
of dissolution. the objections filed; and if no
such objection is sufficient, and
c. Voluntary dissolu- the material allegations of the pe-
tion when creditors are affected tition are true, it shall render
(§119) judgment dissolving the corpora-
• Pe- tion and directing such disposition
tition for dissolution shall be of its assets as justice requires,
filed with the Securities and Ex- and may appoint a receiver to
change Commission. collect such assets and pay the
• Th debts of the corporation
e petition shall be signed by a
majority of its board of directors d. Dissolution by
or trustees or other officers hav- minority in close corporations Volun-
ing the management of its af- tary dissolution when creditors are af-
fairs, verified by its president or fected (§105)
secretary or one of its directors Any stockholder of a close corporation
or trustees, and shall set forth may, by written petition to the
all claims and demands against Securities and Exchange
it, and that its dissolution was Commissions, compel the dissolution
resolved upon by the affirmative of such corporation whenever any of
vote of the stockholders repres- the acts of the directors, officers or
enting at least two-thirds (2/3) those in control of the corporation is
of the outstanding capital stock illegal, or fraudulent, or dishonest, or
or by at least two-thirds (2/3) of oppressive or unfairly prejudicial to
the members at a meeting of its the corporation or any stockholder or
stockholders or members called whenever corporate assets are being
for that purpose. misapplied or wasted.
• If
the petition is sufficient in form e. Failure to organize
and substance, the Commission and commence business; cessation of
shall, by an order reciting the business for 5 years (§22)
purpose of the petition, fix a
date on or before which objec- • Failure to formally organize
tions thereto may be filed by and commence the transaction of
any person, which date shall not its business or construction of its
be less than thirty (30) days nor works within two years→ its cor-
more than sixty (60) days after porate powers shall cease and the
the entry of the order. Before corporation is deemed dissolved
such date, a copy of the order o Transacting
shall be published at least once business – implies a continu-
a week for three (3) consecutive ity of acts or dealings in the
weeks in a newspaper of gener- accomplishment of the pur-
al circulation published in the pose for which the corpora-
municipality or city where the tion was formed
principal office of the corpora- o Formally or-
tion is situated, or if there be no ganize includes not only the
such newspaper, then in a adoption of the by-laws but
newspaper of general circulation also the establishment of the
in the Philippines, and a similar body which will administer
copy shall be posted for three the affairs of the corporation
(3) consecutive weeks in three and exercise its powers
(3) public places in such muni- • Com
cipality or city. menced transaction of its busi-
• Up ness but subsequently becomes
on five (5) day's notice, given continuously inoperative for a
after the date on which the right period of at least five years→

65
ground for suspension or revoc- • When it has commit-
ation of its corporate franchise ted or omitted an act which
amounts to a surrender of its cor-
f. Involuntary dis- porate rights, privileges or fran-
solution chise
• When it has misused
Revocation of certificate of a right, privilege, or franchise
registration by the SEC (§121) conferred upon it by law or when
• A corporation may be it has exercised a right, privilege
dissolved by the Securities and or franchise in contravention of
Exchange Commission upon fil- law
ing of a verified complaint and
after proper notice and hearing 2. Effects of
on grounds provided by existing dissolution; Winding-Up and Liquidation
laws, rules and regulations
• Grounds for revocation a. Loss of juridical personality
(Sec. 2 PD 902-A) • corporation loses its
o Fraud in procuring its certi- juridical personality and can no
ficate of registration longer lawfully continue its busi-
o Serious misrepresentation ness except for the purpose of
as to what the corporation winding up
can or is doing to the great • cannot even be a de
prejudice of or damage to facto corporation, hence subject
the general public to collateral attack
o Refusal to comply or defi- • cannot enter into
ance of any lawful order of new contracts which would have
the Commission restraining the effect of continuing the busi-
commission of acts which ness
would amount to a grave vi-
olation of its franchise b. Executory contracts
o Continuous inoperation for a • No right or remedy in
period of at least five years favor of or against any corpora-
o Failure to file by-laws within tion, its stockholders, members,
the required period directors, trustees, or officers, nor
o Failure to file required re- any liability incurred by any such
ports in appropriate forms corporation, stockholders, mem-
as determined by the Com- bers, directors, trustees, or of-
mission within the pre- ficers, shall be removed or im-
scribed period paired either by the subsequent
• Other grounds dissolution of said corporation or
o Sec. 144 BP 68 – by any subsequent amendment or
repeal of this Code or of any part
Violation by the corporation
thereof. (§145)
of any provision of the Cor-
• The prevailing view is
poration Code
that executory contracts are not
o Sec. 104 BP 68 – In
extinguished. However, some au-
case of a deadlock in a close
thorities make an exception of
corporation, and the SEC
contracts for personal services
deems it proper to order the
such as employment contracts of
dissolution of the corpora-
officers and employees where the
tion as the only practical
dissolution is involuntary or the
solution to the dispute
result of merger or consolidation
in which case the contracts are
Quo Warranto Proceedings (Sec. 2,
deemed terminated.
Rule 66 ROC)
• When it has offen-
ded against a provision of an
Act for its creation and renewal
• When it has for-
c. Winding-Up and Liquidation
feited its privileges and fran-
chises by nonuser

66
• Definition: The winding up and corporation shall distribute
turning assets of corporation any of its assets or property
into cash for distribution except upon lawful dissolution
• A liquidation proceeding is a and after payment of all its
proceeding in rem so that all debts and liabilities.
other interested persons wheth- • What happens if an asset cannot
er known to the parties or not be distributed to the person en-
may be bound by such proceed- titled to it?
ings o Upon the winding up of the
• For how long may the liquida- corporate affairs, any asset
tion of a corporation be under- distributable to any creditor
taken? or stockholder or member
o Every corporation whose who is unknown or cannot be
charter expires by its own found shall be escheated to
limitation or is annulled by the city or municipality where
forfeiture or otherwise, or such assets are located.
whose corporate existence • Who may undertake the liquida-
for other purposes is ter- tion of a corporate (Methods of Li-
minated in any other man- quidation)?
ner, shall nevertheless be o By the corporation itself
continued as a body corpor- through the board of directors
ate for three (3) years after – the board of directors serve
the time when it would have as trustees
been so dissolved o Conveyance of all corporate
o However, in case the cor- assets to trustees who will
porate assets are conveyed take charge of the liquidation.
to a trustee or a receiver From and after any such con-
appointed by the SEC, the veyance by the corporation of
three year limitation will not its property in trust for the
apply benefit of its stockholders,
o Although the three year members, creditors and oth-
period may have expired, it ers in interest, all interest
does not necessarily follow which the corporation had in
that a creditor who was un- the property terminates, the
able to collect his claim be- legal interest vests in the
fore three years would lose trustees, and the beneficial
is rights. It is still possible interest in the stockholders,
for him to sue the trustee, if members, creditors or other
there be one, or if the cir- persons in interest.
cumstances so warrant, to o Liquidation by a receiver who
follow the assets in the may have been appointed by
hands of the stockholders the SEC upon its decreeing
who nay have received the the dissolution of the corpora-
same as liquidating dition. 3-year period does not
vidends apply because the corporation
• What could and should be done is substituted by the receiver.
during the period of liquidation? However, the mere appoint-
o For the purpose of prosec- ment of a receiver, without
uting and defending suits by anything more does not result
or against it and enabling it in the dissolution of the cor-
to settle and close its af- poration nor bar it from the
fairs, to dispose of and con- existence of its corporate
vey its property and to dis- rights
tribute its assets, but not • A corporation cannot
for the purpose of continu- distribute any of its assets or
ing the business for which it property except upon lawful dis-
was established. solution and only after payment
o Except by decrease of capit- of all its debts and liabilities, after
al stock and as otherwise which the remaining assets must
allowed by this Code, no be distributed to the stockholders

67
in proportion to their interest in corporation lacked juridical personality to sue
the corporation. or be sued.
• Exceptions: SC held that it was erroneous to contend
 decrease in c/s result- that a dissolved and non-existing corporation
ing in a surplus which can could no longer be represented by a lawyer
then be distributed to stock- and concomitantly a lawyer could not appear
holders provided no credit- as counsel for a non-existing judicial person.
ors are prejudiced A corporation that has a pending action and
 as otherwise allowed by which cannot be terminated within the three-
the code: year period after its dissolution is authorized
 Appraisal right under Sec. 78 [now §122] of the Corporation
 Deadlock in a close cor- Law to convey all its property to trustees to
poration enable it to prosecute and defend suits by or
 SH of a close corpora- against the corporation beyond the three-year
tion may compel corpora- period. Although private respondent did not
tion to buy his shares at fair appoint any trustee, yet the counsel who
value prosecuted and defended the interest of the
 Corporation repur- corporation in the instant case and who in fact
chases shares for any legit- appeared in behalf of the corporation may be
imate corporate purpose considered a trustee of the corporation at
 Corporation validly dis- least with respect to the matter in litigation
tributes dividend only.
CLEMENTE, ET. AL. v. CA:

The termination of the life of a juridical
entity does not by itself cause the extinction
Chapter XVII
or diminution of the rights and liabilities of
such entity, nor those of its owners and CORPORATE COMBINATIONS
creditors. If the three-year extended life has
expired without a trustee or receiver having
been expressly designated by the 1. Merger and
corporation within that period, the board of Consolidation
directors (or trustees) itself, may be
permitted to so continue as "trustees" by a. What is a merger /
legal implication to complete the corporate consolidation?
liquidation. Still in the absence of a board of • Merger
directors or trustees, those having any o One of the constituent cor-
pecuniary interest in the assets, including porations remains as an ex-
not only the shareholders but likewise the isting juridical person, where-
creditors of the corporation, acting for and in as the other corporation shall
its behalf, might make proper representation cease to exist. Merger is the
with the Securities and Exchange disappearance of one of the
Commission, which has primary and corporations with the other
sufficiently broad jurisdiction in matters of corporation acquiring all the
this nature, for working out a final assets, rights of action, and
settlement of the corporate concerns. assuming all the liabilities of
the disappearing corporation.
o Of course, there is an ar-
Dissolved corporation’s capacity to sue:
rangement as to the shares of
stocks that will be issued to
Reburiano vs. CA, GR 102965, Jan 21,
the former stockholders of
1999
the two (2) corporations
Corporation amended its AoI to shorten which were merged. Said
its corporate existence while the case was stockholders are now stock-
pending in court. SEC approved the holders of the corporation
amendment but the trial court was not which survives. The propor-
notified. After the trial court rendered tion between the two (2) cor-
judgment against corporation, it filed motion porations will be the basis of
to quash writ of execution because the the shares of stocks that will

68
be issued to the stockhold- summary of the plan of merger or
ers under the surviving cor- consolidation.
poration. 4. Any dissenting stockholder in
• Consolidation stock corporations may exercise
o If there is consolidation, his appraisal right in accordance
there will be disappearance with the Code. Provided, that if
of both the constituent cor- after the approval by the stock-
porations with the emer- holders of such plan, the board of
gence of a new corporate directors decides to abandon the
entity which shall obtain all plan, the appraisal right shall be
the assets of the disappear- extinguished.
ing corporations, and like- 5. Amendment to the plan of merger
wise shall assume all their or consolidation may be made by
liabilities. approved of the majority vote of
o Also, the number of shares the respective boards of directors
or trustees of all the constituent
that will be issued to each
corporations and ratified by the
of the stockholders under
affirmative vote of stockholders
the new corporation is de-
representing at least two-thirds
termined by the ration
(2/3) of the outstanding capital
between the assets of the
stock or of two-thirds (2/3) of the
two (2) corporations.
members of each of the constitu-
ent corporations. Such plan, to-
b. What is a “con-
gether with any amendment, shall
stituent corporation”? A “consolid-
be considered as the agreement
ated corporation”?
of merger or consolidation.
Two or more corporations may
merge into a single corporation
which shall be one of the constituent d. What is a plan of
corporations or may consolidate into merger or consolidation? (§76)
a new single corporation which shall The board of directors or trustees of
be the consolidated corporation. each corporation, party to the merger
or consolidation, shall approve a plan
c. What corporate of merger or consolidation setting
forth the following:
approvals are required? (§77)
• The names of the corporations
1. Approval by majority vote of
proposing to merge or consolid-
each of the board of directors or
ate, hereinafter referred to as the
trustees of the constituent cor-
constituent corporations;
porations of the plan of merger
• The terms of the merger or con-
or consolidation.
solidation and the mode of carry-
2. Approval by the stockholders or
ing the same into effect;
members of each of such cor-
porations. The affirmative vote • A statement of the changes, if
of stockholders representing at any, in the articles of incorpora-
least two-thirds (2/3) of the tion of the surviving corporation
outstanding capital stock of in case of merger; and, with re-
each corporation in the case of spect to the consolidated corpora-
stock corporations or at least tion in case of consolidation, all
two-thirds (2/3) of the members the statements required to be set
in the case of non-stock corpor- forth in the articles of incorpora-
ations shall be necessary for the tion for corporations organized
approval of such plan under this Code; and
3. Notice of such meetings shall be • Such other provisions with re-
given to all stockholders or spect to the proposed merger or
members of the respective cor- consolidation as are deemed ne-
porations, at least two (2) cessary or desirable.
weeks prior to the date of the
meeting, either personally or by e. What are articles
registered mail. Said notice shall of merger or consolidation? (§78)
state the purpose of the meet- • After the approval by the stock-
ing and shall include a copy or a holders or members, articles of

69
merger or articles of consolida- this Code or existing laws, it shall
tion shall be executed by each set a hearing to give the corpora-
of the constituent corporations: tions concerned the opportunity
1) to be signed by the presid- to be heard. Written notice of the
ent or vice-president and date, time and place of hearing
2) certified by the secretary or shall be given to each constituent
assistant secretary of each corporation at least two (2) weeks
corporation before said hearing. The Commis-
• The articles of merger or consol- sion shall thereafter proceed as
idation shall set forth: provided in this Code.
1) The plan of the merger or
the plan of consolidation; g. What are the ef-
2) As to stock corporations, fects of a merger or consolidation?
the number of shares out- (§80)
standing, or in the case of 1) The constituent corporations shall
non-stock corporations, the become a single corporation
number of members; and which:
3) As to each corporation, the • In case of merger, shall be
number of shares or mem- the surviving corporation des-
bers voting for and against ignated in the plan of merger;
such plan, respectively. and
• In case of consolidation, shall
f. When is the ef- be the consolidated corpora-
fectivity of merger or consolidation? tion designated in the plan of
• Effectivity: Upon issuance by consolidation;
the SEC of the certificate of 2) The separate existence of the
merger and consolidation constituent corporations shall
• The articles of merger or of con- cease, except that of the surviv-
solidation shall be submitted to ing or the consolidated corpora-
the Securities and Exchange tion;
Commission in quadruplicate for 3) The surviving or the consolidated
its approval. corporation shall possess all the
• In the case of merger or consol- rights, privileges, immunities and
idation of banks or banking in- powers and shall be subject to all
stitutions, building and loan as- the duties and liabilities of a cor-
sociations, trust companies, in- poration organized under this
surance companies, public utilit- Code;
ies, educational institutions and 4) The surviving or the consolidated
other special corporations gov- corporation shall thereupon and
erned by special laws, the favor- thereafter possess:
able recommendation of the ap- • all the rights, privileges, im-
propriate government agency munities and franchises of
shall first be obtained. each of the constituent cor-
• If the Commission is satisfied porations; and
that the merger or consolidation • all property, real or personal,
of the corporations concerned is and all receivables due on
not inconsistent with the provi- whatever account, including
sions of this Code and existing subscriptions to shares and
laws, it shall issue a certificate other choses in action, and all
of merger or of consolidation, at and every other interest of,
which time the merger or con- or belonging to, or due to
solidation shall be effective. each constituent corporation
• these shall be deemed trans-
ferred to and vested in such
• If, upon investigation, the Se- surviving or consolidated cor-
curities and Exchange Commis- poration without further act
sion has reason to believe that or deed; and
the proposed merger or consol- 5) The surviving or consolidated cor-
idation is contrary to or incon- poration shall:
sistent with the provisions of

70
• be responsible and liable for cerned corporations at separate
all the liabilities and obliga- meetings.
tions of each of the con- 3) The same shall be submitted for
stituent corporations in the approval by the stockholders or
same manner as if such sur- members of each such corpora-
viving or consolidated cor- tion at separate corporate meet-
poration had itself incurred ings duly called for the purpose.
such liabilities or obliga- Notice should be given to all
tions; and stockholders or members at least
• any pending claim, action or two (2) weeks prior to date of
proceeding brought by or meeting, either personally or by
against any of such con- registered mail.
stituent corporations may 4) Affirmative vote of 2/3 of the out-
be prosecuted by or against standing capital stock in case of
the surviving or consolid- stock corporations, or 2/3 of the
ated corporation. members of a non-stock corpora-
• The rights of creditors or li- tion shall be required.
ens upon the property of 5) Dissenting stockholders may ex-
any of such constituent cor- ercise the right of appraisal. But
porations shall not be im- if Board abandons the plan to
paired by such merger or merge or consolidate, such right
consolidation is extinguished.
6) Any amendment to the plan must
be approved by the same votes of
the board members of trustees
ASSOCIATED BANK v. CA
and stockholders or members re-
Ordinarily, in the merger of two or more
quired for the original plan.
existing corporations, one of the combining
7) After such approval, Articles of
corporations survives and continues the
Merger or Articles of Consolidation
combined business, while the rest are
shall be executed by each of the
dissolved and all their rights, properties and
constituent corporations, signed
liabilities are acquired by the surviving
by president or VP and certified
corporation. Although there is dissolution of
by secretary or assistant secret-
the absorbed corporations, there is no
ary, setting forth:
winding up of their affairs or liquidation of
• plan of merger or consolida-
their assets, because the surviving
tion
corporation automatically acquires all their
• in stock corporation, the
rights, privileges and powers, as well as their
number of shares outstand-
liabilities.
ing; in non-stock, the number
of members
h. Procedure for • as to each corporation, num-
Merger or Consolidation ber of shares or members
1) Board of each corporation shall voting for and against such
draw up a plan of merger or plan, respectively
consolidation, setting forth: 8) Four copies of the Articles of Mer-
• names of corporations in- ger or Consolidation shall be sub-
volved (constituent corpora- mitted to the SEC for approval.
tions) Special corporations like banks,
• terms and mode of carrying insurance companies, building
it out and loan associations, etc., need
• statement of changes, if the prior approval of the respect-
any, in the present articles ive government agency con-
of surviving corporation; or cerned.
the articles of the new cor- 9) If SEC is satisfied that the merger
poration to be formed in or consolidation is legal, it shall
case of consolidation. issue the Certificate of Merger or
2) Plan for merger or consolidation the Certificate of Incorporation,
shall be approved by majority as the case may be.
vote of each board of the con- 10) If the SEC is not satisfied, it shall
set a hearing, giving due notice to

71
all the corporations concerned. meeting duly called for the pur-
(§76-79) pose.
• Written notice of the proposed ac-
i. Limitation on the tion and of the time and place of
right to merge / consolidate the meeting shall be addressed to
each stockholder or member at
1) Should not create monopolies his place of residence as shown
2) Should not eliminate free and on the books of the corporation
healhty competition and deposited to the addressee in
3) Act 3518 Sec 20 inhibits illegal the post office with postage pre-
combinations paid, or served personally
o When SH approval not neces-
sary - If disposition is neces-
j. Appraisal right –
sary in the usual and regular
any dissenting stockholder may ex- course of business of said
ercise his appraisal right under the corporation or if the proceeds
conditions provided in the Code of the sale or other disposi-
tion of such property and as-
sets be appropriated for the
2. Sale of conduct of its remaining busi-
substantially all assets (§40) ness.
o In non-stock corporations
a. Restrictions: Subject to the pro- where there are no members
visions of existing laws on illegal with voting rights - the vote
combinations and monopolies of at least a majority of the
trustees in office will be suffi-
cient authorization for the
b. Scope of power: To sell, lease,
corporation to enter into any
exchange, mortgage, pledge or oth- transaction authorized by this
erwise dispose of all or substantially section.
all of its property and assets, includ-
ing its goodwill, upon such terms
and conditions and for such consid- d. Appraisal right: any dissenting
eration, which may be money, stockholder may exercise his appraisal
stocks, bonds or other instruments right under the conditions provided in
for the payment of money or other the Code
property or consideration, as its
board of directors or trustees may e. Abandonment of the sale, lease…
deem expedient - After such authorization or approval
• Meaning of disposition of sub- by the stockholders or members, the
stantially all of the corporate board of directors or trustees may,
property and assets- if thereby nevertheless, in its discretion, aban-
the corporation would be don such sale, lease, exchange, mort-
rendered incapable of continuing gage, pledge or other disposition of
the business or accomplishing property and assets, subject to the
the purpose for which it was in- rights of third parties under any con-
corporated. tract relating thereto, without further
action or approval by the stockholders
c. Approval, voting and notice re- or members.
quirement:
• Majority vote of its board of dir- f. Compared to merger and consol-
ectors or trustees, idation
• Authorized by the vote of the
stockholders representing at Advantage of merger and
least two-thirds (2/3) of the consolidation over sale:
outstanding capital stock, or in - furnish a short cut to the accom-
case of non-stock corporation, plishment of various transactions
by the vote of at least to two- - may avoid the difficulty, delay
thirds (2/3) of the members, in and expense which usually ac-
a stockholder's or member's company dissolution, winding up

72
and distribution of assets to its 3. “Doing busi-
SH by a selling corp ness” (Sec. 3(d) RA 7042)
- automatic assumption of liabilit-
ies of the absorbed corp (in • Soliciting orders
sale, there must be sufficient • Service contracts
funds reserved by the absorbed • Opening offices, whether called
corp to pay its liabilities, other- liason offices or branches
wise the sale may be attacked • Appointing representatives or dis-
by the creditors as a fraudulent tributors domiciled in the Philippines
conveyance) or who in any calendar year stay in
- transfer or exchange of shares the country for a period or periods
is exempt from registration un- totaling 180 days or more
der Securities Act (in sale, re- • Participating in the management,
gistration with SEC required) supervision or control of any domestic
business, firm, entity or corporation in
Advantage of sale of substantially all the Philippines
assets: Where the absorbing corp • Any other act or acts that imply a
foresees problems in securing continuity of commercial dealings or
stockholders’ approval and in arrangements, and contemplate to
granting the appraisal right of that extent, performance normally in-
dissenters, it may decide that its cident to , and in progressive prosecu-
purchase of the assets of the tion of, commercial gain or of the pur-
absorbed corp would be more pose and object of the business or-
convenient and practical than ganization
merger • It shall not include:
o Mere investment as a share-
holder by a foreign entity in do-
mestic corporations duly re-
Chapter XVIII gistered to do business and/or the
FOREIGN CORPORATIONS exercise of such rights as such in-
vestor
o Having a nominee director or
officer to represent its interests in
1. Definition
such corporations
(§123)
o Appointing a representative
or distributor domiciled in the
Foreign corporation is one formed, Philippines which transacts busi-
organized or existing under any ness in its own name and for its
laws other than those of the own account
Philippines and whose laws allow
Filipino citizens and corporations to 4. Require-
do business in its own country or ments for the issuance of a license
state.
a. Documentary requirements (§125)
• A foreign corporation applying for
2. Necessity
a license to transact business in
of obtaining a license to do business:
the Philippines shall submit to the
SEC:
The reason for the license is to subject
o Copy of its articles of incor-
the foreign corporation doing business in
poration and by-laws, certi-
the Philippines to the jurisdiction of the
fied in accordance with law
courts, otherwise a foreign corporation
o Their translation to an official
illegally doing business here may
language of the Philippines, if
successfully though unfairly plead such
necessary.
neglect or illegal act so as to avoid
• The application shall be under
service and thereby impugn the
oath and, unless already stated in
jurisdiction of the local courts.
its articles of incorporation, shall
specifically set forth the following:
o The date and term of incor-
poration;

73
o The address, including the • Attached to the application for li-
street number, of the prin- cense shall be a duly executed
cipal office of the corpora- certificate under oath by the au-
tion in the country or state thorized official or officials of the
of incorporation; jurisdiction of its incorporation,
o The name and address of its attesting to the fact that:
resident agent authorized to o The laws of the country or
accept summons and pro- state of the applicant allow
cess in all legal proceedings Filipino citizens and corpora-
and, pending the establish- tions to do business therein
ment of a local office, all o The applicant is an existing
notices affecting the corpor- corporation in good standing.
ation; • If such certificate is in a foreign
o The place in the Philippines language, a translation thereof in
where the corporation in- English under oath of the trans-
tends to operate; lator shall be attached thereto.
o The specific purpose or pur- • The application shall likewise be
poses which the corporation accompanied by a statement un-
intends to pursue in the der oath of the president or any
transaction of its business in other person authorized by the
the Philippines: Provided, corporation, showing to the satis-
That said purpose or pur- faction of the SEC and other gov-
poses are those specifically ernmental agency in the proper
stated in the certificate of cases that the:
authority issued by the ap- o Applicant is solvent and in
propriate government sound financial condition, and
agency; o Setting forth the assets and
o The names and addresses liabilities of the corporation as
of the present directors and of the date not exceeding one
officers of the corporation; (1) year immediately prior to
o A statement of its author- the filing of the application.
ized capital stock and the • Foreign banking, financial and in-
aggregate number of shares surance corporations shall, in ad-
which the corporation has dition to the above requirements,
authority to issue, itemized comply with the provisions of ex-
by classes, par value of isting laws applicable to them.
shares, shares without par • In the case of all other foreign
value, and series, if any; corporations, no application for li-
o A statement of its outstand- cense to transact business in the
ing capital stock and the ag- Philippines shall be accepted by
gregate number of shares the SEC without previous author-
which the corporation has ity from the appropriate govern-
issued, itemized by classes, ment agency, whenever required
par value of shares, shares by law.
without par value, and
series, if any; b. Deposit requirements (§126)
o A statement of the amount • Upon issuance of the license, such
actually paid in; and foreign corporation may com-
o Such additional information mence to transact business in the
as may be necessary or ap- Philippines and continue to do so
propriate in order to enable for as long as it retains its author-
the Securities and Exchange ity to act as a corporation under
Commission to determine the laws of the country or state of
whether such corporation is its incorporation, unless such li-
entitled to a license to cense is sooner surrendered, re-
transact business in the voked, suspended or annulled in
Philippines, and to determ- accordance with this Code or oth-
ine and assess the fees pay- er special laws.
able. • Within sixty (60) days after the
issuance of the license to transact

74
business in the Philippines, the securities at the time they were
license, except foreign banking deposited.
or insurance corporation, shall • The SEC may, from time to time,
deposit with the SEC for the be- allow the licensee to substitute
nefit of present and future cred- other securities for those already
itors of the licensee in the Phil- on deposit as long as the licensee
ippines, securities satisfactory is solvent. Such licensee shall be
to the SEC, consisting of : entitled to collect the interest or
o Bonds or other evidence of dividends on the securities depos-
indebtedness of the Govern- ited.
ment of the Philippines, its • In the event the licensee ceases
political subdivisions and in- to do business in the Philippines,
strumentalities, or of gov- the securities deposited as afore-
ernment-owned or con- said shall be returned, upon the
trolled corporations and en- licensee's application therefor and
tities, upon proof to the satisfaction of
o Shares of stock in "re- the SEC that the licensee has no
gistered enterprises" as this liability to Philippine residents, in-
term is defined in Republic cluding the Government of the
Act No. 5186, Republic of the Philippines.
o Shares of stock in domestic
corporations registered in c. Appointment of resident agent (§128)
the stock exchange, or • A resident agent may be either
o Shares of stock in domestic an:
insurance companies and o Individual residing in the Phil-
banks, or ippines of good moral charac-
o Any combination of these ter and of sound financial
kinds of securities, standing
• With an actual market value of o Domestic corporation lawfully
at least one hundred thousand transacting business in the
(P100,000.) pesos; Philippines:
• Provided, however, That within • The SEC shall require as a condi-
six (6) months after each fiscal tion precedent to the issuance of
year of the licensee, the SEC the license to transact business in
shall require the licensee to de- the Philippines by any foreign cor-
posit additional securities equi- poration that such corporation file
valent in actual market value to with the SEC a written power of
two (2%) percent of the amount attorney:
by which the licensee's gross in- o Designating some person who
come for that fiscal year ex- must be a resident of the
ceeds five million Philippines, on whom any
(P5,000,000.00) pesos. summons and other legal
• The SEC shall also require de- processes may be served in
posit of additional securities if all actions or other legal pro-
the actual market value of the ceedings against such corpor-
securities on deposit has de- ation, and
creased by at least ten (10%) o Consenting that service upon
percent of their actual market such resident agent shall be
value at the time they were de- admitted and held as valid as
posited. if served upon the duly au-
• The SEC may at its discretion thorized officers of the foreign
release part of the additional se- corporation at its home office.
curities deposited with it if the • Any such foreign corporation shall
gross income of the licensee has likewise execute and file with the
decreased, or if the actual mar- SEC an agreement or stipulation,
ket value of the total securities executed by the proper authorit-
on deposit has increased, by ies of said corporation, in form
more than ten (10%) percent of and substance as follows:
the actual market value of the o "The (name of foreign corpor-
ation) does hereby stipulate

75
and agree, in consideration  Either a Filipino or do-
of its being granted by the mestic corporation; and
Securities and Exchange  Power of Attorney to SEC
Commission a license to to receive process
transact business in the o Must prove that the foreign
Philippines, that if at any corporation's country grants
time said corporation shall reciprocal rights to Filipinos
cease to transact business and Philippine corporation.
in the Philippines, or shall o Establish an office in the Phil-
be without any resident ippines
agent in the Philippines on o Bring in its assets
whom any summons or oth- o Undertaking that Filipino
er legal processes may be creditors will be preferred in
served, then in any action the event of insolvency
or proceeding arising out of o Notice of six (6) months
any business or transaction should there be desire to ter-
which occurred in the Philip- minate operations
pines, service of any sum- o Franchise and patents must
mons or other legal process remain in the Philippine, if
may be made upon the SEC this is possible
and that such service shall o Must file a bond of P100,000
have the same force and ef- which may be in the following
fect as if made upon the form:
duly-authorized officers of  surety bond
the corporation at its home  government securities
office."  securities of political sub-
• Whenever such service of sum- divisions
mons or other process shall be  shares of stock of re-
made upon the SEC, the Com- gistered enterprises with
mission shall, within ten (10) the SEC
days thereafter, transmit by  shares of stock of any
mail a copy of such summons or corporation being sold at
other legal process to the cor- the stock exchange
poration at its home or principal o Provided, that within six (6)
office. months after each fiscal year,
• The sending of such copy by the the SEC shall require the de-
Commission shall be necessary posit of additional securities
part of and shall complete such equivalent to 2% of the
service. All expenses incurred amount in excess of P500,000
by the Commission for such ser- of the gross income. [Sec.
vice shall be paid in advance by 125, 126, Corporation Code]
the party at whose instance the
service is made. 5. What laws
are applicable to foreign corporations li-
• In case of a change of address censed to transact business in the Philip-
of the resident agent, it shall be pines? (§129)
his or its duty to immediately
notify in writing the SEC of the • Any foreign corporation lawfully
new address. doing business in the Philippines shall
be bound by all laws, rules and regu-
d. Summary: Requisites for the Issu- lations applicable to domestic corpor-
ance of License ations of the same class, EXCEPT such
• The SEC will issue a license to only as provide for the:
the foreign corporation to do o Creation, formation, organiz-
business in the Philippines, ation or dissolution of corpora-
provided the following conditions
tions are met: o Those which fix the relations,
o Appointment of a Resident liabilities, responsibilities, or du-
Agent: ties of stockholders, members, or

76
officers of corporations to each ippines, the parties in this case
other or to the corporation. cannot obtain relief on the con-
tracts entered into because they
6. What are are charged with the knowledge
the consequence of doing business in of the existing law at the time
the Philippines without a license? (§133) they entered into such contract
and at the time it is to be operat-
• No foreign corporation transact- ive. [Top-Weld Mfg. v. ECED,
ing business in the Philippines S.A., 138 SCRA 118 (1985)]
without a license, or its successors o However, in the case of Mer-
or assigns, shall be permitted to rill Lynch Futures, Inc. v. CA, 211
maintain or intervene in any action, SCRA 824 (1992), the SC held
suit or proceeding in any court or that although the foreign corpora-
administrative agency of the Philip- tion has engaged in business in
pines; the Philippines without a license,
• Such corporation may be sued the dismissal of the suit would not
or proceeded against before Philip- be proper on the ground that if
pine courts or administrative the local investors knew that the
tribunals on any valid cause of ac- foreign corporation had no license
tion recognized under Philippine to do business, then they are es-
laws. topped from using the lack of li-
• Shall not be permitted to main- cense to avoid their obligations.
tain or intervene in any action, suit • Legal standing of foreign corpora-
or proceeding in any court or admin- tions to sue on their corporate names,
istrative agency in the Philippines; trade names, and trademarks
but such corporation may be sued or o A foreign corporation al-
proceeded against before Philippine though not doing business in the
courts or administrative tribunals. Philippines has a personality to
• In addition, Sec. 134 makes it a sue to oppose the registration of
ground for revocation of license a trademark when it is shown that
when a foreign corporation transacts its products using such trademark
business in the Philippines as agent are being imported and sold in
of or acting for and in behalf of any the Philippines, pursuant to the
foreign corporation or entity not terms of RA 166. [General Gar-
duly licensed to do business in the ments v. Director of Patents, 41
Philippines. SCRA 50 (1971)]
• Status of Contracts entered into o A foreign corporation has a
without the requisite license right to maintain an action in Phil-
o The failure to obtain a li- ippine courts even if it is not li-
cense by a foreign corporation censed to do business and is not
doing business in the Philippines actually doing business on its own
does not affect the validity of therein to protect its corporate
contracts entered into by such and trade names, since it is a
foreign corporation, but merely property right in rem, which it
removes its legal standing to may assert to protect against all
sue in local tribunals. However, the world, in any of the courts of
the defect may be cured by sub- the world--even in jurisdiction
sequent registration by the for- where it does not transact busi-
eign corporation to obtain the ness--just the same as it may
necessary license to do business protect its tangible property,
in the Philippines. [Home Insur- against trespass or conversion.
ance Co. v. Eastern Shipping o This is consonance with the
Lines, 123 SCRA 424 (1983)] Convention of the Union of Paris
o Although the law does not for the Protection of Industrial
declare as void or invalid the Property to which the Phils. is a
contracts entered into by a for- party. Article 8 thereof provides,
eign corporation with a local "A trade name shall be protected
corporation without the former in all the countries of the Union
first securing a license or certi- without the obligation of filing or
ficate to do business in the Phil- registration, whether or not it

77
forms part of the trademark." 10. Merger or
The mandate is contained in RA consolidation involving a foreign corpora-
166, or the Trademark Law. tion licensed in the Philippines (§132)
[Converse Rubber Corp. v. Uni-
versal Rubber Products, 147 • One or more foreign corporations
SCRA 154 (1987)] authorized to transact business in the
Philippines may merge or consolidate
7. Application with any domestic corporation or cor-
to existing foreign corporations (§129) porations if :
o Such is permitted under Phil-
• Every foreign corporation which on ippine laws and by the law of its
the date of the effectivity of the incorporation
Code is authorized to do business in o The requirements on merger
the Philippines under a license is- or consolidation as provided in
sued to it, shall continue to have this Code are followed
such authority under the terms and • Whenever a foreign corporation
condition of its license, subject to authorized to transact business in the
the provisions of this Code and other Philippines shall be a party to a mer-
special laws. ger or consolidation in its home coun-
try or state as permitted by the law of
8. Amend- its incorporation, such foreign corpor-
ments to articles of incorporation or by- ation shall, within sixty (60) days
laws of foreign corporations (§130) after such merger or consolidation be-
comes effective, file with the SEC, and
• Within sixty (60) days after the in proper cases with the appropriate
amendment becomes effective, file government agency, a copy of the
with the SEC, and in the proper articles of merger or consolidation
cases with the appropriate govern- duly authenticated by the proper offi-
ment agency, a duly authenticated cial or officials of the country or state
copy of the articles of incorporation under the laws of which merger or
or by-laws, as amended, indicating consolidation was effected
clearly in capital letters or by under- • Provided, however, that if the ab-
scoring the change or changes sorbed corporation is the foreign cor-
made, duly certified by the author- poration doing business in the Philip-
ized official or officials of the country pines, the latter shall at the same
or state of incorporation. time file a petition for withdrawal of
• The filing thereof shall not of itself its license.
enlarge or alter the purpose or pur-
poses for which such corporation is 11. Revocation
authorized to transact business in of license (§134)
the Philippines.
• Without prejudice to other
9. Amended grounds provided by special laws, the
license (§131) license of a foreign corporation to
transact business in the Philippines
• A foreign corporation authorized may be revoked or suspended by the
to transact business in the Philip- SEC upon any of the following
pines shall obtain an amended li- grounds:
cense in the event it : o Failure to file its annual re-
o Changes its corporate name, or port or pay any fees as required
o Desires to pursue in the Philip- by this Code;
pines other or additional pur- o Failure to appoint and main-
poses tain a resident agent in the Philip-
• By submitting an application pines as required by this Title;
therefor to the SEC, favorably en- o Failure, after change of its
dorsed by the appropriate govern- resident agent or of his address,
ment agency in the proper cases. to submit to the Securities and
Exchange Commission a state-
ment of such change as required
by this Title;

78
o Failure to submit to the Se- withdrawal, and must meet the fol-
curities and Exchange Commis- lowing requirements:
sion an authenticated copy of o All claims accrued in the Phil-
any amendment to its articles of ippines must be settled
incorporation or by-laws or of o All taxes must be paid
any articles of merger or consol- • Petition must be published once a
idation within the time pre- week for three (3) consecutive weeks.
scribed by this Title; (§136)
o A misrepresentation of any
material matter in any applica- Doing business in the Philippines without a
tion, report, affidavit or other license:
document submitted by such
corporation pursuant to this Communications Materials vs. CA, GR
Title; 102223, Aug 22, 1996
o Failure to pay any and all In determining whether a corporation does
taxes, imposts, assessments or business in the Philippines or not, aside from
penalties, if any, lawfully due to their activities within the forum, reference
the Philippine Government or may be made to the contractual agreements
any of its agencies or political entered into by it with other entities in the
subdivisions; country. A scrutiny of the different contracts
o Transacting business in the and agreements entered into with various
Philippines outside of the pur- business contacts in the country indicate
pose or purposes for which such convincingly a purpose to convey to customers
corporation is authorized under and the general public that they are dealing
its license; directly with the foreign corporation, and that
o Transacting business in the foreign corporation is actively engaging in
Philippines as agent of or acting business in the country. These agreements
for and in behalf of any foreign also contain provisions which are highly
corporation or entity not duly li- restrictive in nature, reducing the local
censed to do business in the signatory to be a mere extension or
Philippines; or instrument of the foreign corporation. Hence,
o Any other ground as would the foreign corporation is deemed to be doing
render it unfit to transact busi- business in the Philippines without a license.
ness in the Philippines. (n) Nonetheless, petitioner is estopped from
raising this fact to bar the foreign corporation
12. Issuance of from suing. One who has dealt with a
certificate of revocation (§135) corporation of foreign origin as a corporate
entity is estopped to deny its corporate
• Upon the revocation of any such existence and capacity. And the doctrine of
license to transact business in the estoppel to deny corporate existence applies
Philippines, the Securities and Ex- to a foreign as well as to domestic
change Commission shall issue a corporations. The principle will be applied to
corresponding certificate of revoca- prevent a person contracting with a foreign
tion, furnishing a copy thereof to the corporation from later taking advantage of its
appropriate government agency in noncompliance with the statutes chiefly in
the proper cases. cases where such person has received the
• The Securities and Exchange benefits of the contract.
Commission shall also mail to the
corporation at its registered office in
MR Holdings, Ltd vs. Bajar, GR 102965,
the Philippines a notice of such re-
Jan 21, 2002
vocation accompanied by a copy of
the certificate of revocation. The question whether or not a foreign
corporation is doing business is dependent
principally upon the facts and circumstances of
13. Withdrawal
each particular case, considered in the light of
by a foreign corporation (Section 136)
the purposes and language of the pertinent
statute or statutes involved and of the general
• If a foreign corporation duly li-
principles governing the jurisdictional
censed to do business desires to
authority of the state over such corporations
withdraw, it must file a petition for

79
CAB, the CA categorized as “doing business” another corporation which is not a
petitioner’s participation under the close corporation.
“Assignment Agreement” and the “Deed of
Assignment.” This is simply untenable. The b. What entities may not be or-
expression “doing business” should not be ganized as closed corporations?
given such a strict and literal construction as • Any corporation may be incorpor-
to make it apply to any corporate dealing. At ated as a close corporation, ex-
this early stage and with petitioner’s acts or cept:
transactions limited to the assignment o Mining
contracts, it cannot be said that it had o Oil companies
performed acts intended to continue the o Stock exchanges
business for which it was organized. It may o Banks
not be amiss to point out that the purpose o Insurance companies
or business for which petitioner was o Public utilities
organized is not discernible in the records. o Educational institutions
No effort was exerted by the CA to establish o Corporations declared to be
the nexus between petitioner’s business and vested with public interest in
the acts supposed to constitute “doing accordance with the provi-
business.” Thus, whether the assignment sions of this Code.
contracts were incidental to petitioner’s
business or were continuation thereof is c. Validity of restrictions on
beyond determination. transfer of shares (§98)
• Restrictions on the right to trans-
fer shares must appear in the:
o Articles of incorporation
Chapter XIX o By-laws
o Certificate of stock
SPECIAL
• OTHERWISE, the same shall not be
CORPORATIONS binding on any purchaser in good
faith.
• Said restrictions shall not be more
1. Close Cor- onerous than granting the exist-
porations ing stockholders or the corpora-
tion the option to purchase the
a. What is a close corporation? shares of the transferring stock-
(§96) holder with such reasonable
• A close corporation is one whose terms, conditions or period stated
articles of incorporation provide therein.
that: • If upon the expiration of said
o All the corporation's issued period, the existing stockholders
stock of all classes, exclus- or the corporation fails to exercise
ive of treasury shares, shall the option to purchase, the trans-
be held of record by not ferring stockholder may sell his
more than a specified num- shares to any third person.
ber of persons, not exceed-
ing twenty (20); d. Effects of issuance or transfer
o All the issued stock of all of stock in breach of qualifying condi-
classes shall be subject to tions (§99)
one or more specified re- • A person is conclusively presumed
strictions on transfer per- to have notice of the fact of in-
mitted by this Title; and eligibility to be a stockholder:
o The corporation shall not list o If stock of a close corporation
in any stock exchange or is issued or transferred to any
make any public offering of person who is not entitled un-
any of its stock of any class. der any provision of the art-
• A corporation shall not be icles of incorporation to be a
deemed a close corporation holder of record of its stock,
when at least two-thirds (2/3) and
of its voting stock or voting
rights is owned or controlled by

80
o If the certificate for such • The provisions of subsection (4)
stock conspicuously shows shall not be applicable if the
the qualifications of the per- transfer of stock, though contrary
sons entitled to be holders to subsections (1), (2) or (3), has
of record thereof been consented to by all the
• A person to whom stock is stockholders of the close corpora-
issued or transferred is con- tion, or if the close corporation
clusively presumed to have has amended its articles of incor-
notice of these facts: poration in accordance with this
o If the articles of incorpora- Title.
tion of a close corporation • The term "transfer", as used in
states the number of per- this section, is not limited to a
sons, not exceeding twenty transfer for value.
(20), who are entitled to be • The provisions of this section shall
holders of record of its not impair any right which the
stock, and transferee may have to rescind
o If the certificate for such the transfer or to recover under
stock conspicuously states any applicable warranty, express
such number, and or implied.
o If the issuance or transfer of
stock to any person would e. Agreements by stockholders
cause the stock to be held (Section 100)
by more than such number 1. Agreements by and among stock-
of persons. holders:
• If a stock certificate of any • Executed before the forma-
close corporation conspicu- tion and organization of a
ously shows a restriction on close corporation,
transfer of stock of the cor- • Signed by all stockholders
poration, the transferee of • Shall survive the incorpora-
the stock is conclusively pre- tion of such corporation and
sumed to have notice of the shall continue to be valid and
fact that he has acquired binding between and among
stock in violation of the re- such stockholders, if such be
striction, if such acquisition their intent,
violates the restriction. • To the extent that such
• Whenever any person to whom agreements are not inconsist-
stock of a close corporation has ent with the articles of incor-
been issued or transferred has, poration, irrespective of
or is conclusively presumed un- where the provisions of such
der this section to have, notice agreements are contained,
either except those required by this
o That he is a person not eli- Title to be embodied in said
gible to be a holder of stock articles of incorporation.
of the corporation, or 2. An agreement between two or
o That transfer of stock to more stockholders, if in writing
him would cause the stock and signed by the parties thereto,
of the corporation to be may provide that in exercising
held by more than the num- any voting rights, the shares held
ber of persons permitted by by them shall be voted as therein
its articles of incorporation provided, or as they may agree,
to hold stock of the corpora- or as determined in accordance
tion, or with a procedure agreed upon by
o That the transfer of stock is them.
in violation of a restriction 3. No provision in any written agree-
on transfer of stock, the ment signed by the stockholders,
corporation may, at its op- relating to any phase of the cor-
tion, refuse to register the porate affairs, shall be invalidated
transfer of stock in the as between the parties on the
name of the transferee. ground that its effect is to make

81
them partners among them- corporation's business and af-
selves. fairs
4. A written agreement among • The votes required for any
some or all of the stockholders corporate action cannot be
in a close corporation shall not obtained
be invalidated on the ground • The consequence is that the
that it so relates to the conduct business and affairs of the
of the business and affairs of corporation can no longer be
the corporation as to restrict or conducted to the advantage
interfere with the discretion or of the stockholders generally
powers of the board of direct-
ors: 2. Resolution of deadlocks
• Provided, That such agree- • The SEC, upon written peti-
ment shall impose on the tion by any stockholder, shall
stockholders who are have the power to arbitrate
parties thereto the liabilities the dispute.
for managerial acts imposed • In the exercise of such
by this Code on directors. power, the Commission shall
5. To the extent that the stock- have authority to make such
holders are actively engaged in order as it deems appropri-
the management or operation of ate, including an order:
the business and affairs of a o Cancelling or altering any
close corporation, the stockhold- provision contained in the
ers shall be held to strict fidu- articles of incorporation,
ciary duties to each other and by-laws, or any stock-
among themselves. Said stockholder's agreement;
holders shall be personally liable o Cancelling, altering or en-
for corporate torts unless the joining any resolution or
corporation has obtained reas- act of the corporation or
onably adequate liability insur- its board of directors,
ance. stockholders, or officers;
o Directing or prohibiting
f. Amendment of articles of in- any act of the corporation
corporation (§103) or its board of directors,
Any amendment to the articles of stockholders, officers, or
incorporation which seeks to delete other persons part to the
or remove any provision required by action;
this Title to be contained in the o Requiring the purchase at
articles of incorporation or to reduce their fair value of shares
a quorum or voting requirement of any stockholder, either
stated in said articles of by the corporation re-
incorporation shall not be valid or gardless of the availabil-
effective unless approved by the ity of unrestricted re-
affirmative vote of at least two- tained earnings in its
thirds (2/3) of the outstanding books, or by the other
capital stock, whether with or stockholders;
without voting rights, or of such o Appointing a provisional
greater proportion of shares as may director;
be specifically provided in the o Dissolving the corpora-
articles of incorporation for tion; or
amending, deleting or removing any o Granting such other relief
of the aforesaid provisions, at a as the circumstances may
meeting duly called for the purpose. warrant.
g. Deadlocks 3. Provisional Director

• An impartial person who is
1. Deadlocks, Defined: neither a stockholder nor a
• The directors or stockhold- creditor of the corporation or
ers are so divided respect- of any subsidiary or affiliate
ing the management of the of the corporation, and whose

82
further qualifications, if any, San Juan Structural and Steel
may be determined by the Fabricatiors vs. CA
Commission. Motorich entered into agreement with San
• A provisional director is not Juan for the transfer of a parcel of Land to
a receiver of the corporation latter. San Juan already paid downpayment.
and does not have the title When San Juan was ready to pay the
and powers of a custodian balance, Motorich refused to sell. Motorich
or receiver. contend that Nenita Gruenberg’s, treasurer
• A provisional director shall of Motorich, signature is not sufficient to bind
have all the rights and Motorich, and that the signature of Reynaldo
powers of a duly elected Gruenberg, president of Motorich is required.
director of the corporation, Nenita Gruenberg is the spouse of Reynaldo
including the right to notice Gruenberg and both owns 99.866% of the
of and to vote at meetings shares of stock of the corporation.
of directors, until such time HELD: Motorich is not a close corporation.
as he shall be removed by The mere ownership by a single stockholder
order of the Commission or or by another corporation of all or nearly all
by all the stockholders. of the capital stock of a corporation is not of
• His compensation shall be itself sufficient ground for disregarding their
determined by agreement separate personalities. A narrow distribution
between him and the cor- of ownership does not of itself make a close
poration subject to approval corporation. There are exceptional cases
of the Commission, which where an action by a director who is singly is
may fix his compensation in the controlling stockholder may be
the absence of agreement considered as a binding corporate act and a
or in the event of disagree- board action is a mere formality. However,
ment between the provi- Nenita is not the sole controlling stockholder.
sional director and the cor-
poration.
CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Management / Board Authority
• There can be classification of directors into one • There are no classification of board of directors
or more classes, each of whom may be voted
for and elected solely by a particular class of
stock; and
• Corporate Powers devolved upon board of dir-
• The articles of incorporation of a close corpora- ectors whose powers are executed by officers.
tion may provide that the business of the cor- Cannot provide that it be managed by stock-
poration shall be managed by the stockholders holders
of the corporation rather than by a board of
directors. So long as this provision continues in
effect:
• Board of directors must be elected in a stock-

83
1. No meeting of stockholders need be called holders meeting
to elect directors
2. Unless the context clearly requires other- • Stockholders of a corporation are separate and
wise, the stockholders of the corporation distinct from directors
shall be deemed to be directors for the
purpose of applying the provisions of this
Code
3. The stockholders of the corporation shall
be subject to all liabilities of directors. • Officers must be elected by the Board of Direct-
ors
• 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.
2. Meetings • The directors or trustees shall not act individu-

ally nor separately but as a body in a lawful
• Unless the by-laws provide otherwise, any ac- meeting. They will act only after discussion and
tion by the directors of a close corporation deliberation of matters before them. Contracts
without a meeting shall nevertheless be entered into without a formal board resolution
deemed valid if: does not bind the corporation except when rati-
fied or when majority of the board has know-
1. Before or after such action is taken, written ledge of the contract and the contract benefited
consent thereto is signed by all the direct- the corporation.
ors; or
• Absence of a prompt objection in writing does
2. All the stockholders have actual or implied not ratify acts done by directors without a valid
knowledge of the action and make no meeting. There must be express or implied rat-
prompt objection thereto in writing; or ification.
3. The directors are accustomed to take in- • Express ratification may consist of a Board Res-
formal action with the express or implied olution to that effect
acquiescence of all the stockholders; or
• Implied ratification may consist of acceptance of
4. All the directors have express or implied benefits from said unauthorized act while having
knowledge of the action in question and knowledge of said act
none of them makes prompt objection
thereto in writing. • Failure to give notice would render a meeting
voidable.
• If a director's meeting is held without proper
call or notice, an action taken therein within • Attendance to a meeting despite want of notice
the corporate powers is deemed ratified by a will be deemed implied waiver
director who failed to attend, unless he
promptly files his written objection with the • All proceedings had and any business transacted
secretary of the corporation after having know- at any meeting of the stockholders or members,
ledge thereof. if within the powers or authority of the corpora-
tion, shall be valid even if the meeting be im-
properly held or called, provided all the stock-
holders or members of the corporation are
present or duly represented at the meeting.
(§51)
3. Voting / Quorum • No share may be deprived of voting rights, ex-

cept Preferred or Redeemable shares, unless
• The AOI may provide for a classification of dir- otherwise provided by the Code
ectors into one or more classes, each of which

84
may be voted for and elected solely by a par- • There shall always be a class/series of shares
ticular class of stock. which have a COMPLETE VOTING RIGHTS
• EACH SHARE SHALL BE EQUAL IN ALL RE-

SPECTS TO EVERY OTHER SHARE, except as
otherwise provided in the AOI
• For Board of directors, the by-laws or AOI can

• The AOI may provide for a greater quorum or provide for a greater majority in quorum
voting requirements in meetings of stockhold-
ers or directors than those provided in this • For stockholders, the AOI can provide for a dif-
Code. ferent percentage in quorum
4. Pre-emptive Right • Limitations on the exercise of pre-emptive right:
• The pre-emptive right of stockholders in close a. Such pre-emptive right shall not extend to
corporations shall extend to all stock to be is- shares to be issued in compliance with laws re-
sued, including reissuance of treasury shares, quiring stock offerings or minimum stock own-
whether for money, property or personal ser- ership by the public;
vices, or in payment of corporate debts, unless
the articles of incorporation provide otherwise. b. Not extend to shares to be issued in good faith
with the approval of the stockholders repres-
enting two-thirds (2/3) of the outstanding cap-
ital stock, in exchange for property needed for
corporate purposes or in payment of a previ-
ously contracted debt
c. Shall not take effect if denied in the Articles of

Incorporation or an amendment thereto.
5. Transferability
• Restrictions on the right to transfer shares • Restrictions on the right to transfer not allowed
must appear in the AI 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
6. Withdrawal Right
• Any stockholder of a close corporation may, for • Stockholders may require the corporation to
any reason, compel the said corporation to buy-back their shares at fair value when the
purchase his shares at their fair value, which Corporation has unrestricted Retained Earnings:
shall not be less than their par or issued value, a. In case any amendment to the articles of
when the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive • changing or restricting the rights of
of capital stock any stockholder or class of shares, or
• authorizing preferences in any re-
• Any stockholder of a close corporation may, by spect superior to those of outstanding
written petition to the SEC, compel the dissolu- shares of any class, or
tion of such corporation whenever: • extending or shortening the term of
1. Any of acts of the directors, officers or corporate existence
those in control of the corporation is illegal, b. In case of sale, lease, exchange, transfer,
or fraudulent, or dishonest, or oppressive mortgage, pledge or other disposition of all
or unfairly prejudicial to the corporation or or substantially all of the corporate prop-
any stockholder, or erty and assets as provided in the Code;
2. Corporate assets are being misapplied or and

85
wasted. c. In case of merger or consolidation
d. Extension or shortening of the term of the
corporation (§37)
e. Diversion of funds of corporation from
primary purpose to secondary purpose
(§41)
• The corporation may buy-back shares of stock-

holders subject to the following limitations
(Treasury shares):
a. There must be unrestricted retained earn-
ings
b. Must be for a legitimate purpose


01barops Corp 1to84

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

01barops Corp 1to84

Enviado por

Direitos autorais:

Formatos disponíveis

1

Has the right of succession:

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

According to the Interim Rules of Procedure

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

Note that while this case was pending in the

Thus, under the new law, the PED ceased to

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

Conditions Precedent for Incorporation

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

1. CORPORATE NAME Philips Export BV (PEBV) v CA (1992)

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

8. TREASURER’S AFFIDAVIT D. EXAMINATION OF ARTICLES BY SEC;

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

B. ELECTION OF DIRECTORS – discussed in Doctrine of separate juridical

C. COMMENCEMENT OF BUSINESS • A corporation has a personality separate

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

• Sources of power (repositories)

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

1. Minimum set of officers and 3. Authority of corporate officers

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

WHO MAY ATTEND AND VOTE? WHO PRESIDES?

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

Approval and Voting 4. Appraisal right

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

b. Fixing compensation of directors

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

So that if they find the conditions • Financial statements (§75)

Minutes of meetings without the signature of 1. Limitations as to time and place

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

[Lorybeth_Baldrias.head] [Nayna_Malayang.deputy] [Dionne_Sanchez.acads] [Jam_Jacob.design]

Derivative suit – suits of stockholders based