Chapter I: Introduction

Role of corporation in modern business Corporate form of business organization permits the combination of funds from various sources to raise the big capital needed for large business and industrial enterprise Combination of resources+advantages of limited liability= corporations popularity

Advantages of Corporate Form 1. 2. strong legal personality limited liability to investors a. limited to their shares b. in partnershipscreditors can still go after individual properties of the partners free transferability of units of investment a. GR: shares of stocks can be transferred even without the consent of other SHs Centralized management a. Centralized in the Board b. SHs are not agents and cannot bind the corporation c. SHs are bound by management decisions and transactions of the board, generally Disadvantages Complicated and costly formation Lack of personal element Abuse of corporate management Limited liability hits innocent victims Double taxation

3. 4.

Definition and attributes of a corporation Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (2) Four attributes: (1) artificial being By operation of law, becomes a being with the attributes of an individual with full capacity to enter into contractual relations a juridical person capable of having rights and obligations; with a personality separate and distinct from its members or SHs fundamental principle in corporate law: SHs are not personally liable for corporate obligations, and cannot be liable beyond their contribution to the corporate capital corporation not liable for personal obligations of its SHs (2) created by operation of law from a strict legal point of view, a corporation cannot come into being by mere consent of the parties o there must be a law granting it o once granted, form the primary franchise of the corporation o mere consent insufficient State must have given its consent either through a special law or general enabling law o General law: The Corporation Code o Compliance with the Code=acquisition of juridical personality There must be an underlying contract among the individuals forming the corporation o Interplay of State grant and contractual relations (3) right of succession Continued existence cannot be affected by any change in the members or SHs (4) powers, attributes, and properties expressly authorized by law or incident to its existence 1 2 3 4 5

Advantages Strong legal personality Limited liability Free transferability Centralized management

Laws governing Philippine corporations Choice of Business organizations (1) The Individual Proprietorship works well for carrying simple or small businesses owners unlimited personal liability difficulties in expansion upon death business will have to stop and be liquidated

(2) The Partnership 1767: two or more persons bind themselves to contribute money or industry to a common fund, with the intention of dividing the profits among themselves partners are personally liable for debts of the partnership; while SHs cannot be made to personally answer to corporate creditors beyond the amount contributed much simpler to form a partnership: 5 incorporators vs. at least 2 for partners Personal relationship between and among partners based on mutual trust and confidence

Death or insolvency of partner will result in dissolution Corporations cannot be voluntarily dissolved except by 2/3 vote of stock + some State act, whether judicial or administrative (SEC) Mere agreement is sufficient to give rise to a partnership v. substantial compliance with the Corpo Code for corporations Managementevery partner is an agent of the partnership, with capacity to bind vs. centralized management in the BoD for corporations o SH has no voice in the management except to elect directors o o

(3) The Close Corporation Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Small closely-knit group like a family They act and feel as partners but wishing to avail of limited liability Most distinct characteristic: all or most SHs are active in the corporate business either as directors or officers De facto partnership with a corporate shell o AOI of close corp can do away with a BOD o Can vest management exclusively with the SHs o SHs active in management are made liable for personal torts o Business/industry imbued with public interest cannot be by a close corporation

(4) The Joint Venturea form of partnership and should be governed by the law on partnerships Common defn: organization formed for some temporary purpose Community of interests, sharing of profits and losses, mutual agency Formed for the execution of a single transaction, and is thus of a temporary nature Form of partnership and should be governed by the law on partnerships SC has ruled that a corporation can enter into a JV, but not a partnership Separate juridical personality Mutual agency Unlimited liability The Business Trusta vesting of title to the assets of a business enterprise in trustees who act as representative thereof, for the benefit of others called the cestui que trust deed of trust which is easier and less expensive to constitute for it is not bound by any legal requirements No separate juridical personality Governed by contract law and common law principles on trusts Government regulation of corporations By the Legislature By the SEC Union Glass v SEC. F: The complainant Carolina Hofilea is a stockholder of Pioneer Glass Manufacturing Corporation, engaged in the operation of silica mines and the manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained various loan accommodations from the Development Bank of the Philippines [DBP], and also from other local and foreign sources which DBP guaranteed. As security for said loan accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and personal, to the DBP, in addition to the mortgages executed by some of its corporate officers over their personal assets. The proceeds of said financial exposure of the DBP were used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation. Through the conversion into equity of the accumulated unpaid interests on the various loans amounting to P5.4 million as of January 1975, and subsequently increased by another P2.2 million in 1976, the DBP was able to gain control of the outstanding shares of common stocks of Pioneer Glass, and to get two, later three, regular seats in the corporation's board of directors. When Pioneer Glass suffered serious liquidity problems such that it could no longer meet its financial obligations with DBP, it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full satisfaction of the corporation's obligations in

the total amount of P59,000,000.00. Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter referred to as Union Glass. Hofilea filed a complaint before the respondent SEC against the DBP, Union Glass and Pioneer Glass, asserting the alleged illegality of the aforesaid dacion en pago resulting from: [1] the supposed unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement; [2] the self-dealing indulged in by DBP, having acted both as stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when the same had already been converted into equity. Union Glass moved for dismissal of the case on the ground that the SEC had no jurisdiction over the subject matter or nature of the suit. I: W/N the SEC or the TC has jurisdiction over the suit of Hofilena H: In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the glass plant covered by the dacion en pago agreement, should be joined as party-defendant under the general rule which requires the joinder of every party who has an interest in or lien on the property subject matter of the dispute. But since petitioner Union Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant in SEC Case No. 2035 brings the cause of action asserted against it outside the jurisdiction of the respondent SEC, as delineated by Section 5 of PD No. 902-A. This grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter (SEC) "absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines ... " The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners, members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; and [d] among the stockholders, partners or associates themselves. The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule or jurisdiction. Hofileas complaint against petitioner for cancellation of the sale of

the glass plant should therefore be brought separately before the regular court. The SC added however that for Hofileas complaint against Union Glass to prosper, final judgment must first be rendered in the issue of the validity of the dacion en pago, which is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the action against petitioner Union Glass. But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp., impleaded as third party purchaser of the plant from DBP in the action to annul the dacion en pago. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the regular courts only if and when the SEC rendered final judgment annulling the dacion en pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith. Abejo v dela Cruz. F: Case involves a dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejo vs. De la Cruz Abejo (hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P6 million) and of 63,000 shares registered in the name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said purchases, Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell. Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of shares in the corporate books, asserting that the Bragas claim preemptive rights over the 133,000 Abejo shares and that Virginia Byaga never transferred her 63,000 shares to Telectronics but had lost the five stock certificates representing those shares. This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos and Telectronics, as new majority shareholders, claim the contrary. Respondent Judge de la Cruz issued an order rescinding the order which dismissed the complaint of the Bragas in the RTC, thus holding that the RTC and not the SEC had jurisdiction. Respondent judge also revived the temporary restraining order previously issued restraining Telectronics' agents or representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions. The Abejos filed a MR, which motion was duly opposed by the Bragas, which was denied by respondent Judge.

I: W/N the RTC, as claimed by the Bragas, has jurisdiction over the case or the SEC, as claimed by the Abejos H: The Court ruled that the SEC has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell, namely, the Abejos and Telectronics, the purchasers of the 56% majority stock on the one hand, and the Bragas, erstwhile majority stockholders, on the other, and that the SEC, through its en banc Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition questioning its jurisdiction, that "the issue is not the ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary." The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly premised on, and fully supported by, the applicable provisions of P.D. No. 902-A which reorganized the SEC with additional powers "in line with the government's policy of encouraging investments, both domestic and foreign, and more active public participation in the affairs of private corporations and enterprises through which desirable activities may be pursued for the promotion of economic development and, to promote a wider and more meaningful equitable distribution of wealth. The dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority shareholders, to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register the transfers and issue new certificates in favor of Telectronics and its nominees was properly resorted to therefore. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged preemptive rights in the case of the Abejos' shares and alleged loss of the certificates and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute clearly involves controversies "between and among stockholders," as to the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and the management and control of its operations. Such a dispute and case clearly fall within the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation employed by them to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and substantial investor in

the corporate stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders as to the transfer and disposition of the controlling shares of the corporation, falling under paragraph (b) of Sec 5 PD 902-A. As pointed out by the Abejos, Pocketbell is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the bylaws 10 and the certificates of stock themselves, as required by law for the enforcement of such restriction. As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder." This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. An intra-corporate controversy is one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations. Effect of Corporation Code on Existing Corporations Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. (n)

Must be understood to be subject to the accrued or vested rights of the existing corporation, its SHs and 3rd parties Any rights accrued or liabilities incurred prior to the effectivity of the latter in favor of or against such corporation, its SHs must be respected Any additional requirements imposed by the Code must be complied with within 2 years from its effectivity

Magalad v Premiere Financing Corporation (209 SCRA 261). F: Premiere is a financing company engaged in soliciting and accepting money market placements or deposits. On September 12, 1983 with expired permit to issue

commercial papers and with intention not to pay or defraud its creditors, Premiere induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum for which it issued a receipt as well as two (2) post-dated checks in the total sum of P51,079.00 and assigned to Magalad its receivable from a certain David Saman for the same amount. Drawee bank dishonored the checks for lack of sufficient funds to cover the amount. Despite demands by Magalad for the replacement of said checks with cash, Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent acts of Premiere. The TC found that Magalad has fully established her claim that defendant had indeed acted fraudulently in incurring the obligation and considering that no evidence has been adduced by the defendant to contradict the same, judgment is hereby rendered ordering the defendant to pay Magalad. Premiere contends that the Securities and Exchange Commission (SEC) has exclusive and original jurisdiction over a corporation under a state of suspension of payments. Magalad submits that the legal suit which she has brought against Premiere is an ordinary action for damages with the preliminary attachment cognizable solely by the RTC. H: Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of which would originally fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987). The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of the investing public. That Magalad's money placements were in the nature of investments in Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from moneys she had paid to Premiere. Unfortunately, however, she was the victim of alleged fraud and misrepresentation. Reliance by Magalad on the case of Union Glass & Container Corp. v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld, is misplaced for, as explicitly stated in those cases, nowhere in the complaints therein is found any averment of fraud of misrepresentation committed by the respective corporations involved. The causes of action, therefore, were nothing more than simple money claims. Further bolstering the jurisdiction of the SEC in this case is

the fact that said agency already appointed a Rehabilitation Receiver for Premiere and has directed all proceedings or claims against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against corporations . . . under receivership pending before any court, tribunal, board or body shall be suspended accordingly." By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving: "a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments.

Chapter II: Classification of Private Corporations

Stock and Non-stock Corporations Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a) Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n) Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) 2 elements to become a stock corporation: o capital stock divided into shares o stock must be authorized to distribute dividends to its SHs

because the main purpose of the corporation is to make profits for its shareholders GR: a business corporation should organize as a stock corporation Non-stock corporation: special kind of corporation with needs different from those of stock corporations o

It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit making club. The fact that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (see. 3, Act No. 1459). In the case at bar, while the respondent Club's capital stock is divided into shares, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. "A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and patent." Manual R. Dulay Ent. Inc. v. CA (225S 678). Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject property since 1973 while at the same time managing the Dulay Apartment as his shareholdings in the corporation was subsequently increased by his father. Manuel Dulay by virtue of Board Resolution No. 186 of petitioner corporation sold the subject property to private respondents spouses, Maria Theresa and Castrense Veloso in the amount of P300,000.00. The parties then executed a Memorandum to the Deed of Absolute, giving Manuel Dulay within two (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was however, not annotated. Thereafter private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon default of Veloso to pay the loan. Veloso then executed a Deed

CIR v Club Filipino. The "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation, owning and operating a club house, a bowling alley, a golf course, and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and -its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golfcourse. In 1951, as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant. The Collector of Internal Revenue assessed against and demanded from the Club, percentage taxes on its gross receipts as well as fixed taxes and compromise penalty. The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review. I: W/N the respondent Club is liable for the payment of the sum of P12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned H: It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary of a business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. Having found as a fact that the Club was organized to develop and cultivate sports of all, class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assests, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).

of Absolute Assignment of the Right to Redeem in favor of Manuel Dulay assigning her right to repurchase the subject property from private respondent Torres. As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within the one year statutory period for redemption, private respondent Torres sought to consolidate his ownership over the property. Petitioner Virgilio Dulay appeared in court to intervene in said case alleging that Manuel Dulay was never authorized by the petitioner corporation to sell or mortgage the subject property, and sought to cancel the sheriff sale to Torres and regain possession of the property. TC rules ifo Torres, Veloso et al. The corporation and Virgilio Dulay contend that the respondent court had acted with grave abuse of discretion when it applied the doctrine of piercing the veil of corporate entity in the instant case considering that the sale of the subject property between private respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of the subject property was resolved without the approval of all the members of the board of directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary. H: In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed to do. It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its individual stockholders or members, the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct and separate from. its stockholders or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. The Supreme Court had repeatedly disregarded the separate personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members. Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. Virgilio is very much privy to the transactions involved. To begin with, he is an incorporator and one of the board of directors designated at the time of the organization of

Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the said entity is loosely referred to as a family corporation'. The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R. Delay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father whose name identifies their corporation. Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is valid and binding. The sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and treasurer but also the general manager of the corporation. The corporation, was a closed family corporation, where the incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation. NDC v Philippine Veterans Bank (192 SCRA 257). AGRIX executed ifo Phil Veterans Bank a REM over 3 parcels of land. During the existence of the mortgage, AGRIX went bankrupt. Veterans Bank than filed a claim with the AGRIX Claims Committee for the payment of its loan credit. Agrix and NDC refused to recognize the claim, invoking PD 1717 which ordered the rehabilitation of the Agrix Group of Companies is administered by the National Development Company. Sec 4(1) thereof provides all mortgages and other liens attached to the assets of the dissolved corporations are hereby extinguished. Agrix proceeded to cancel the mortgage lien in light of the PD. TC annulled the entire PD 1717. NDC appeals. It claims that since Veterans Bank invoked questioned PD when it filed a claim with the Agrix Claims committee, it is thus estopped from questioning the validity of the PD which also provides that all mortgages attached to properties of Agrix shall be extinguished. H: Estoppel does not apply where Veterans Bank invoked the questioned PD when Pres Marcos was still absolute ruler and his decrees were absolute law. Not a single act or issuance of Marcos was ever declared unconstitutional as long as he was in power. In this case, Veterans Bank has not been paid a single centavo on its claim, which was kept pending for more than 7 years. The new corporation, New Agrix Inc, is neither owned nor controlled by the government. The DC was merely required to extend a loan of not more than P10M to New Agrix Inc. it is entirely private and so should have been organized under the Corporation Law. The Court thus declared the PD 1717 as unconstitutional. Does a defective incorporation result into a partnership? NO.

1. 2.

If parties intended to create a corporation, then a partnership arrangement cannot be created in its stead since such is not within their intent Important differences between the corporation and partnership, such as limited liability, centralized management, and easy transferability of shares are by themselves strong factors to be bound by a corporate agreement

relationship all must share in the losses and/or gains of the venture in proportion to their contribution. I: What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? H: it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se. Where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized. However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter. In this case, it was established by the evidence contrary to Lims postulations, that Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put up the corporation as he promised, which he received. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. (When parties come together intending to form a corporation, but no corporation is formed due to some legal cause:

Pioneer Insurance v CA (175 SCRA 668). F: In 1965, Jacob S. Lim was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single proprietorship. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. The 2 planes were delivered to Lim in Manila. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. Lim had duly received the amount of P151,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts. The indemnitors then executed two (2) separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond. Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for Pioneers suretyship. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. CA modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all other respect the trial court's decision was affirmed. Lim asserted that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such

(1) (2)

parties who intended to participate or actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto corporation parties who took no part except to subscribe for stock in a proposed corporation, do not become partners with the subscribers engaged in the business of the corporation)

Corporation Sole only a religious corporation can become a corporation sole Parent and corporations Subsidiary corporations; holding companies; affiliate

subsidiary corporation: one where the control, in the form of ownership of majority shares, is in another corporation called the parent corporation parent has the power to elect the subsidiarys directors, thus controlling management properties holding company: a parent company where the sole function is to hold the shares of other corporations which it controls i. no other business other than holding of shares investment company: a corporation which holds shares not for control but for investment affiliates: corporations subject to operated as part of a system i. also called sister corporations common control and

Chapter III Formation/Organization

Who may form a corporation? Section 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) Incorporators: SHs or members mentioned in the AOI as originally forming and composing the corporation and who are signatories thereof Corporators: all SHs or members, whether incorporators or those joining the corporation after incorporation Every incorporator must be a stockholder 3.

Reason for 5 incorporator requirement: if anything goes wrong if the incorporation process, and liabilities created at the time of incorporation, then the existence of 5 allows the public or injured party to run after the persons

Residence requirement; citizenship requirement only in certain areas No general requirement of RP citizenship Some areas of industry and business are limited/reserved for Filipino citizens o Public utilities o Retail trade o Banks o Investment houses o Savings and loan associations o Schools o Other areas Congress may by law provide Where more than 40% of outstanding capital is to be owned or controlled by aliens: written authorization must first be sought with the BOI before registration with the SEC

Section 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a) 1. Must be natural persons Only natural persons can be incorporators o Excluding partnerships and other corporations But partnerships and other corporations can be stockholders in another corporation as long as they are not incorporators thereof (El Hogar case)

4.

Restrictions on stock ownership of closely-knit groups Sensitive areas where ownership by a close-knit group may be detrimental to the public interest o Ex. Banksno bank may be licensed to operate if equity of one person or persons related to each other within the 3rd degree of consanguinity/affinity exceed 20% of bank voting stock

2.

At least five (5) incorporators, but not more than 15 At least 5 incorporators must sign the AOI If only 2 incorporators are residents of the RP, a corporation still existsa de facto corporation, provided o At least 5 incorporators must sign the AOI One-man corporations: owner can still incorporate by giving nominal ownership of one share of stock each to four other persons (legal) Incorporator will always retain his status as incorporator of the corporation

Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the

10

general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry. o Stock ownership in close corporations may be limited by the AOI ifo members of the same family or group

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section;

2.

at least 25% authorized capital stock should be subscribed o at least 25% of subscribed stock is paid-in if initial capital requirements cannot be met, then promoters have to promote the business so other persons could invest shares of stock cannot be sold publicly unless they are first registered with the SEC SEC requires disclosure of all pertinent information regarding: o purposes, o character and nature of business, o financial position, o financial responsibility of directors and officers, o nature of shares to be issued Must appear in a registration statement o Filed with the SEC o Published in 2 newspapers of gen. circulation o Once a week for 2 consecutive weeks If all requirements are complete, SEC issues an order making registration effective SEC grants corporation a permit to offer securities for sale o

Articles of Incorporation; drafting

-- x X x --

Steps in Formation of Corporation 1. Promotional stage Promoter, Defn: one who brings together persons who become interested in enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formulation of the corporation Securities Regulation Code: promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business of the issuer and receives consideration therefor o He formulates the necessary initial business and financial plans o If necessary, buys the rights and property which the business may need; with the understanding that once formed, he shall take over the same o Promoters may also be incorporators o Revised securities act sec 2 Code: before incorporation,

AOI: constitute the charter of the corporation. It is the contract between the corporation and its SHs as well as the agreement among SHs Basic contract document in Corporate Law o Defines the charter of the corporation o Defines contractual relationships between and among: State and corporation SHs and State Corporation and SHs AOI does not become binding unless they have been filed with the registered by the SEC Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and

11

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

Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF __________________________ (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines; AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be "_____________________, INC. or CORPORATION"; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is City/Municipality of ________________________, _______________________, Philippines; located in Province the of

FOURTH: That the term for which said corporation is to exist is _____________ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE ___________________ ___________________ ___________________ ___________________ ___________________ ___________________

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___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ SIXTH: That the number of directors or trustees of the corporation shall be _______; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: NAME NATIONALITY RESIDENCE ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ SEVENTH: That the authorized capital stock of the corporation is ______________________ (P___________) PESOS in lawful money of the Philippines, divided into __________ shares with the par value of ____________________ (P_____________) Pesos per share. (In case all the share are without par value): That the capital stock of the corporation is ______________ shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of _____________ shares of which ______________ shares are of the par value of _________________ (P____________) PESOS each, and of which _________________ shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows:

Name of Subscriber Nationality No of Shares Amount Subscribed Subscribed _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber Amount Subscribed Total Paid-In _________________ ___________________ _______________ _________________ ___________________ _______________ _________________ ___________________ _______________ _________________ ___________________ _______________ _________________ ___________________ _______________ (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That _____________________ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given

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by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this __________ day of ________________, 19 ______ in the City/Municipality of ____________________, Province of ________________________, Republic of the Philippines. _______________________ _______________________ _______________________ _______________________ ________________________________ (Names and signatures of the incorporators) SIGNED IN THE PRESENCE OF: _______________________ _______________________ (Notarial Acknowledgment) TREASURER'S AFFIDAVIT REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF )

I, ____________________, being duly sworn, depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ____________________ (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of ___________________ Province of _____________________, this _______ day of ___________, 19 _____; by __________________ with Res. Cert. No. ___________ issued at _______________________ on ____________, 19 ______ NOTARY PUBLIC My commission expires on _________, 19 _____ Doc. No. _________; Page No. _________; Book No. ________; Series of 19____ (7a) Contents of AOI (Sec 14) (1) Corporate name Name is essential to corporate existence It is through the name that the corporation can sue and be sued and perform all legal acts

14

Code does not allow the corporation to adopt a name identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or which is patently deceptive, confusing, or contrary to existing laws If name is legally permissible the SEC allow the parties to reserve it for a reasonable period Code requires a corporation to append the word Corporation or Inc. to its chosen name A corporation should transact business only in its corporate name Can amend the name provided it is done in accordance with the procedure laid down by the Code for amendments of AOI and approval by SEC of the change in corporate name Once approved SEC issues an amended certificate of incorporation under the corporations new name Change of name does not result in dissolution

devices, products, or supplies which fall under its primary purposes. Standards use also tends to show its intention to ride on the popularity and established goodwill of Philips. Furthermore, because Philips is a trademark or trade name registered as far back as 1922, they have the exclusive right to use the name free from infringement by similarity. Lyceum of the Phils. v CA (219 S 610). Lyceum of the Philippines Inc sues all academic institutions it could find having the corporate name Lyceum. SEC rules against Lyceum and upheld by the CA. I: W/n use of word Lyceum in its corporate name has been for such length of time and with such exclusivity as to have been associated with Lyceum of RP. H: Lyceum is not entitled to a legally enforceable exclusive right to use the word Lyceum in its corporate name. (1) corporate names of the other Lyceums not identical with, or deceptively or confusingly similar to Lyceum of the RP. Confusion and deception are precluded by the appending of the geographic name after Lyceum. (2) Lyceum the word is as generic in character as the word university. But Lyceum of RPs use of the word Lyceum in its corporate name has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. In fact Western Lyceum used the word 17 years before Lyceum of RP. (3) even if Western Lyceum is deemed to have lost its rights under the original registration which was never restored when destroyed by fire, the point was merely to emphasize that the word has already been used previously and is not exclusive to Lyceum of RP. PC Javier and Sons v CA. H: From the foregoing documents, it cannot be denied that petitioner corporation was aware of First Summa Savings and Mortgage Bank's change of corporate name to PAIC Savings and Mortgage Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid reason not to pay because the IGLF loans were applied with and obtained from First Summa Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. (2) Purpose clause Confers as well as limits the powers which a corporation may exercise Sec 45: corporate powers: o Expressly granted by law and the AOI o Incidental to conferred powers

Philips Export BV v CA (206 S 457). Philips of the Netherlands files an action with the SEC to delete the name Philips from the corporate name of Standard Philips Company. Standard refuses, and Philips sought an injunction to enjoin Standards from the use if the name Philips. SEC Hearing Officer dismisses Philips petition, arguing that Sec 18 of Corpo Code is only applicable when the corporate names are identical. SEC en banc affirms HOs decision; corporate names contain at least two different words and rules out confusion. CA dismisses Philips petition, saying that Standards products are unrelated and do not compete with Philips products and would not mislead consumers. I: W/N Standards use of the word Philips in its corporate name is unlawful and may be removed under the Corpo Code. H: Yes. The corporations right to use its corporate name is a property right, a right in rem which it may assert and protect against the world. A name is secularly important as necessary to the very existence of a corporation. Its name is one of its attributes, an element of its existence, and essential to its identity. GR: each corp must have a name by which it is to sue and be sued and do all legal acts. A corp acquires its name by choice and need not select a name identical with or similar to one already appropriated. To come under the application of Sec 18 of the Corpo Code, 2 requisites must be proven: (1) corp has a prior right over the use of the name, or; (2) proposed name is either identical or deceptively/confusingly similar, or; (3) it is patently deceptive, confusing or contrary to existing law. The right to exclusive use of corporate name is determined by priority of adoption. Philips was incorporated on 1956 and Standard only 2 years later. In determining the existence of confusing similarity in corporate names, the test is w/n the similarity is such as to mislead a person using ordinary care and discrimination. A reading of the names of Philips and its subsidiary companies indicate that Philips is indeed a dominant word in that all companies affiliated with the principal corp are known in the RP. Given also Standards primary purpose, nothing could prevent it from dealing in the same line of business of electrical

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Reasonably necessary to accomplish its purposes and incidental to its existence Must specify primary and secondary purposes o Secondary purpose need not be related to the main purpose Three reasons for requiring a purpose clause in the AOI o So that a prospective SH contemplating an investment shall know within what lines of business his money is to be risked o So that management may know within what lines of business it is authorized to act o So that anyone who deals with the corporation may ascertain w/n a contract or transaction is within the general authority of management Sec 14(2): a corporation can have as many purposes as it may wish to include in its AOI, subject to the ff conditions: a) The AOI must specify which is the primary purpose and which are the secondary purposes (need not be related) b) For corporations governed by special laws or covered by special provisions in the Code: can have only ONE purpose peculiar to them and no other (ex educational corporations cannot engage in export and import) c) Purpose(s) must be lawful NEDA has the power to refuse or deny the application for registration of any corporation if not consistent with the declared national economic policies A corporation cannot be formed for the purpose of practicing a profession Non-stock corporations: o

Except incidental or subordinate powers and rights necessary to an exercise of powers expressly given

(3) Place of Principal office of the corporation Residence of the corporation Must be within the Philippines Specify city or town where located (4) Term of existence Not to exceed 50 years from date of incorporation o extendible for a period not exceeding 50 years by amendment to AOI o no extension made earlier than 5 years before original or subsequent expiry date exception: justifiable reasons

Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (6)

Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) Investment in activities not within its primary purpose o Sec 42: allowed provided Approved by majority of Board Ratified by 2/3 of outstanding capital stock o Exception: where reasonably necessary to accomplish primary purposes, SHs approval not necessary Interpretation of purpose clauses o GR: construed as including incidental powers reasonably necessary to the proper exercise of the powers enumerated in the AOI o Detailed specification of powers enumerated, by implication, excludes all other powers or rights

(5) Names, nationalities, and Incorporators and directors;

residencies

of

the

Names, nationalities, and residencies of the incorporators, and directors or trustees who will act as such until the first regular directors/trustees are elected o AOI must also name the treasurer chosen by the preincorporation subscribers (6) Number of directors or trustees; qualifications

Number of directors: not less than 5, not more than 15 o For non-stock: can exceed 15 trustees o Merger of banks: total number of directors of the merged banks (may exceed 15) o Educational non-stock: multiples of 5

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Code is SILENT on amendment of AOI to increase number of directors to more than 15 Incorporators must own at least one share of capital stock Directors must own at least one share of stock of a corporation of which he is a director In non-stock corps, a trustee must be a member thereof Aliens may be directors, but only in such number proportional to their allowable participation in the capital of an entity

(7)

Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n) Paid-up capital at time of incorporation must be in cash deposited in a bank or property Pre-incorporation subscription: amount which each incorporator or SH agrees to contribute to a proposed corporation o Embodied in an agreement which takes and pays for the original unissued shares of a corporation formed or to be formed (Delpher)

Names, nationalities and residencies of persons acting as directors/trustees until the 1st regular directors/trustees are duly elected and qualified

(8) Amount of authorized capital stock, number of shares par value or no-par value, original subscribers and the amounts subscribed and paid by each; subscription; payment Sec 12: corporations shall not be required to have any minimum authorized capital stock except where provided by special law In normal practice, SEC will not allow incorporation for P5000 minimum paid-up capital Maximum capitalization is needed to protect SHs Capital stock, defn: the amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the shareholders, at the organization of the corporation or afterwards Outstanding Capital Stock: total shares of stock issued to subscribers or SHs, whether or not fully or partially paid except treasury shares Subscribed Capital Stock: portion of capital stock subscribed (i.e. procured to be paid) whether or not fully paid Subscription, defn: mutual agreement of the subscribers to take and pay for the stock of a corporation o AOI must show: the names, nationalities, and residencies of the original subscribers, the amount subscribed, and how much is paid thereon o Sec 13: at least 25% of authorized capital stock, at least 25% of total subscription to be paid upon subscription o for non-stock: minimum authorized capital stock not required, but subject to Sec 13

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n

Par value share: appears in the stock certificate specifiying the amount in pesos as the nominal value of the shares appearing in the certificate of stock o Must be stated in the AOI o Cannot be issued at less than stipulated par value o Can only be changed by amendment in the AOI Sec 62: Consideration for no par value shares issued is the issued value, to be fixed in the ff ways: o AOI o By the BOD when authorized by the AOI or BLs o SHs representing at least a majority of outstanding capital stock

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Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged reclassification or conversion. for stocks in the event of

(9) Treasurers Affidavit SEC shall not accept AOI unless accompanied by a sworn statement by the Treasurer that: o at least 25% of TOTAL authorized capital stock has been subscribed o at least 25% of subscribed and authorized capital stock has been fully paid-up

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) Issuance of no par value must be reflected in the AOI o Consideration cannot be less than issued valuecannot be less than 5 pesos

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 meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Treasurer must make sworn statement that minimum requirements of subscription and payment have been complied with o If false, AOI disapproved or certificate of registration revoked (10) Other matters

AOI may include other matters not inconsistent with law, such as: o classes of shares into which shares of stock have been divided o Preferences of and restrictions on any class o Denial of voting rights on certain shares or pre-emptive right of SHs o Prohibition against transfer of stock which would reduce ownership to less than required minimum for wholly or partially nationalized businesses/industries (11) Close corporations

A corporation will be governed by Title XII on Close Corporations only if its articles provide for certain specific matters

TITLE XII - CLOSE CORPORATIONS Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated

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 therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 5. 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Code allows a close corporation to provide in its AOI special provisions which would exclude it from the operation of some of the requirements and prohibition imposed on corporations in general, and in effect make it an incorporated partnership (Sec 97)

If not, SEC must give the incorporators reasonable time within which to correct or modify objectionable portions Grounds for rejection by the SEC: 1) AOI or any amendment thereto is not substantially in accordance with the prescribed form 2) Purpose(s) are patently unconstitutional, illegal, immoral or contrary to government rules/regulations 3) Treasurers Affidavit concerning the amount of capital stock paid or subscribed is false 4) Required percentage of ownership to be owned by Filipino citizens has not been complied with SEC may, after consultation with BOI and NEDA, reject or deny registration if not consistent with the declared national economic policies SEC decision appealable to CA

Issuance of certificate of incorporation It is only upon issuance of the certificate of incorporation that the corporation acquires a juridical personality distinct and separate from its members or SHs, with power to sue and be sued and to perform all other legal acts Corporation DEEMED incorporated from the date SEC issues the certificate of incorporation

3.

Filing of articles; payment of fees AOI and treasurers affidavit filed with the SEC and corresponding fees paid Failure to file AOI will prevent due incorporation and will not give rise to juridical personality and will not even be a de facto corporation

Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) 6. Amendment of AOI Sec 16: any provision may be amended by: o majority vote of the Board of Directors AND o WRITTEN ASSENT of SHs representing at least 2/3 of OCS or 2/3 members of non-stock entitled to vote o Without prejudice to appraisal right of dissenting SH o Unless otherwise provided in the Code or special law

4.

Examination of articles; approval or rejection by SEC Upon receipt the SEC shall examine the AOI to determine conformity with law

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AOI: Contractual implications AOI is the contract between the three (3) parties: o State and corporation o Stockholders and State o Corporation and stockholders

1.

User of corporate powers

Defectively incorporated entities; De jure corporation

A slight evidence of conducting business is deemed sufficient It is not necessary that the dealings between the parties should be on a corporate basis Ex. Buying a lot and constructing and leasing a building will constitute sufficient user of corporate powers 2. Law subsequently declared void GR: there can be no de facto corporation under a statute subsequently declared unconstitutional Exception: where the corporation in GF did all that is required under the statute to form a valid corporation

Not every defect precludes a de jure corporation; as long as the mandatory requirements for incorporation are substantially complied with, a corporation de jure will be formed A de jure corporations due incorporation cannot be successfully attacked even in quo warranto proceedings

De facto corporations Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n) If there is no substantial compliance with the mandatory requirements for incorporation, a corporation be deemed to exist as a person distinct and separate from its members or SHs if all of the ff are present: (1) there must be an apparently valid statute (2) there has been colorable compliance with the legal requirements in GF (3) there has been user of corporate powers i.e. transaction of business in some way as if it were a corporation if all are met by the defectively formed corporation, it will be considered a de facto corporation the due incorporation of a de facto corp cannot be collaterally attacked either by the State or by private individuals such incorporation must be attacked by the State through a quo warranto proceeding where requirements for a de jure or de facto corporation are not present, then the associates may be held liable as partners for obligations of the alleged corporation o unless estoppel can apply (Sec 21)

Municipality of Malabang v Benito. Balindog, mayor of Malabang, files an action to nullify EO 386 which created the municipality of Balabagan, of which the mayor is Benito. They invoke SCs ruling in Pelaez v Audito General declaring as unconstitutional RA2370 or the Barrio Charter Act and Sec 68 of the Administrative Code for being a statutory denial of the Presidents authority to create a new barrio and for being an undue delegation of legislative powers, respectively. Benito counters that Pelaez does not apply to them because the municipality of Balabagan is a de facto corporation, having been created under the color of statute before it was declared unconstitutional, and as a de facto corporation, its existence cannot be collaterally attacked. H: Balabagan is neither a de facto nor a de jure corporation. The true basis for denying to a corporation de facto status is the absence of any legislative act giving life to its creation. An unconstitutional act is not a law; it confers no rights, it imposes no duties, it affords no protection, it creates no office. EO 386 thus created no office, although acts done by the office are not exactly a nullity. The EO is as inoperative legally as though it were never passed, an operative fact which cannot justly be ignored. But a corporation created under a statute declared void it is given life by other valid acts or in the constitution itself. The color of authority requisite to the organization of a de facto municipal corporation may be: (1) an unconstitutional law, upheld for a time or not yet declared void, provided a warrant for its creation is found in some other valid law or recognition of its existence by the general laws or the constitution. (2) there can be no de facto municipal corporation unless either directly or potentially such a de jure corporation is authorized by some legislative fiat (3) there can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face (4) there can be no de facto corporation created to take the place of an existing de jure corporation.

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3.

Substantial or colorable compliance Difficult to ascertain when compliance with the legal requirements is substantial or only colorable or less than colorable In Hall v Piccio, unless certificate of incorporation has been issued, there can be no de facto corporation While in the process of incorporation, there can be no substantial nor colorable compliance, and thus no de facto corporation (Cagayan Fishing v Sandiko)

private suit between the stockholders without need for interference by the State. The petitioners also have their remedy by appealing the order of dissolution at the proper time. (2) Far Eastern not being a de facto corp, the principle of corporation by estoppel doesnt also apply. The complaining partners have not represented themselves that they were incorporated, and nobody was led to believe anything to his prejudice and damage. Corporation by Estoppel In corporation by estoppel, a party is precluded or estopped from denying corporate existence May apply to a third party or the alleged corporation

Harrill v Davis. Davis, Mann, R. Davis, and Knight agreed to take specified shares in a $10000 enterprise for the purpose of building a cotton gin and carrying on the business of buying, ginning, and selling cotton and to organize a corporation for this purpose. They did business with Harrill, buying material and procure labor and build their cotton gin. They purchased lumber and other materials from Harrill after the gin was completed and after they commence operations. As a result, they incurred indebtedness of over $5000, $4700 of which were incurred before they had filed their articles of incorporation. During all this time, the four treated themselves as a corporation, and so did Harrill. H: They did not become a corporation de jure just because they failed to file their articles of incorporation. Nor did they become a corporation de facto before they filed the articles to such an extent as to exempt them from individual liability because they did not before that time secure any color of legal organization as a corporation under an charter or enabling act; they were liable individually as partners for that part of the claim falling prior to the filing of the articles. Hall v Piccio. The Halls, Browns, Chapman and Abella signed and acknowledged articles of incorporation of the Far Eastern Lumber and Commercial Co Inc. Pending action on the articles, the Browns, Chapman, and Abella sued the Halls in the TC to dissolve what they call an unregistered partnership because of bitter dissension, mismanagement, and fraud. Hall questions the jurisdiction of the TC over their dispute. Judge Piccio then ordered the dissolution of the partnership and appointed a receiver. The Halls filed a counterbond to discharge the receiver which was denied by Piccio. I: W/N the TC had jurisdiction over the case, considering Far Eastern Lumber was a de facto corporation which can only be dissolved in a quo warranto proceeding in accordance with the Corpo Law. W/N the Browns, upon signing the articles of inc, are estopped from claiming that it is not a corporation. H: (1) the rule on de facto corps are not applicable to the case. Not having obtained the certificate of incorporation, Far Eastern Lumber and even it stockholders cannot claim in GF to be a corporation. It is the issuance of the certificate of incorporation that calls a corporation into being. The immunity of collateral attack is granted to corps claiming in GF to be a corporation. Furthermore, the corporation is not a party to the suit, it being a litigation bet stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corp may be terminated in a

Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n)

When a 3rd person entered into a contract with an association which represented itself a corporation, the association will be estopped from denying its corporate personality if sued by the 3rd party When a 3rd person who dealt with an unincorporated association as a corporation may be precluded from denying its corporate existence if sued by the alleged corporation, even if he did not know about the defective incorporation When business associates fraudulently misrepresent the existence of a corporation, and a 3rd party contracts without knowledge of the defective incorporation, the 3rd person may sue the associates as general partners o If the business associates and the 3rd person in the above example had no knowledge of the defective incorporation, then the 3rd person cannot hold the associates liable as partners (i.e. personally liable) Estoppel also applies even in a case where the alleged corporation did not deal with the plaintiff suing on a tort Difference bet de facto and estoppel: o where all requisites of a de facto corporation are present, it will have the status of de jure

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But if any of the requisites is absent, then estoppel may be applied only if any of the parties is estopped from defending

ABC v Standard Products. Asia Bank is the creditor of Standard Products Co. It seeks to recover the balance due on a promissory note issued by the latter iao P24736.47. TC ruled IFO Asia Bank. Standard appeals, contending that ABC failed to prove affirmatively the corporate existence of Standard. H: GRin the absence of fraud, a person who contracted with an association in such a way as to recognize and admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of such contract or dealing, unless its existence is attacked for causes arising since making the contract or other dealings. Standard already recognized the corporate existence of Asia Bank by making a promissory note in its favor and making partial payments, and is thus estopped from denying its corporate existence. Cranson v Intl Business Machines. Cranson invested in a new business corp to be created. He purchased and received stock certificates. The business was conducted as if it were a corporation through corporate bank accounts, corporate books etc. Cranson was also elected President of the corporation and all transactions made by him was for the account and as officer of the corporation. However, the articles of incorporation which had been acknowledged and signed prior to May 1 1964 were only filed on Nov 24 1961. During that time, the Bureau purchased 8 typewriters from IBM, and partials payments had already been made. On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion Cranson was a partner in the business and thus personally liable for the debts, IBM sued Cranson for the balance due on electric typewriters purchased by the Bureau. I: W/N an officer of a defectively incorporated corporation may be subjected to personal liability under the circumstances of the case. H: No. The doctrine of de facto corporations applies only on (1) existence of a law authorizing incorporation (2) effort in GF to incorporate (3) actual user or exercise of corporate powers. The doctrine of estoppel to deny corporate existence is generally employed where the person seeking to hold the officer personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its existence as a corporate body. It has been generally held that where there had been a failure to comply with a requirement which the law declared to be a condition precedent to the existence of a corporation, the corporation was not a legal entity and was therefore precluded from suing or being sued as such. Substantial compliance with the formalities of corporation law, which are condition precedent to corporate existence, was not only necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of a de facto corporation or a corporation by estoppel. The doctrine of estoppel cannot be successfully invoked unless the corporation has at least a de facto existence, and a de facto corporation cannot be recognized in violation of a positive law. There is a broad distinction between those acts made necessary by statute as a prerequisite to the exercise of corporate powers and

those acts required of individuals seeking incorporation. On the other hand, where the corporation has obtained legal existence but has failed to comply with a condition subsequent to corporate existence, the Court has held that such nonperformance afforded the State the right to institute proceedings for the forfeiture of the charter, but that such neglect or omission could never be set up by the corporation itself, or by its members and stockholders, as a defense to an action to enforce their liabilities. It is clear that when a defect in the incorporation process resulted from a failure to comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a creditor to estop the corporation, or the members or stockholders thereof, from denying its corporate existence. Where the parties had assumed corporate existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the theory that the parties by recognizing the organization as a corporation were thereafter prevented from raising a question as to its corporate existence. Where there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine there exists an entity which is a corporation de jure against all persons but the State. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even where there is no corporation de facto. Thus in the case, IBM dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, it is thus estopped from asserting that the Bureau was not incorporated at the time the typewriters were purchased. Cranson is therefore not personally liable for the balance of the purchase price of the typewriters. Salvatierra v Garlitos, et. al. Salvatierra entered into a lease contract with the Phil. Fibers Producers Co. Inc, allegedly a corporation duly organized and registered under the laws of RP, with Refuerzo as its president. Among the obligations in the contract were: period of lease is 10 years; land would be planted with kenaf, ramie, or other crops; the lessor would be entitled to 30% of net income and lessee should declare at the earliest possible time the income derived therefrom. PFP failed to fulfill the obligations and Salvatierra sued the corp and Refuerzo in the RTC for an accounting, rescission and damages. TC granted her petition, but Refuerzo countered that decision was void with respect to him, there being no allegation as to his personal liability and that while he was a signatory to the contract, he did so in his capacity as president. TC granted his motion and released all properties levied by its earlier judgment. Salvatierra appealed, claiming that her failure to allege his personal liability was because all this time she was under the impression that the PFP represented by Refuerzo was a duly registered corporation, but a subsequent inquiry with the SEC revealed otherwise. H: GRa person who contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such dealing but this doctrine may not be held to be applicable where fraud takes a part in the transaction. A stockholder cannot be held liable for any financial obligation by the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. This is because such

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unincorporated association is incompetent to act and appropriate for itself the powers and attributes of a corporation and cannot create agents or confer authority. Thus those who act or purport to act as its representatives or agents do so without authority and at their own risk. Considering that Refuerzo was the moving spirit behind the consummation of the lease agreement by acting as the representative of PFP, his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting in behalf of a corporation he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights if any arising out of the transaction. Chaing Kai Shek School v CA (172 S 389). Elementary schoolteacher Fausto Oh, a teaching in the Chiang Kai Shek School in Sorsogon for 33 years, was summarily dismissed from the school. In her suit against the school she demanded separation pay, SSS benefits, and damages. She impleaded the other officials of the school. TC dismissed the complaint but was reversed by the CA which held the school liable, but not the school officials. I: W/N a school that has not been incorporated may be sued by reason alone of its long continued existence. H: School may be sued. The school is governed by Act 2706 as amended by CA 180. Having recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days from recognition. Although in existence since 1932, it had never made any attempt to incorporate, and thus cannot invoke its own noncompliance with the law to immunize it from Ohs complaint. Having contracted with Oh for 32 years while representing itself as possessed of juridical personality, the school is now estopped from denying such personality. LBC Express, Inc. v CA (236 S 602). Carloto, President of Rural Bank of Labason, was instructed to fly to Manila to meet with BSP officials on the payment plan for rediscounting of its obligations. He requested his sister to send P1000 as pocket money for the trip and include some rediscounting papers through the petitioner LBCs Dipolog Office. The documents however, arrived at Carlotos residence but without the cash. Despite follow-up, the cash was only received after a month and after his scheduled trip to Manila. LBC claims Carloto was not at home upon delivery and as a result the money was returned to LBC Dipolog. Carloto claims that because of the delay in sending the money he failed to submit the required papers and his bank was made to pay a P32000 fine. He then sued LBC for damages, in his personal capacity, with the Rural Bank as one of the plaintiffs. TC ruled ifo Carloto and the Rural Bank. I: W/N the Rural Bank of Labason should be awarded moral damages. H: No. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no sense; therefore, it cannot experience physical suffering and mental aguish. Mental suffering can only be experienced by one having a nervous system and it flows from real ills, sorrows, and all griefs of lifeall of which cannot be suffered by the corporation.

Lozano v delos Santos (274 S452). Case involves a dispute between two leaders of jeepney associations. Lozano is president of Kapatirang MabalacatAngeles JDA or KAMAJDA while Anda is president of the Samahang AngelesMabalacat JODA or SAMAJODA. The two organizations merged to form the Unified Angeles-Mabalacat JODA or UMJODA. Lozano and Anda ran for president of the new organization and Lozano won. Anda protested, alleging fraud and refused to recognize the results of the election. Anda also continued collecting dues from the members of the SAMAJODA despite several demands to desist. Lozano sues Anda in the TC, but Anda claims TC has no jurisdiction, only the SEC. MCTC rules ifo of Lozano, but was reversed upon appeal by the RTC, which held the dispute to be intracorporate. I: W/N the SEC or the TC has jurisdiction over the dispute. H: Not intracorporate; SEC has no jurisdiction. The jurisdiction of the SEC is determined by two elements: (1) status or relationship of the parties, which must arise out of intracorporate or partnership relations between the parties (2) nature of the question which is the subject of the controversy, which requires that the dispute be intrinsically connected with the regulation of the corporation/association or deal with the internal affairs of the corporation. There is no intracorporate dispute between the parties in this case, because it arose out of their plan to consolidate their associations, which is still a proposal and has not yet been approved by the SEC nor has the articles been submitted. Consolidation only becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. Thus the KAMAJDA and the SAMAJODA are two separate entities, and the dispute of the parties in the case is not within any of the associations mentioned. It is between members of separate and distinct associations. The doctrine of incorporation by estoppel advance by Anda is also not applicable, which is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form corporations and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation and who have knowledge that it is not incorporated, there is no corporation by estoppel. Lim Tong Lim v Phil. Fishing Gear Industries, Inc (317 S 728). In behalf of Ocean Quest Fishing Corporation, Chua and Yao entered into a contract for the purchase of fishing nets from Phil Fishing Gear Industries Inc. Lim Tong Lim was their joint venture partner but was not a signatory to the agreement. Chua and Yao failed to pay for the nets; and PFGI sued them and included Lim Tong Lim in their capacities as general partners, on the allegation that Ocean Quest was a nonexistent corporation upon inquiry with the SEC, and moved to attach their properties. Lim filed a counterclaim and crossclaim and moved for the lifting of the writ. TC ruled ifo PFGI, holding that a partnership existed between the three. CA affirmed the TC ruling and held that Lim is a partner of Chua and Yao and is liable as such for the payment of the nets. Lim appeals, claiming he did directly participate in the negotiations and was not even a signatory to the agreement, and was merely a lessor and not a partner. I: Is Lim a partner? H: Yes. It is clear that Chua Yao and Lim together set up the fishing business,

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buying boats and financed by a loan from Lims brother. The compromise agreement reveals the intention to divide the excess/loss from proceeds of the sale of the boats. The boats, financed by borrowed money, fell under the common fund which indicates the existence of a partnership relation between the three. I: Is Ocean Quest a corporation by estoppel, exonerating Lim from liability? H: No. The doctrine of estoppel applies only to the alleged corporation and to the third party. As to the alleged corporation, if it represents itself to be a corporation, will be estopped from denying it corporate capacity in a suit against it by a third person who relied in GF on such representation. As to the third party who, having an association to be incorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. Lim definitely benefited from the use of the nets inside the FB Lourdes, which was found to be an asset of the partnership. Although it was never legally formed for unknown reasons, under the law on corporation by estoppel, those acting in behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held to be liable as general partners. Although it is also true that Lim did not directly act in behalf of the corporation, since he reaped the benefits of the contract entered into by Chua and Yao with whom he had an existing relationship, he is covered by the doctrine of corporation by estoppel. Intl Express Travel v CA (343 S 674). Kahn is the president of the Phil Football Federation. He contracted with the International Express Travel for the travel arrangements for the football team to compete in the SEA Games in KL, including matches in China and Australia. Amount due to the travel agent reached P449654.83, of which P176467.50 were paid. Kahn also paid P50000 from his personal funds. The remaining balance being unsatisfied, the travel agent sued Kahn both in his personal and official capacity as well as the Federation in the RTC. Kahn claims he merely acted as agent for the Federation, and that the Federation being a corporation, he should not be liable. CA overrules TC and exonerates Kahn, while recognizing the corporate existence of the Federation. I: Is the Federation a corporation? If not, is it at least a corporation by estoppel? H: No. Although the Federation derives its existence from RA 3135 or the Charter of the Phil Amatuer Athletic Assoc and PD 604 which recognized the juridical existence of national sports associations, such corporate status does not automatically take effect by the mere passage of the laws. This is because before the corporation may acquire juridical personality, the State must give its consent either in a special law or a general enabling act. The laws cited merely recognized the existence of the associations and provided the manner by which they acquire juridical personality. Such entity must first be recognized by the accrediting organization (PAAF and the Dept of Youth and Sports Devt. The bylaws presented by Kahn does not prove that the Federation has indeed been recognized and accredited. Thus, Kahn, falling under a person acting or purporting to act in behalf of the corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into as its agent. It also does not fall under a corporation by estoppel, which was mistakenly applied by Kahn. It applies only to a third

party when he tries to escape liability on a contract from which he had benefited on the irrelevant ground of defective incorporation. Loyola Grand Villas Homeowners south Assoc Inc (South Assoc) v CA (276 S 681). LGVHAI is the association of homeowners and residents of the Loyola Grand Villas, duly registered with the HIGC as the sole homeowners assoc in the LGV, but did not file its corporate by-laws promptly. When it did attempt to file, 2 other assoc were already in existencethe North Assoc and the South Assoceach with 5 registered homeowners who were also incorporators and officers thereof. HIGC claims the LGVHAI has been automatically dissolved for its failure to file its corporate by-laws and non-user of the corporate charter. LGVHAI files a complaint with the HIGC, which the latter recognizes in its ruling and revokes the certificates of registration of the North and South Assoc. South appeals to Appeals Board of HIGC, and upon dismissal, appeals with CA. CA dismisses appeal, holding that although the Corpo Code does not provide for automatic dissolution of the corporation as a result of delay in filing of by-laws, the SEC has the power to suspend or revoke certificates of registration, one of the grounds of which is failure to file by-laws. But since there was no showing the LGVHAIs registration was validly revoked, it continued to be the recognized assoc in LGV. I: W/N LGVHAIs failure to file its by-laws within the period prescribed by the Corpo Code had the effect of automatically dissolving the corporation? H: No. Sec 46 requiring filing of bylaws reveals the legislative intent to attach a directory, not a mandatory, meaning of the word must. By-laws may be necessary for the government of the corporation but these are merely subordinate to the articles of incorporation as well as to the Corpo Code and related statutes. In some cases, the by laws were considered unnecessary to corporate existence or to the valid exercise of corporate powers. The failure to exercise the power will be ascribed to mere non-action and will no render void any acts of the corporation which are otherwise valid. There can also be no automatic dissolution without notice and compliance with the requirements of due process. The Court also stressed that substantial compliance are mere conditions subsequent and not prerequisites for acquisition of corporate responsibility.

Internal Organization of Corporation 1. By-laws

Contractual significance By-laws are the product of the agreement of the SH or members and establish the rules for the internal government of the corporation By-laws are subordinate to the AOI, Corpo code and the related statutes

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If by-laws are inconsistent with any of these, it has no binding effect Power to adopt and amend by-laws is an inherent power of every corporation (Gokongwei case) Unlike AOI, are meant to be an intramural document to govern the relationship between and among members of a corporate family Intended for the protection of the corporation and prescribes regulations, not restrictions GR: although the power to adopt by-laws is an inherent right, the by-laws cannot contravene the law (El Hogar case) o Validity or reasonableness of the by-laws is a question of law (Gokongwei case) Provisions of AOI prevail over the by-laws Board of Liquidators vs. Kalaw: it is possible for an express provision of the by-law to be violated and the board may, in certain corporate actions, bind the corporation despite it being contrary to the by-laws o Whether through board action or authorization or through ratificatory act of the SHs, so long as there is corporate approval through the board, be it implied or express, it is valid to bind the corporation GR: 3rd persons are not bound by the by-aws o Exception: where they have actual or constructive knowledge the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: -- x X x -5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code -- x X x -TITLE V - BY LAWS Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of

Requisites of by-laws: (1) By-law provisions cannot contravene law (2) By-law provisions cannot contravene the AOI (3) By-laws must be reasonable and cannot discriminate Procedure for Adoption of by-laws (Sec. 46): Within one (1) month after receipt of official notice of issuance of certificate of incorporation o Loyola Grand villas case: Sec 46 is merely directory, and thus failure to file by-laws within the period does not imply the demise of the corporation, but is a mere ground for the SEC to revoke the certificate It may also de adopted and filed prior to incorporation o must be approved, signed by all incorporators and filed with the SEC together with the articles vote required to adopt: at least majority of outstanding capital stock or members of non-stock corp signed by SHs and kept in principal office certified copy filed with SEC attached to AOI becomes effective only upon issuance of the SEC certification

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Code allows adoption and filing of by-laws even prior to incorporation, but must be approved by ALL incorporators and submitted to the SEC together with the AOI By-laws may be submitted within one (1) month after receipt of notice of issuance of the certificate of incorporation o Failure to do so may result in suspension or revocation of certificate SEC may disapprove by-laws which are inconsistent with law Sec 46 provides clearly that in ALL cases, the by-laws shall be effective only upon issuance by the SEC of a certification that these are not inconsistent with law Once approved by the SEC, by-laws will bind the corporation, and all SHs and members including those who voted against the adoption

other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) Sec 47 enumerates matters which may be included in the by-laws By-laws may provide for the time, place and manner of directors meetings By-laws may provide for time and manner of SH meetings (place of SH meeting is fixed by law at the principal office of the corporation Code requires the by-laws provide for at least three (3) officers: o President o Secretary o Treasurer o Additional officers

Basic Contents of By-Laws: Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers

Other matters that may be included in by-laws: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) designation of time when voting rights may be exercised by SH of record (24) providing for additional officers (25) provisions for compensation of directors (30) creation of an executive committee (35) date of annual meeting or provisions for a special meeting of SHs/members (50 & 53) quorum on meetings of SHs/members (52) providing for presiding officer at meetings of directors/trustees and of SHs/members (54) procedure for issuance of stock certificates (63) providing for interest on unpaid subscriptions (66) entries to be made in stock and transfer book (74) providing for meetings of members outside the principal office (24)

Other matters that may be included in either the AOI or the by-laws: (a) (b) (c) cumulative voting in non-stock corporations higher quorum for valid board meeting limiting, broadening or denial of right to vote and voting by proxy, for non-stock corporations

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(d) (e) (f) (g) (h)

transferability of membership in non-stock corps termination of membership in non-stock corps manner of election and term of office of trustees and officers in non-stock corps manner of distribution of assets in non-stock corps upon dissolution staggered board in educational institutions in close

inconsistent with this Code. (22a and 23a) who can amend by-laws: o owners of at least a majority of outstanding capital stock or members of non-stock corp 2/3 of outstanding capital stock or members may delegate to the board the power to amend or repeal by-laws o only then can the board amend by majority vote In the Kalaw case, the SC held that contract entered into without strict compliance with the by-laws may, due to long acquiescence and usage, be binding on the corporation, which may be deemed to have waived such compliance. In the Fleischer, since by-laws operate merely as internal rules among SHs, they cannot affect or prejudice 3rd persons who deal with the corporation, unless they have knowledge of the same

Matters that must appear in BOTH AOI and BLs: (a) restrictions on right to transfer shares corporations (98) Matters (a) (b) (c) (d) (e) (f) (g) (h) that CANNOT be in the by-laws: classification of shares and preferences to preferred shares founders shares redeemable shares purposes of the corporation corporate term of existence capitalization of stock corporations corporate name denial of pre-emptive rights

Amendments to By-Laws Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not

Fleischer v Botica Nolasco. Fleischer was the owner and transferee, for valuable consideration, of 5 shares of stock of the Botica Nolasco Corp, transferred to him by the original owner. The Corporation however invokes Article 12 of its corporate by-laws, which effectively gives the corporation a preferential right of the shares in question. It claims it has a preferential right to buy the shares from the original owner. When Fleischer requested Botica to register his shares, the latter refused, and Fleischer sues in the TC. TC ruled ifo Fleischer, holding that the questioned Art 12 is in direct conflict with Sec 13 of Act 1459. I: W/N Art 12 of the by-laws of the corporation is in direct conflict with the Corporation Law? H: Yes. The Corpo Law at the time provides in Sec 13 that every corporation has the power to make their own by-laws, provided they are not inconsistent with any existing law, governing among others the transfer of its stock. This section does not contemplate any restriction on how and to whom the shares may be transferred or sold, nor does it suggest any discrimination ifo or against a certain purchaser. The holder of these shares, as owner of personal property, is at liberty to dispose of them to anyone he pleases, without any limitation other than in the general law. Every owner of corporate shares has the same uncontrollable right to alienate them which attaches to the ownership of any other species of property. Furthermore the SC says Sec 13 should be harmonized with Sec 35 of the same law, which requires that shares of capital stock are personal property transferable by delivery of the certificate indorsed by the transferor-owner. For a transfer to be valid, it should be entered into the books of the corporation. GR is that bylaws of a corporation are valid if they are reasonable and calculate to carry into effect the objectives of the corporation, and always within the limits of the charter. They must be subordinate to the Constitution and the laws of the land, must not infringe public policy or be hostile to public welfare, must not disturb vested rights or impair obligations of contracts. It cannot take away or abridge the substantial rights of a stockholder. Under the statute authorizing by-laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books

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and cannot justify an unreasonable restriction upon the right of sale. The right of unrestrained transfer of shares inheres in the very nature of a corporation. The right to impose restrictions on transfer of shares must be conferred upon the corporation be the governing statute or by the articles of incorporation. It cannot be done by a by-law without statutory or charter authority. Therefore by-laws or other regulations restraining such transfers, unless derived from statutory authority, would be regarded as impositions in restraint of trade. The by-law in question cannot also have any effect on Fleischer, since he had no knowledge of the by-law when the shares were transferred to him and obtained the same in GF and for value. When no restriction is placed by law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice or wasnt aware. A by-law of a corporation which provides that transfer of stock shall not be valid unless approved by the board for instance, or any other restriction imposed, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons. Mandamus will lie in favor of Fleischer to compel the Treasurer of Botica to register his shares. Govt of Phils. V El Hogar. (for the facts, goto corporate powers section) I: W/n the by-laws of el Hogar, which empowers the board to cancel shares and return to the owner the balance resulting from the liquidation, by a vote of absolute majority of the members. H: The by-law provision is an absolute nullity, since it is in direct conflict with the Code which declares that the board shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or forfeiture of stock. While it is a nullity, it is insufficient to necessitate the involuntary dissolution of the corporation through a quo warranto proceeding. It cannot be enforced even if the directors were to attempt to do so. I: W/n a by-law provision which allows directors to fill vacancies in the directorate by choosing suitable persons from among the SHs to avert a failure of a quorum in SH meetings is valid H: The practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to the personality of individuals chosen by the directors to fill the vacancies in the body. I: W/n a by-law provision which authorizes the distribution to the directors of el Hogar 5% net profit in proportion to their attendance at board meetings is valid H: The Corporation Law does not undertake to prescribe the rate of compensation for the directors of the corporation. The power to fix compensation is left to the corporation itself, to be determined in its by-laws. Pursuant to this statutory authority, el Hogar has fixed the compensation for its directors in its by-laws. If a mistake has been made, or the rule adopted in the byaws has been found to work harmful results, the remedy is in the hands of the SHs who have the power at any lawful meeting to change the rule.

I: W/n 2 by-law provisions which require (1) persons elected to the board be holders of shares with a paid-up value of P5K and (2) that directors who loan from the association waive their right as SHs are valid H: the Code specifically gives power to the corporation to provide in its by-laws for the qualifications of directors, and the requirement of security from them for the proper discharge of the duties of their office, is highly prudent and in conformity with good practice. The code also has safeguards on directors from making loans to themselves, designed to prevent the possibility of looting of the corporation. The by-law provision is consistent with the code on this one. Valid. 2. Election of directors and officers; commencement of business

Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. formally organize includes not only adoption of by-laws but also the establishment of the Board of Directors which will administer the affairs of the corporation and exercise its powers the AOI names the initial members of the Board who are to act until the 1st set of directors are duly elected and qualified o this interim board can perform the functions of a regular board until the date of the election of directors o once elected, the directors must complete the organization of the corporation by electing the officers

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

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The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) after approval of by-laws, and the directors and offices elected, the corporation is ready to commence business it must do so within 2 years from date of incorporation; o otherwise, its corporate powers will cease and will be deemed dissolved

3.

Annual financial statements Once organized, a corporation is required to keep proper accounting records and to file financial statements with the SEC annually

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Chapter IV The Corporate Entity

Theory of Corporate Entity: Its effects A corporation has a juridical personality separate and distinct from the SHs or members who compose it Issuance of certificate of incorporation marks beginning of the corporations existence as a legal entity

Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) Not affected by personal rights, obligations, and transactions Stockholders have no claim on corporate property as ownersthey only have an inchoate right to it A corporation has no interest in the individual property of its stockholders, unless transferred to the corporation A corporation, as a juridical person, is entitled to immunity against unreasonable search and seizure A corporation is civilly liable for torts in the same manner

property to the stockholders: W/N the certificate of liquidation involves a mere distribution of corporate assets or a transfer or conveyance of property. H: It is a transfer/conveyance of property. A corporation is a juridical person separate and distinct from the stockholders. Properties registered in the name of the corporation are owned by it as a separate entity. The shares held by stockholders are their personal property and not the corporation, and it only typifies an aliquot part of the corporations property or the right to share in the proceeds. The holder of such share is not the owner of any part of the capital of the corporation, nor is he entitled to possession of any definite portion of its assets, neither is he a co-owner. Liquidation by stockholders after a corporations dissolution is not mere partitioning of community property, but already a conveyance or transfer of title to them from the corporation. The distribution of the corporate properties to the SHs was deemed not in the nature of a partition among co-owners, but rather a disposition by the corporation to the SHs as opposite parties to a contract Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members; shares of stock are personal property, and NOT corporate property share of stock typifies an aliquot part of the corporations property, or the right to share in the proceeds to that extent when distributed holder of shares is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets

Stockholders of F Guanzon v Register of Deeds. 5 stockholders of F Guanzon executed a certificate of liquidation of the assets of the corporation. By virtue of a resolution dissolving the corporation, they wish to distribute as liquidated dividends among themselves and in proportion to their shareholdings, the assets of the corporation, which includes real estate properties in Manila. The Register of Deeds however, upon presentment of the certificate of liquidation by the 5 stockholders, denied registration of the properties to be distributed on 7 grounds, 3 of which were questioned by the stockholders: (1) no statement of the # of parcels of land to be distributed (2) registration fees iao P430.50 (3) doc stamp tax iao P940.45 (4) court judgment approving the dissolution and directing disposition of the assets. The stockholders claim that the certificate of liquidation merely partitions/distributes the corporate assets among them because the corporation has already been dissolved. Hence they need not comply with the requirements imposed by the Register of Deeds and the Land Registration Authority. The LRA counters that the distribution of the corporate assets upon dissolution of the corporation, is ultimately a transfer/conveyance of

Caram v CA. A certain Barretto and Garcia contracted the services of respondent Arellano for his technical services to undertake a project study for the formation of a corporation, the Filipinas Orient Airways. The study was then presented to Caram, who wanted to invest in the corporation. The airline was eventually organized on the basis of the project study with Caram spouses as major stockholders, and Barretto and Garcia as corporate officers. Arellano sued for compensation due to him for his services in undertaking the study. TC ruled that Caram spouses are liable jointly and severally with Barretto and Garcia for P50K due to Arellano. Caram spouses claim they were mere investors in the fledgling airline and were not involved in its formation nor in the project study, which was merely presented to them to induce them to invest. I: W/N Caram spouses are solidarily liable with Barretto and Garcia for the compensation to Arellano. H: No. Filipinas Orient is a bona fide corporation, the principal stockholders of which are the Carams. As such, the corporation, should alone be liable for its corporate acts as duly authorized by its officers. It has a separate juridical personality and its principal stockholders should not be liable for the acts thereof. The Carams did not contract the services of Arellano; it was only the results of the study made by Arellano that was presented to them to induce them to invest.

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Palay Inc v Clave. Palay Inc. through its President Onstott executed ifo Dumpit a contract to sell a parcel of land in Crestview Heights Subd in Antipolo for P23300, with 9% interest, payable with a downpayment and monthly installments. The contract contains a provision that should Dumpit default in payment of any monthly installment after the lapse of 90 days from the expiration of the 1 month grace period, Palay Inc will automatically rescind the contract without need of notice and will forfeit all payments made. Dumpit paid the downpayment and made several payments, but soon defaulted. 6 years after the last payment, Dumpit wanted to update all his overdue accounts, but was told by Palay Inc that the contract had already been rescinded in accordance with the contract and the land had already been sold. Dumpit filed a complaint with the NHA which held the contract void for absence of judicial or notarial demand and instructed Palay Inc and Onstott to return to Dumpit all he has paid plus 12% interest from filing of complaint. Palay appealed to OP which affirmed the NHA resolution. I: W/N Onstott should be held solidarily liable with Palay Inc H: No. GRa corporation may not be made to answer for acts and liabilities of its stockholders or those of the legal entities to which it may be connected and vise-versa. Exceptionthe veil of corporate fiction may be pierced when: 1. it is used as a shield to further an end subversive of justice 2. it is used for purposes not intended by the law that created it 3. it is used to defeat public convenience, or: 4. justify a wrong 5. protect fraud 6. defend crime 7. perpetuate frad or confuse legitimate issues 8. circumvent the law or perpetuate deception 9. use as an alter-ego, adjunct or business conduit for the sole benefit of the stockholders the SC did not find any badges of fraud on the part of Palay and Onstott. They had literally and mistakenly relied on paragraph 6 of the contract when it rescinded the same, and which was held to be void by the NHA and OP. Onstott was made liable because he was then the President and appeared to be the controlling stockholder of Palay Inc. No proof was found that Onstott used the corporation to defraud Dumpit. Unless sufficient proof appears on record that an officer has used the corporation to defraud a third party, he cannot be made personally liable just because he appeared to be the major stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. JG Summit Holdings Inc v CA. The National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine

Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million for the capitalization of PHILSECO in the proportion of 60%-40% respectively. It also contains a proviso whereby neither party to the JVA shall sell transfer or assign all or any part of its interest in SNS to any third party without giving the other under the same terms the right of first refusal. NIDC transferred all its rights, title and interest in PHILSECO to the Philippine National Bank (PNB). Such interests were subsequently transferred to the National Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and possession of, conserve, manage and dispose of nonperforming assets of the National Government. Thereafter, on February 27, 1987, a trust agreement was entered into between the National Government and the APT wherein the latter was named the trustee of the National Government's share in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO increased to 97.41% thereby reducing KAWASAKI's shareholdings to 2.59%. In the interest of the national economy and the government, the COP and the APT deemed it best to sell the National Government's share in PHILSECO to private entities. After a series of negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be "exchanged" for the right to top by five percent (5%) the highest bid for the said shares. They further agreed that KAWASAKI would be entitled to name a company in which it was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) 1 would exercise its right to top. The Asset Specific Bidding Rules provide among others that the subject of the sale is the NG's 87.67% equity in PHILSECO, that the highest bid shall be subject to the final approval of the APT Board of Trustees and COP, and that the indicative price is P1.3B. At the public bidding, JG Summit submitted a bid of P2.03B with an acknowledgement of Kawasaki's right to top. JG Summit then informed APT that it was protesting the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the losing bidders thereby circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings. H: The SC upheld the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The agreement of co-shareholders to mutually grant this right to each other, by itself, does not constitute a violation of the

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provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO's equity. In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected but the capacity of the corporation to own land that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land. This is the clear import of the Constitution. Tramat Mercantile Inc v CA. On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. (Tramat), one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit. On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit. TC ordered Ong to pay the plaintiff the sum of P33,500.00 with legal interest thereon at the rate of 12% per annum from July 7, 1984 until fully paid. H: It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; 6 or 4. He is made, by a specific provision of law, to personally answer for his corporate action. In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases. Magsaysay-Labrador v CA. On February 9, 1979, Adelaida RodriguezMagsaysay, widow and special Administratrix of the estate of the late Senator Genaro Magsaysay, brought an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequea Island"; that after the death of her husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of Deeds of the title holders was effected without the approval of the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor. On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on June 20, 1978, their brother conveyed to them one-half (1/2) of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41% of the total outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of

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litigation and that they have a legal interest in the success of the suit with respect to SUBIC. On July 26, 1979, the TC denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders. The CA upheld the TC and further stated that whatever claims the petitioners have against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding, such that with the denial of the motion for intervention, they are not left without any remedy or judicial relief under existing law. H: Attempts by stockholders to intervene in suits against their corporations as in this present case were struck down by the SC. A party may intervene under remedial provisions if the stockholder has a legal interest in the matter in litigation; but stockholders right in corporate property is purely inchoate and will not entitle them to intervene in a litigation involving corporate property. A majority stockholders interest in the corporate property, if at all, is indirect, contingent, remote, conjectural, consequential, and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof upon dissolution, after payment of corporate debts and obligations. While a stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner with any legal right or title to any of the property, his interest in the corporation being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct person. Disregarding Corporate Entity/Piercing the Veil of Corporate Entity the privilege of being treated as an entity distinct and separate from the stockholders is confined to legitimate uses and is subject to equitable limitations to prevent its being exercised for fraudulent, unfair or illegal purposes in piercing cases, it is always important to consider that the aim is not to use the piercing doctrine as a ram to break down the ramparts of the main doctrine of separate juridical personality, but more properly for the ancillary piercing doctrine to act as a regulating valve by which to preserve the powerful engine that is the main doctrine of separate juridical personality the main effect of disregarding the corporate fiction is that stockholders will be held personally liable for the acts and contracts of the corporation whose existence, at least for the purpose of the particular situation involved, is ignored not to be confused with the de facto doctrine, where it may be presumed that the corporation is de jure or even de facto and therefore not subject to collateral attack

when the court disregards the corporate entity in a proper case, it is not denying corporate existence for all purposes, but merely refuses to allow the corporation to use the corporate property Piercing is to prevent fraud or a wrong, and not for any other purpose where no fraud or injustice would be prevented as to make directors and officers liable personally, doctrine does not apply Boyer-Roxas: piercing cannot be used or resorted to merely establish a right or interest, and the SC denied piercing when it was employed to justify under a theory of co-ownership the continued use and possession by SHs of corporate properties In all piercing cases, the effect has always been to make the active or intervening SH or officer liable for corporate debts and obligations

Classification of piercing cases:

(1)

To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay, Concept Builders) a. There must be a fraud or evil motive in the affected transaction; mere proof of control of the corporationby itselfwould not justify piercing b. Main action should seek for the enforcement of pecuniary claims c. Corporate entity was used in the perpetration of the fraud or in the justification of wrong or to escape personal liability as an ALTER EGO, business conduit of another person or entity, or mere farce to defeat public convenience (La Campana, Marvel, Liddell, Koppel, Indophil) a. use of corporation as an alter ego is in direct violation of the separate juridical entity doctrine b. by not respecting the separate personality, others who deal with the corporation are not also expected to be bound by the separate personality of the corporation, and may treat the interests of the controlling SH/officer/director and the corporation as the same c. piercing alter ego may prevail even when no pecuniary claims are sought to be enforced d. since only the medium by which the business enterprise is changed, then the veil may be pierced to allow the business creditors to recover from whoever has actual control necessary to achieve EQUITY or justice

(2)

(3)

Cases where veil was pierced: Marvel Bldg v David (corporate entity used to evade war profits taxes). On the strength of a report by a special committee in the DoF tasked to study the war

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profits tax case of Mrs Maria Castro, President of Marvel Building Corporation, who is allegedly the single owner of all the capital stock of the Corporation, the SoF recommended the collection of around P3.6 million as war profits tax due to the government and instructed the CIR to collect the same. The CIR then seized various properties of Marvel, including 3 properties (Wise Bldg, Aguinaldo Bldg, Dewey Mansion). Marvel sued CIR, and TC ruled ifo of Marvel, ordering the release of the seized properties and enjoined the auction of the same. CIR appeals. I: W/N Maria Castro the owner of all shares of stock of Marvel Building Corp and the other stockholders mere dummies. H: Yes. The following findings of the SC proved that Castro was the sole and exclusive owner and that the other persons name in the articles of incorporation are mere dummies: (1) Castro endorsed in blank the shares of stock in the name of the other incorporators and maintained it in her possession. Upon examination of the books the CIR discovered that 11 stock certificates endorsed in blank by the subscribers except that of Ms Castro. She admitted however, signing 25 certificates of stock, which indicates that 2 sets of certificates was prepared by the company bookkeeper Llamado, with out only the 11 mentioned were actually issued. (2) The dummy stockholders did not have incomes in such amounts in the certificates during the time of the organization of the corporation or after in order to enable them to pay in full for their subscriptions. It appears that all of the dummies have incomes which are insufficient to pay for the subscribed share of the stock. On the other hand, Maria Castro had been found to have made enormous profits in the business such that the taxes assessed amounted to more than P3 million. (3) The subscriptions were not receipted for and were deposited in the corporation name but kept in Castros possession (4) The stockholders or directors never appeared to have met to discuss the business of the corporation (5) Castro had advance large sums of money to the corporation without any accounting and that the books were kept as if they belonged to Castro alone (6) The supposed subscribers did not appear in court to support their claim, nor did they present any documentary evidence such as receipts and testify on the payments made on the subscriptions. Jacinto v CA. F: The case involves an appeal by Roberto Jacinto from the ruling of the CA affirming the ruling of the TC in finding him liable to pay the outstanding obligation to Metrobank as evidenced by trust receipts signed by Jacinto in behalf of Inland Industries. The TC said that [a]s to [the] liability of [the] defendant Roberto A. Jacinto, it would appear that he is in fact, the corporation itself known as Inland Industries, Inc. Aside from the fact that he is admittedly the President and General Manager of the corporation and a substantial stockholders (sic) thereof, it was defendant Roberto A. Jacinto who dealt entirely with the plaintiff in those transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even

mentioned that he did so in this official capacity. Roberto Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely and exclusively on Inland Industries, asserting that he cannot be held solidarily liable with Inland Industries because he just signed said instruments in his official capacity as president of Inland Industries, Inc. and it has a juridical personality distinct and separate from its officers and stockholders. Furthermore, a cursory perusal of the stipulation of facts clearly shows that Roberto Jacinto acted in his capacity as President and General Manager of Inland Industries, Inc. when he signed said trust receipts. The conflicting statements by Jacinto place in extreme doubt his credibility anent his alleged participation in said transactions and the CA was persuaded to agree with the findings of the lower court that the Jacinto was practically the corporation itself. Indeed, a painstaking examination of the records show that there is no clear-cut delimitation between the personality of Roberto Jacinto as an individual and the personality of Inland Industries, Inc. as a corporation. The circumstances aforestated led the CA to conclude that the corporate veil that en-shrouds defendant Inland Industries, Inc. could be validly pierced, and a host of cases decided by our High Court is supportive of this view. When the veil of corporate fiction is made as a shield to perpetuate fraud and or confuse legitimate issues, the same should be pierced. The CA ruled that Roberto Jacinto even admitted that he and his wife own 52% of the stocks of Inland Industries, and it cannot accept as true the assertion of Jacinto that he only acted in his official capacity as President and General Manager of Inland Industries, Inc. when he signed the aforesaid trust receipts. Jacintos ploy is just a clever ruse and a convenient ploy to thwart his personal liability therefor by taking refuge under the protective mantle of the separate corporate personality of Inland Industries. His appeal now faults the TC for piercing the veil of corporate fiction despite the absence of any allegation in the complaint questioning the separate identity and existence of Inland Industries, Inc. H: While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the examination of witnesses, unequivocably show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from petitioner. (It was held that the piercing doctrine may be applied by the courts even when the complaint does not seek its enforcement, so long as evidence is adduced during trial as the basis for its application can be had. In other words, there must be evidentiary basis for application of the piercing doctrine during trial on the merits.) Concept Builders v NLRC. Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila,

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is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers. On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner. H: SC summarized the probative factors considered when the corporate mask may be lifted and the corporate veil may be pierced, when a corporation is but the alter ego of a person or of another corporation: (1) stock ownership by one or common ownership corporations (2) identity of directors and officers (3) manner of keeping corporate books and records (4) methods of conducting the business. of both

The absence of any of these elements prevents the piercing doctrine. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation. In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Furthermore, the NLRC stated that: "Both information sheets were filed by the same Virgilio 0. Casio as the corporate Secretary of both corporations. It would also not be amiss to note that both corporations had the same president, the same board of directors, the same corporate officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the respondent (herein petitioner-) and the third-party claimant shared the same address an/or premises. Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of respondents." Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation. Claparols v CIR. Allied Workers Assoc, Garlitos and 10 workers filed a complaint for ULP against Claparols Steel and Nail Plant owned by Mr Eduardo Claparols. The Court of Industrial Relations found Mr Claparols guilty of union busting and ordered, among other things, the reinstatement of the complainants to their former or equivalent jobs with back wages and the examination of the company payrolls to compute the backwages due. The CIR Chief examiner submitted a report on the computation of the periods for the backwages: first computation covers the period Feb 1 1957- Oct 31 1964. The second is up to and including 7 Dec 1962, when the company stopped operations, and the third is only up to 30 June 1957 when the Claparols Steel and Nail Plant ceased to operate. This is based on the record that the Claparols Steel Corpestablished on 1 July 1957 and ceased operations in Dec 7 1962had succeeded the Claparols Steel and Nail Plant which ceased operations on 30 June 1957. Claparols opposed the ruling, contending that the computation of the backwages should only be limited to 3 months pursuant to the court ruling in Sta. Cecilia Sawmills v CIR. The workers claim that the Claparols Steel and Nail Plant and the Claparols Steel Corporation are one and the same corporation controlled by petitioner Claparols. The CIR approves the report of the CIR examiner concerning the computation, and Claparols appeals to the SC. H: It is very clear that the Claparols Corp which succeeded Claparols Steel and Nail is the continuation and successor of the first entity and its emergence was skillfully timed to avoid the financial liability that already attached to its

The Court held that the conditions under which the juridical entity may be disregarded very according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly there are some probative factors of identity that will justify the application of the piercing doctrine. The Court also applied the following tests in determining the applicability of the piercing doctrine:

(1) (2) (3)

control, not mere majority of complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked such control must have been used to commit fraud or wrong, to perpetuate the violation of statutory or other positive legal duty, or dishonest and unjust act in contravention of legal rights the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of

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predecessor, Claparols Steel and Nail. Both corporations were owned and controlled by Eduardo Claparols and there was no break in the succession and continuity of the same business. This avoiding-the-liability scheme is very patent, considering that 90% of the subscribed shares of Claparols Steel was owned by Eduardo Claparols himself, and all assets of the dissolved Claparols Steel and Nail were turned over to Claparols Steel Corp. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should be pierced as it was deliberately and maliciously designed to evade the financial obligation to its employees. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or in the case of two corporations, will merge them into one. Villa Rey Transit v Ferrer. Jose Villarama was an operator of a bus transportation under the business name of Villa Rey Transit, a single proprietorship. Two certificates of public convenience issued to Villarama authorized to operate 32 units in various routes or lines from Pangasinan to Manila, and vice-versa. In 1959, he sold the CPCs to Pantranco for P350K, under the proviso that Villarama shall not apply for any TPU service competing with or identical to Pantranco for 10 years from date of sale. 3 months later Villa Rey Transit Inc was organized and registered with the SEC, having a capital stock worth P500K (5000 shares at par P100), 200K of which was subscribed, of which Natividad (wife of Jose Villarama and Treasurer) has subscribed for P1000. Villa Rey Corp then bought 5 CPCs, 49 buses, and tools from Valentin Fernando for P249K. The two parties then applied to the Public Service Commission for a provisional permit to operate the transport service, which was granted. Before PSC could take final approval on the application, 2 of the 5 CPCs were levied in an execution issued by the TC ifo the creditor of Fernando, Eusebio Ferrer, who also was the winning bidder in the subsequent public sale. Ferrer then sold the 2 CPCs to Pantranco, and sought the approval of the sale with the PSC, with a prayer for provisional authority to operate the service. The PSC order that during the pendency of the application Pantranco shall be authorized to operate the service under the 2 CPCs. Villa Rey elevated the matter to the SC which ruled in its favor and allowed it operated provisionally instead of Pantranco. Villa Rey then filed an action to annul the sheriff sale of the 2 CPCs and the sale to Pantranco of the same, and to annul the orders of the PSC related to the sale. Ferrer and Pantranco averred that Villa Rey had no valid title to the CPCs because of a suspensive conditionthe approval of the PSChad not yet been fulfilled, and thus they had a superior right to the CPCs. Pantranco filed a 3 rd party suit against Jose Villarama, alleging that Villarama and Villa Rey are one and the same, and that both are disqualified from operating the 2 CPCs by virtue of the agreement between Villarama and Pantranco in the original sale of the CPCs. TC rules that Villa Rey Corp is a separate and distinct entity from Jose Villarama, and that the restriction clause is void, which thus makes the sheriffs sale void as well.

H: IT would appear that Villarama supplied the organization expenses and the assets of Villa Rey such as trucks and equipment, and that there was no actual payment by the original subscribers of the amounts of P95K and P100K as first and second installments of the paid-up capital. The finances of the corporation was manipulated and disbursed by Jose as they were his private funds, in such a way that he appeared to be the actual owner-treasurer and not the wife. The initial cash capitalization of P105K was also mostly financed by Jose V, mostly covered by the check iao P85K drawn by Jose. It was also made to appear, as testified by the accountant, that the P95K second installment of the paid-up capital was delivered to Jose in payment of the equipment purchased and that the P100K first installment were loaned as advances to stockholders, when in fact the only money of the corporation was the P105K, which was Joses money. Villarama made use of the money of the corporation and deposited it to his private accounts, and the corporation paid for his expenses. He admitted that he mingled corporate with his personal funds. All these are strong evidence that Villarama had been much too involved in the affairs of Villa Rey and show that Villa Rey is his alter ego. Thus the restrictive clause in the contract of sale of CPCs worth P350K is also binding on the Villa Rey Corp as it is on Jose. The fiction of legal entity is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or a crime, the veil with which the law covers and isolates the corporation from its members or stockholders who compose it will be lifted to allow for its consideration merely as a aggregation of individuals. The Court pierced the veil to enforce a non-competition clause entered into by its controlling stockholder in his personal capacity. Liddel v CIR (corporate entity was used to evade the payment of higher taxes). Liddell & Co was engaged in importing and retailing cars and trucks. Frank Liddell owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing for Liddell & Co. Franks wife owned almost all of that corporations stocks. Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR considered the sales by Liddell Motors to the public as the basis for the original sales tax. H: The Court, agreeing with the CIR, held that Frank Liddell owned both corporations as his wife could not have had the money to pay her subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven facts alone, Liddel Motors was the medium created by Liddel & Co to reduce its tax liability. A taxpayer has the legal right to decrease, by means which the law permits, the amount of what otherwise would be his taxes or altogether avoid them; but a dummy corporation serving no business purposes other than as a blind, will be disregarded. A taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in the proper cases may disregard the separate corporate entity where it serves but as a shield for tax

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evasion and treat the person who actually may take the benefits of the transaction as the person accordingly taxable. Mere ownership by a single stockholder or by another corporation of all or nearly all capital stocks of the corporation is not by itself a sufficient ground for disregarding the separate corporate personality. Substantial ownership in the capital stock of a corporation entitling the shareholder a significant vote in the corporate affairs allows them no standing or claims pertaining to corporate affairs. Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction may be ignored. Substantial ownership in the capital stock of a corporation entitling the SH to a significant vote in corporate affairs allows then no standing or claims pertaining to corporate affairs. Mere ownership by a single SH or by another corporation of all or nearly all capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality La Campana Coffee Factory v Kaisahan. Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of coffee and the other in starch. Both corporations had one office, one management, and one payroll, and the laborers of both corporations were interchangeable. The 60 members of the labor association in the coffee and starch factories demanded higher wages addressed to La Campania Starch and Coffee Factory. La Campania Coffee sought dismissal on the ground that the starch and coffee factory are two distinct juridical persons. I: W/N the Court of Industrial Relations had jurisdiction over the case H: the Court disregarded the fiction of corporate existence and treated the two companies as one. In alter ego cases, no pecuniary claim need be involved to allow the courts to apply the piercing doctrine. Cases where veil was NOT pierced: IndoPhil Textile Mill Workers Union v Calica. Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor organization and the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is impleaded in his official capacity as the Voluntary Arbitrator of the National Conciliation and Mediation Board of the Department of Labor and Employment, while private respondent Indophil Textile Mills, Inc. is a corporation engaged in the manufacture, sale and export of yarns of various counts and kinds and of materials of kindred character and has its plants at Barrio Lambakin, Marilao, Bulacan. In April, 1987, Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil Textile Mills, Inc. executed a collective bargaining agreement effective from April 1, 1987 to March 31, 1990. On November 3, 1987, Indophil Acrylic Manufacturing Corporation was formed and registered with the Securities and Exchange Commission. Subsequently, Acrylic applied for

registration with the Board of Investments for incentives under the 1987 Omnibus Investments Code. The application was approved on a preferred nonpioneer status. In 1988, Acrylic became operational and hired workers according to its own criteria and standards. Sometime in July, 1989, the workers of Acrylic unionized and a duly certified collective bargaining agreement was executed. In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA. In other words, it is the Union's contention that Acrylic is part of the Indophil bargaining unit. Indophil Union's contention was opposed by private respondent which submits that it is a juridical entity separate and distinct from Acrylic. The existing impasse led the petitioner and private respondent to enter into a submission agreement on September 6, 1990. The parties jointly requested the public respondent to act as voluntary arbitrator in the resolution of the pending labor dispute pertaining to the proper interpretation of the CBA provision. The Voluntary Arbitrator rendered its award, ruling that the proper interpretation and application of Sec. 1, (c), Art. I of the 1987 CBA does not extend to the employees of Acrylic as an extension or expansion of Indophil Textile Mills, Inc. I: Whether or not the operations in Indophil Acrylic Corporation are an extension or expansion of private respondent Company H: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders or the corporation will be considered as the corporation, that is liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. I n the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.

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Although it was shown that the two corporations businesses are related, that some of the employees of the two corps are interchanged, and that the physical plants, offices, and facilities, are situated in the same compound, were not considered sufficient bases to pierce the veil in order to treat the two corporations as one bargaining unit. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Secosa et al v Heirs of Erwin Suarez Franscisco. On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc. Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision. Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and Dassads president, El Buenasucenso Sy. H: It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or members. It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporations authority to act and its liability for its actions are separate and apart from the individuals who own it. The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be

disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. The records of this case are bereft of any evidence tending to show the presence of any grounds enumerated above that will justify the piercing of the veil of corporate fiction such as to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it. The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these things, when taken collectively, point toward El Buenasenso Sys exclusion from liability for damages arising from the death of Erwin Francisco. Yu v NLRC. Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery, Inc. (TDI). 22 employees of TDI, including private respondents employees, received a memorandum from TDI terminating their services, for reason of retrenchment, effective 30 days from receipt thereof or not later than the close of business hours on April 28, 1988. On April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary restraining order against their retrenchment. The labor arbiter issued the restraining order the following day. However, due to the 20-day lifetime of the temporary restraining order, and because of the on-going negotiations for the sale of TDI to the First Pacific Metro Corporation, the retrenchment pushed through. The instant petition involves only the 4 individual respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos. On June 1, 1988, or after respondents-employees had ceased as such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the business name Tanduay Distillers. The employees filed a motion to implead herein petitioners James Yu and Wilson Young, doing business under the name and style of Tanduay Distillers, as party respondents in said cases. Petitioners filed an opposition thereto, asserting that they are representatives of Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that there is no employer-employee relationship between Tanduay Distillers and private respondents. Respondentsemployees filed a reply to the opposition stating that petitioner of TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a probation basis. H: The order of execution and the writ of execution ordering petitioners and Tanduay Distillers to reinstate private respondents employees are, therefore, null and void. Neither may be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems to be the impression of respondents when

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they impleaded petitioners as party respondents in their complaint for unfair labor practice, illegal lay off, and separation benefits. Such a stance is not supported by the facts. The name of the company for whom the petitioners are working is Twin Ace Holdings Corporation. As stated by the Solicitor General, Twin Ace is part of the Allied Bank Group although it conducts the rum business under the name of Tanduay Distillers. The use of a similar sounding or almost identical name is an obvious device to capitalize on the goodwill which Tanduay Rum has built over the years. Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other, are distinct and separate corporations. There is nothing to suggest that the owners of DTI, have any common relationship as to identify it with Allied Bank Group which runs Tanduay Distillers. We hold that the director of Labor relations acted with grave abuse of discretion in treating the two companies as a single bargaining unit. That ruling is arbitrary and untenable because the two companies are indubitably distinct with separate juridical personalities. The fact that their businesses are related and that the 236 employees of Georgia Pacific International Corporation were originally employees of Lianga Bay Logging Co., Inc. is not a justification for disregarding their separate personalities. Hence, the 236 employees, who are now attached to Georgia Pacific International Corporation, should not be allowed to vote in the certification election at the Lianga Bay Logging Co. ,Inc. They should vote at a separate certification election to determine the collective bargaining representative of the employees of Georgia Pacific International Corporation. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related (Palay, Inc vs. Clave) The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent interested buyer. At the time when termination notices were sent to its employees, TDI was negotiating with the First Pacific Metro Corporations for the sale of its assets. Only after First Pacific gave up its efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the picture. Respondents-employees have not presented any proof as to communality of ownership and management to support their contention that the two companies are one firm or closely related. The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers Union vs. Calica) To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed.

The complaint for unfair labor practice, illegal lay off, and separation benefits was filed against TDI. Only later when the manufacture and sale of Tanduay products was taken over by Twin Ace or Tanduay Distillers were James Yu and Wilson young impleaded. The corporation itself Twin Ace or Tanduay Distillers was never made a party to the case. Another factor to consider is that TDI as a corporation or its shares of stock were not purchased by Twin Ace. The buyer limited itself to purchasing most of the assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay Distillers did not take over the corporate personality of TDI although they manufacture the same product at the same plant with the same equipment and machinery. Obviously, the trade name "Tanduay" went with the sale because the new firm does business as Tanduay Distillers and its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate corporation. In point of fact TDI is now herein a party respondent represented by its own counsel. Significantly, TDI in the petition at hand has taken the side of its former employees and argues against Tanduay Distillers. In its memorandum filed on January 9, 1995, TDI argues that it was not alone its liability which the arbiter recognized "but also of James Yu and Wilson Young, representatives of Twin Ace and/or the Allied Bank Group doing business under the name 'TANDUAY DISTILLERS,' to whom the business and assets of DTI were sold." If DTI and Tanduay Distillers are one and the same group or one is a continuation of the other, the two would not be fighting each other in this case. TDI would not argue strongly "that the petition for certiorari filed by James Yu and Wilson Young be dismissed for lack for merit." It is thus obvious that the second corporation, Twin Ace or Tanduay Distillers, is an entity separate and distinct, from the first corporation, TDI. The circumstances of this case are different from the earlier decisions of the Court in Labor cases where the veil of corporate fiction was pierced. In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM), (93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both business. The laborers of the gaugau factory and the coffee factory were also interchangeable, the workers in one factory worked also in the other factory. In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the Claparols Steel and Nail Plant, which was ordered to pay its workers backwages, ceased operations on June 30, 1956 and was succeeded on the very next day, July 1, 1957, by the Clarapols Steel Corporation. Both corporations were substantially owned and controlled by the same person and there was no break

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or cessation in operations. Moreover, all the assets of the steel and nail plant were transferred to the new corporation. In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be disregarded and brushed aside, there being not the least indication that the second corporation is a dummy or serves as a client of the first corporate entity. In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities, the order for Tanduay Distillers (and petitioners) to reinstate respondents-employees is obviously without legal and factual basis. Yu: when a transferee purchases only the assets of the transferor, the transferee cannot be held liable for the labor claims and obligation for reinstatement adjudged against the transferor there must be continuity of the identity of the owners in the business; the doctrine of business-enterprise transfer as to make the transferee liable for the business obligations of the transferor is really a species of piercing doctrine and would require a certain degree of continuity of the same business by the same owners using the corporate fiction as a shield

legal entity to which it may be related. The notion of corporate entity will be pierced or disregarded and the corporation will be treated as an association of persons or where there are two corporations, they will be merged into one, the one being merely regarded as part or instrumentality of the other. The business of the corporation in question is largely the personal venture of Forrest. The children were neither subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated solely from Forrests gratuitous dole out of his own shares to the benefit of his children. Delpher Trade v CA. Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which they leased to Construction Components. The lease contract had a right of first refusal provision ifo the lessee. CCI then assigned its rights to Hydro Pipes, which included the RFR, with the consent of the Pachecos. The Pachecos then executed a deed of exchange of the property with Delpher Trades Corp for 2,500 shares, or a total value of P1,500,000. Delpher is a family corporation organized by the children of the Pachecos in order to perpetuate their control over the property and avoid taxes. The transfer of shares in exchange for the land are equivalent to a 55% majority stake in Delpher, with the remaining 45% also in the hands of the Pacheco family (they call it estate planning). Hydro argues that Delpher is a corporate entity separate from the Pachecos and is not their alter ego or business conduit, and that the transfer was in the nature of a sale which prejudiced their RFR and supports their claim to exercise the right under the terms granted to Delpher. Delpher claims there was no transfer of ownership in the nature of a sale prejudicing the RFR of Hydro, because the corporation is a mere alter ego or conduit of the Pachecos, hence Delpher and Pachecos should be deemed one and the same. Thus there was no sale and that the Pachecos merely exchanged the land for shares of stock in their own corporation. Hydro sues for reconveyance exercising its RFR under the same terms of the transfer to Delpher. TC rules ifo Hydro, and the CA affirms. I: W/N the DoE made by the Pachecos ifo Delpher was meant to be a contract of sale thus prejudicing Hydros RFR over the property. H: No. The DoE between Pachecos and Delpher cannot be considered a contract of sale. There was no transfer of actual ownership. The Pacheco family merely changed their ownership from one form to another, and it remained in the same hands. After incorporation, one becomes a stockholder by subscription or purchasing stock directly from the corporation or from the individual owners thereof. In this case, the Pachecos became owners of the corporation by subscription, which is an agreement to take and pay for original unissued shares of a corporation formed or to be formed. It is significant in this case that the Pachecos took no par value shares in exchange for the properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of shares of the issuing corporation. The capital stock of a corporation issuing only no-par shares is not set forth by a stated amount of money, but is expressed to be divided into a stated number of shares. This indicates that a shareholder of say 100 shares is an aliquot sharer in the assets of the corporation, no matter what the value of the shares are. By ownership of 2500

Cease v CA. Forrest Cease and 5 other kanos organized the Tiaong Milling and Plantation Company. The original incorporators were then bought out by Forrest and his children (Ernest, Cecilia, Teresita, Benjamin, and Florence). The charter of the company then lapsed without any effort to liquidate it; but when Forrest died the company was partitioned extrajudicially among his children. Benjamin and Florence desired an actual division, but Ernest, Cecilia, and Teresita preferred reincorporation. The latter group of siblings then proceeded to incorporate themselves into the FL Cease Plantation Company and registered with the SEC, while Benjamin and Florence commenced proceedings for the settlement of the estate of Forrest and filed a action to declare the Tiaong Corp to be identical with the FL Cease Corp and its properties divided among the children. The Board of Liquidators of Tiaong Milling then assigned and transferred the properties of the corp to FL Cease as trustee. TC ruled that the Tiaong Corp is also part of the estate of Forrest and should be divided share and share alike to all children, cancelled the conveyance ifo FL Cease and removed the latter as trustee and ordered it to deliver to the appointed receiver all its properties. Ernesto et al contend that no evidence has been found to support the conclusion that the properties of Tiaong Milling are also properties of the estate of Forrest Cease. H: In sustaining the theory that the estate of Forrest and Tiaong Milling are merged as one personality and that the company is only the business conduit and alter ego of Forrest, the TC correctly ruled that the company developed into a close family corporation, with the Board and stockholders belonging to one family, the head of which was Forrest who always retained the majority stocks and thus control and management of its affairs. Generally, a corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other

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shares, the Pachecos have control over Delpher, which makes it a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher to take control of the properties and save on inheritance taxes. The records do no point to anything objectionable about this estate planning scheme. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or avoid them cannot be doubted. As they are still the owners, Hydro has no basis for its claim of RFR under the lease contract. Parent-Subsidiary Relationship The general principles outlined in the preceding section apply to parentsubsidiary corporations Taken alone, mere fact of ownership by the mother of all or substantially all the stocks of another corporation is not sufficient to justify their being treated as on entity If used to perform legitimate functions, the subsidiarys existence may be respected, and liability will be confined to that which arises from their respective businesses The courts however, in the exercise of its equity jurisdiction, will step in to prevent abuses and pierce the veil Liddell: mere fact that one or more corporations are owned and controlled by a single SH is not of itself sufficient ground for piercing, but in Koppel: control of shareholdings of the corporation necessarily means by itself control of the operations of the corporation! Although ownership of the controlling capital stock of the corporation by itself would not authorize piercing, however, when existing together with other factors, the courts have given much weight to such control feature to pierce

Southern, countered with the ff facts in support of its contention that it is not the parent of Lenoir: Management of Lenoir is vested in its manager, Henry Marius, who is in the payroll of Lenoir and has no other connection with Southern except holding and proxy voting for Southern Marius establishes the pricing of Lenoir products and all Lenoir sales are the result of his business judgment Lenoir does not sell to Southern exclusively, and Southern does not buy from Lenoir exclusively or substantially, and that it buys from Lenoir just as it buys from other sellers Lenoirs corporate and accounting offices are in Washington DC in a building owned by Southern; but it is still based in Tennessee Lenoir is a specialty business and Southern has not in any way been in a position to direct or supervise the operations of Lenoir Lenoir is a duly qualified employer under the Tennessee Workmens Compensation Act and suits and claims similar to Garretts have been covered by that law Lenoir maintains a separate bank account and has never intermingled its funds with Southern Lenoir and Southern keep separate books and pay their own taxes Lenoirs general accounting and legal is handled by its own departments in Lenoir City H: The Court finds the existence of two distinct companies. There is no evidence that Southern dictated the management of Lenoir. In fact, Marius the manager was in full control of its operations. He established prices, handled all negotiations in CBAs. It paid local taxes, had local legal counsel, maintained Workmens Compensation. Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions and pricing remained in the hands of Marius and was not dictated by Southern. Marius operated the business as a going concern. The facts do not reveal the intimacy and inseparability of control which would lead one to believe that Southern and Lenoir are one and the same. It was also not an agent of Southern because it was not a common carrier by railroad to make it liable under the Federal Act. It was not an operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and Garrett was one of its employees. There are certain circumstances which if present in the proper combination, would render the subsidiary an instrumentality: (1) parent owns all or most of the capital stock (2) parent and subsidiary have common directors or officers (3) parent finances the subsidiary (4) parent subscribes to all capital stock of the subsidiary or causes its incorporation (5) subsidiary has grossly inadequate capital

Garnett v Southern Railway. Garrett is a wheel molder employed by Lenoir Car Works who claims and sues for Workmens Compensation under the Federal Employers Liability Act because of injuries contracted from silica dust which permeated the foundry. He contends that since Southern Railway acquired the entire capital stock of Lenoir and so completely dominated it that it was merely an instrumentality or subsidiary of Southern, he is considered an employee of Southern and thus entitled under the Act mentioned for recovery. He cites the ff facts: All directors and officers of Lenoir are employees of southern Southern owns all stock of Lenoir except 5 shares All profits of Lenoir went to Southern Claims of Lenoir employees for accidents are handled by Southern Litigation against Lenoir is handled by Southern General accounting of Lenoir is handled by Southern Lenoir sold to Southern $30M of its products compared to $4.5M to other buyers

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(6) parent pays salaries and other expenses or losses of subsidiary (7) subsidiary has substantially no business except with the parent or no assets except those conveyed to the parent (8) the subsidiary is described as a department in the books of the parent (9) parent uses the property of the subsidiary (10) directors of the subsidiary do not act independently but take orders from the parent (11) formal legal requirements of the subsidiary are not met Since only two of the 11 indicia occurthe ownership of most of capital stock and subscription by Southern to capital stock of LenoirLenoir is not a subsidiary and is a separate corporation. Thus there is no basis for the claim of Garrett with Southern under the Federal Act Jardine Davies Inc v JRB Realty Inc. In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondent's Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal air conditioning equipment with a net total selling price of P99,586.00. Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When the units with rotary compressors were installed, they could not deliver the desired cooling temperature. Despite several adjustments and corrective measures, the respondent conceded that Fedders Air Conditioning USA's technology for rotary compressors for big capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981, Aircon stated that it would be replacing the units currently installed with new ones using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date when delivery could be effected. TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads, that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.

The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded that: at the time it contracted with Aircon on March 13, 1980 and on the date the revised agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead of its March 13, 1980 contract with plaintiff as well as the Aircon's letterhead of Jardine's Director and Senior Vice-President A.G. Morrison and Aircon's President in his March 26, 1981 letter to plaintiff confirming the revised agreement. Aircon's newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 also show that defendant Jardine publicly represented Aircon to be its subsidiary. Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardine's December 31, 1986 and 1985 Financial Statements that "The company acts as general manager of its subsidiaries". Jardine's Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning 94.35% of Aircon. Also, Aircon's reportorial General Information Sheet as of April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon and that out of seven members of the Board of Directors of Aircon, four (4) are also of Jardine. Jardine's witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" and that Jardine nominated, elected, and appointed the controlling majority of the Board of Directors and the highest officers of Aircon. H: It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale behind piercing a corporation's identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon's corporate legal existence can just be disregarded. The Court categorically held in another case that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to

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perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon's majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner. In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments and corrective measures. Koppel v Yatco (the subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alter ego of the parent and was used to evade taxes). Koppel Industrial and Car Company is a corporation organized and existing under the laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils however quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits realized or its share of the losses on the transactions. Koppel also returned a sum allotted as payment of commercial brokers tax of 4%. Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchants sales tax of 1 % of the share of Koppel Phils in the profits. H: The Court said that the virtual control of the shareholdings of a corporation would lead to certain legal conclusions. It could not overlook the fact that in the practical working of corporate organizations of the class to which the two entities belonged, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the board of directors but more often than not, also the action of that board. It held that applying this to the case, it cannot be conceived how the Koppel Phils could effectively go against the policies, decisions, and desires of the American corporation Neither can it be conceived how the Phil corporation could avoid following the directions of the American corporation in every other transaction where they had both to intervene, in view of the fact that the

American corporation held 99.5% of the capital stock of the Phil corporation In so far as the sales are concerned, Koppel Phils and Koppel Industrial are for all intents and purposes one and the same, and the former is a mere branch, subsidiary, or agency of the latter. The ff are facts which led to the Court to conclude the above: share in the profits of Koppel Phils was left to the sole, unbridled control of Koppel Industrial shares of stock of Koppel Phils are all owned by Koppel Industrial (overwhelming majority) Koppel Phils acted as agent and representative of Koppel Industrial Koppel Phils alone bore the incidental expenses for transactions, such as cable expenses Koppel Phils was fully empowered to instruct banks it deals with, if purchasers were not able to pay the bank drafts to the bank as payment for the purchases Koppel Phils makes good any deficiencies by deliveries from its own stock The application of the piercing doctrine is not a contravention of the principle that the corporate personality of a corporation cannot be collaterally attacked. When the piercing doctrine is applied against a corporation in a particular case, the court does not deny legal personality for any and all purposes. The application of the piercing doctrine is therefore within the ambit of the principle of res judicata that binds only the parties to the case and only to the matters actually resolved therein.

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GR: separate personality Exception: cases where veil may be pierced There was a violation of rights or injury in all these cases where veil was pierced Elements of ownership, control, mgt in the corporate entity Inevitable that these will exist All elements have to be satisfied so the corporate veil can be pierced What determines pierceability? Motive/intention Liability arising Injury or damage or loss Estate planning: No impediment to use corporate as vehicle for estate planning Corporation can be put up by a single person Nothing prevents an individual from funding a corporation To meet requirements of code, assign nominal shares to persons If it is money, can be used to acquire assets; still corporate-owned Even a 99.9% owner cannot distribute the property, only the shares Cease: ideal, but there was a dispute Marvel had no compulsory heirs Delpher ruling on transfer is obiter Just defer: use corporate as a vehicle to distribute what appears to be the estate But: you still have to distribute the shares (dispose or donate) Mechanism to ensure that once you die, corporation is dissolved Otherwise: Cease case Exit mechanism for those who want out

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Chapter V Promoters Contracts

Promoter: a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor Promoters contracts refer to contracts entered into with the parties knowing fully well that a corporation does not yet legally exist GR: promoters contracts are not necessarily binding on the corporation once formed Exception: When the corporation received benefits from the contract at the time of its constitution

Types: A pre-incorporation subscription contract is a special contract, and a type of promoters contract, and although these are contracts between the subscriber and the corporation, they are at the same time deemed to be contracts among the SHs of the corporation Contracts entered into in the name of the intended corporation by the promoters or organizers of the corporation Liability of corporation for promoters contracts. Promoters contracts are entered into prior to the corporations existence, and the question that oftentimes comes up after its incorporation is the liability of the corporation on these contracts. 60: any contract for the acquisition of unissued stock in an existing corporation or one still to be formed shall be deemed a subscription even if the parties say otherwise 61: GR: subscription for shares in a corporation still to be formed shall be irrevocable for at least 6 mos from date of subscription exceptions: all other subscribers consent to the revocation incorporation fails to materialize within 6 mos or within a longer period as stated in the subscription contract before submission of the AOI pre-incorporation agreement is a type of promoters contract The corporation may make these contracts its own and may become bound on such contracts if after incorporation, it adopts or ratifies the same or accepts the benefits with knowledge of the terms. Adoption need not be express and may even be implied by the acts of its officers. Contract must also be one within the powers of the corporation to enter (Builders Duntile case) Upon adoption or ratification, the corporation becomes liable

McArthur v Times Printing. CA Nimocks and others were engaged as promoters in procuring the organization of the Times Printing Company. Nimocks, in behalf of the contemplated company, entered into a contract with McArthur for the latters services as advertising solicitor for the period of 1 year from 1 Octthe date when the company was to be formed. Times commenced operations on 1 Oct, but had only formed on 16 Oct. McArthur began performing his duties on 1 Oct, continuing in his work until discharged the ff April. The corporation (officers, stockholders, directors) knew of the contract but never took any formal action thereto; neither did they object to or repudiate the same, but kept McArthur in its employ. H: Where a contract is made in behalf of and for the benefit of a proposed corporation, the corporation after is organization cannot become a party to the contract either by adoption or ratification. While a corporation is not bound by engagements made in its behalf by promoters before its organization, it may thereafter make such engagements its own contracts, through formal action of the board. It is not necessary that such adoption or acceptance be expressed, but it may even be inferred from acts or acquiescence on the part of the corporation or by its own agents. The right of agents to adopt an agreement originally made by the promoters depends on the purposes of the corporation and the nature of the agreement. Times also claims that the promoters contract violates the SoF, because by its terms it is not to be performed within one year from making thereof. SC ruled that it cannot be a ratification because at the time of the making of the promoters contract between Nimocks and McArthur, there was no corporation yet, and it could not have ratified it if it were not a party thereto. There cannot be in law, a ratification of a contract which could not have been made binding on the ratifier at the time it was made, because the ratifier was not yet in existence. It is adopted by the corporation as its own as of the date of adoption and not as of the date of the making. Cagayan Fishing v Sandiko. Tabora owned 4 parcels of land in Aparri. He sold the 4 parcels to the Cagayan Fishing Development Company, (of which he is a promoter) then under the process of incorporation, for one peso, subject to the REM ifo PNB, and under the condition that title shall not pass until Cagayan pays Taboras debt to PNB. Cagayan Fishing was then formed, and the Board adopted a resolution authorizing the president to sell the lands to Sandiko for P42000. Cagayan executed a deed of sale transferring and ceding all rights titles and interests to the land to Sandiko. Sandiko failed to make good on the PN. Cagayan Fishing sues Sandiko. TC dismisses suit on the ground that the deed of sale is void. H: Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was not even a de facto corp at the time, thus not being in legal existence it does not yet possess juridical capacity to enter into contracts. The Tabora contract was entered into not only between him and a non-existent corporation, but between him as owner and the same Tabora, his wife and others, as mere promoters of the corporation. They could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. The

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SC refused to extend the doctrine of ratification which would result in the commission of injustice or fraud to third parties. Tabora owned a majority of the shares subscribed and paid. Tabor was also one of the directors, and title remained under Taboras name. Sandiko the buyer dealt with Tabora directly and considered him as the owner. Even PNB treated Tabora as the owner, not the corporation. Thus Cagayan Fishing never really purchased the lands, and thus it did not have the right to dispose by sale to Sandiko. There are circumstances where the acts of promoters may be ratified by the corporation, but in Cagayan the SC declined to extend the doctrine of ratification which would result in the commission of injustice or fraud, because the object of the contracts were treated as personal assets and not corporate assets Ratification is the key element in upholding the validity and enforceability of promoters contracts

or is authorized to make. In this case it was clear that the contract was made by Samuels in behalf of the projected corporation, and after it was formed, the incorporators took over the whole thing and ratified all that had been done in its behalf. To deny the corporation the right to sue for damages for breach of contract and the loss it sustained by reason of the first agents negligence and improper acts would be to deny it all remedy for the breach of contract, for Samuels did not make the contract for himself, and he personally did not sustain any damages. It was the corporation that sustained the damages resulting from the breach. The corporation was the real party in interest, and brought suit in its own name. The contract, though made in the name of Samuels was, as all parties knew, made in his name for the benefit of the corporation to be organized. He was one of the promoters but had no intention of buying it for himself. Though there was no formal assignment of the contract to the corporation, its action to bring suit were an adoption of the contract. Rizal Light v PSC and Morong Electric. Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of respondent Public Service Commission cancelling and revoking the certificate of public convenience and necessity and forfeiting the franchise of Rizal, and (2) to review and set aside the decision of the Commission granting a certificate of public convenience and necessity to respondent Morong Electric Co., Inc to operate an electric light, heat and power service in the municipality of Morong, Rizal. Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. The Commission, in its decision dated March 13, 1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. The Commission found that Morong Electric is a corporation duly organized and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality. H: The bulk of petitioner's arguments assailing the personality of Morong Electric

Corporate rights under promoters contracts If the other party fails to perform under the pre-incorporation contract, the corporation which adopts or ratifies it may sue for specific performance or damages for breach of contract Bringing an action to enforce the contract has been held to be sufficient adoption or ratification

Builders Duntile v Dunn. WE Dunn Company manufactures machinery for making duntile, a hollow building tile. Samuels told Gaston the agent of Dunn that he was organizing a company to manufacture the duntiles. Samuels preferred to organize the corporation and then make the contract for the machinery. Gaston wanted to make the contract first, then form the corporation after. Samuels then made the contract ordering the machinery from WE Dunn, which also provided for the free services of an experienced serviceman (Aaron) for 5 years to insure proper installation. WE Dunn accepted the contract, and the machinery was shipped to Samuels. Aaron the serviceman began setting up the machinery. Meantime, the articles of the Builders Duntile (Samuels company) was filed. Operations for the manufacture of the duntiles then started. It turns out that the duntiles made were so inferior in quality and practically value-less for building purposes, because the machinery had been installed improperly by Aaron the service guy, and had even used the wrong formula for the mixing. Builders (not Samuels) sues WE Dunn Co. to recover on the contract made before the corporation formed. I: Can a corporation enforce or sue upon a contract made by its promoters in its behalf and before its incorporation? H: the case turns on the right of a corporation to sue upon a contract made in its behalf by one of its promoters before it was organized. A corporation has the power to adopt a contract of its promoters, and one of the effects of this adoption is that the contract becomes that of the corporation. But the power to adopt must only be limited to such contracts as the corporation itself can make

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dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be considered as de facto corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized. While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. An ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions. The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also cured the

deficiency pointed out by the petitioner in the application of Morong EIectric. Thus, the Commission did not err in denying petitioner's motion to dismiss said application and in proceeding to hear the same. The efficacy of the franchise, however, arose only upon its approval by the Commission on March 13, 1963. The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko, where it was held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized. Although a franchise may be treated as a contract, the eventual incorporation after the grant of the franchise and its acceptance thereof, as well as the efforts made to prosecute the application not only perfected a contract but cured the deficiency Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or accept a contract made by promoters in behalf of the corporation before its incorporation

Personal liability of promoter on pre-incorporate contracts. 3 possible situations between the promoter and the other party to a preincorporation contract: 1. promoter makes a continuing offer in behalf of corp. If accepted, contract perfected a. promoter no personal liability 2. promoter makes contract binding himself. If accepted or adopted, he is relieved of liability 3. promoter binds himself personally, but seeks reimbursement from corporation. GR: promoter is personally liable for contracts made by him in behalf of the proposed corporation. Exception: express or implied agreement to the contrary Adoption or ratification of the contract does not release him from responsibility, unless a novation was intended. Quaker Hill v Parr. Parr et al while in the course of negotiations with Quaker Hill Inc, a NY corporation, for the former to purchase nursery stock, undertook to organize a separate corporation to be known as the Denver Memorial Nursery Inc. 2 orders for nursery stock were signed by Parr in behalf of Denver Memorial

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which to the knowledge of Quaker was not yet formed. The nursery stock was then delivered to Parr and was planted with the help of Quaker. A substitute order was then made, with the name Mountain View Nurseries instead of Denver Memorial, which never actually came into being. Because of name confusion, it was subsequently called Mountain View Nurseries. Its articles were filed but the companies never functioned as going concerns. After Mountain View was formed, a new note and contract was submitted to Parr et al, containing the name Mountain View as contracting party. Quaker then referred to the company as Mountain View. Mountain View became financially troubled, and Quaker sues Parr et al on the ground that the corporation was not yet formed at the time the sales contract was made and that Parr et al as promoters should be personally liable. H: GRpromoters are personally liable on their contracts, though made in behalf of a corporation to be formed. Exceptionif the contract is made in behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment. In this case, Quaker was well aware that the corporation was not yet formed and even urged that the contract be made in the name of the to-be formed corporation. The entire transaction contemplated the corporation as the contracting party. Thus personal liability does not attach. There was clearly an intent on the part of Quaker to contract with the corporation and not with the promoters. Compensation of promoters. Promoters take so much risk in forming a corporation not only because of the possibility of sharing in the corporate earnings as future SHs, but also the expectancy of compensation for their services GR: the corporation is NOT liable to pay such compensation because this would be an imposition on innocent investors Exception: corporation may become liable after it is formed if: o it expressly promises to do so o it takes/receives the benefits of services rendered by the promoter partly performed before and after incorporation note: Corpo Code silent on compensation of promoters o but Securities Act authorizes a promotion fee (cf Villanueva on updates) o may be in cash or shares. If shares, fair value of services=par or issued value of shares

Old Dominion Copper Mining and Smelting Co v Bigelow. Action to recover secret profits made by Bigelow and Lewisohn, promoters of the Old Dominion Copper. Bigelow and Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000, then sell to the corporation for $3,250,000 their property worth $1M but having a market value of not over $2M, and then sale to the general public at par for cash of the remaining $500,000 of stock, and all this without providing Old Dominion with any independent board of officers while making a huge secret profit. The court has decided that such a transaction creates a liability on the part of the promoters to account for the secret profits to Old Dominion. The corporation seeks to recover a secret profit made by the promoters in the sale of their own property to the corporation, basing its claim on the general rule that a promoter cannot lawfully take a secret profit and will be held to account for it if he does. Fundamentally the action is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries to the company. A promoter includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter and to establish it as fully able to do its business. It is now established without exception that a promoter stands in a fiduciary relation to the corporation which he is interested in, and that he is charged with all the duties of GF which attach to other trusts. I: W/N the rule that a promoter is in a fiduciary capacity with respect to the corporation he helped in forming is applicable in this case, and w/n the corporation is in a position to assert his claim for secret profits. I: W/N the promoters, who owned all of the issued stock at the time of incorporation, with the intention to immediately issue the same to the public without disclosure, would be liable to the corporation if a substantial portion of the stock remains unissued, and w/n a vote of ratification of this breach would exonerate them. H: Notwithstanding this fiduciary relation, the promoter may sell property to the company which he is promoting. In order that the contract may be absolutely binding, the promoter must pursue one of 4 courses of action: (1) provide an independent board of officers and make a full disclosure to the corporation through the board; (2) make a full disclosure of all material facts to each original subscriber of shares (3) procure a ratification of the contract by vote of the SHs of the established corporation (4) subscribe himself in all the shares of the capital stock contemplated as part of the promotion scheme In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held all the shares issued at the time of ratification, but not all which it was proposed to issue as part of their promotion scheme. There is a liability of the promoter to the corporation when further original subscribers to capital stock contemplated as an essential part of the scheme of promotion came in after the

Fiduciary relationship between corporation and promoter. Promoters have the duty to exercise GF and fairness in all their acts and transactions Promoters should not, in passing title to the corporation, later make secret profits at the expense of the corporation o They will make an accounting of all profits to the corporation when formed

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transaction complained of, even though that transaction is known to all the then SHs at the timewhich are the promoters themselves and their representatives. In the present case, the whole purchase price was paid in stock, issued before any stock was issued to the public although after a substantial public subscription. In other words, it is the order in which the transaction is carried out, and not its substantial nature, which makes the difference between liability and immunity of the promoter. It is of know consequence whether in fact the dummy directors know of the terms of sale and the breach of trust of the promoters. The point is that the directors were selected with the purpose that they should be the mere instruments of the promoter and they carried out the will of their masters. If the assent of all SHs is good in one case, by the same token it should be equally good in the other, and the breach of trust in one is equally a breach of trust in the other. The starting point is that promoters stand in a fiduciary position toward the corporation, as well as when as part of the scheme of promotion, uninformed SHs are expected to come in after the wrong has been perpetrated, as when at the time there are SHs to whom no disclosure was made. Promoters have in their hands the creation and molding of the company, like clay in the hands of a potter. It is not necessary to inquire how far he may be trustee also for shareholders and associates. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must continue until the promoter has completely established according to his plan the being which he has undertaken to create. The principle that one cannot rightfully sell property, belonging to him in his private capacity, to himself in a trust capacity is universal. The theory upon which corporations are founded is that they are entities, separate and distinct from officers and SHs. Looking through the form of the corporation to the SHs and treating them as the corporation is an exception to the rule that the corporation is a separate legal entity for all purposes, even though all its stock be held by a single interest and it be to all practical intents merely the instrument of the SH. The wrong which the promoters did in this case was in selling property worth $1M and in the market at most $2M for $3.25 without revealing that they were making a secret profit. The wrong was done to the corporation. It affected all its SHs, present and future alike. It is done directly to the corporation as an independent entity, and thus indirectly the rights of those who are or will become SHs are affected. In buying the promoter property, the directors of the corporation acted for the corporation, as such, without reard to who were the then SHs. The wrong is not done when the innocent public subscribes but when the sale was made to the corporation at a grossly exaggerated price with secret profit. The occasion for complaining of this wrong comes when the promoters issue to the public the balance of stock in order to provide the money necessary to set the corporation on its feet.

What is a promoter? Takes initiative in founding and organizing a business or enterprise of an issuer Receives, directly or indirectly, consideration for services/property 10% or more of shares or proceeds of sale thereof Except: consideration solely as underwriting commissions or solely as property Promoters: principal-agent relationship Must directly or indirectly assume liability for services of promoters Elements: Party engaging services Nature of services before, after or during incorporation consideration for services rendered questions: who engaged the services? For what? When? Does it apply to pre-incorp or post-incorp? Who benefited? Bigelow is an exception! From prior to post, promoters benefited!! Sandiko: adoption by SHs does not retroact! Adoption is not ratification Rizal Light: subject to suspensive condition Builders Duntile: the filing of suit is the act of adoption!

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Chapter VI Corporate Powers

Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Primary rule: all corporate powers shall be exercised and all corporate businesses shall be conducted by the board of directors of the corporation Exception: specific instances where the Code requires the consent and ratification of the SHs, particularly those where the underlying contractual relationship between the parties: the corporation, the SHs/members, and the State, is being amended or altered How is consent expressed by the parties? o Corporation= through the Board o State= through act of the regulatory body o SHs= through majority or 2/3 vote where applicable But dissenting SHs in certain instances are given the option to withdraw from the relationship through the exercise of his appraisal right

General Powers of Corporations a. Express Powers

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

Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) 1. A corporation has only three (3) types of power: a. Express (Sec 36) b. Implied or Necessary c. Incidental

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its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (13a) Sources of express powers are provided for by law and those enumerated in its charter Other express powers are in its AOI These are exercised by the Board In the absence of authority from the Board, no person, not even the officers, can validly bind the corporation in the exercise of express powers Code laws down two (2) general restrictions on the power of any corporation to purchase and hold properties o (1) property must be reasonable and necessarily required by the transaction of its lawful business depends on the nature of the business o (2) must be subject to limitations prescribed by law and the Constitution cannot acquire available public lands except by lease of not more than 1000 hectares (consti Art XII Sec 3) exploration, development, exploitation, etc, of natural resources= 60% Filipino-owned, and only in JV with the state General powers in Sec 36 are to be exercised by the Board of Directors in accordance with Sec 23 (except where otherwise provided) 2.

o o

Amendment to AOI: YES Appraisal rights? YES (37 & 81)

To increase or decrease capital stock (38) o o o o o Vote required: majority of board Ratification: vote of at least 2/3 of OCS or members Prior approval of SEC required to take effect Amendment to AOI: YES Appraisal rights? NO Dissenting SH can simply sell his shares A grant of appraisal rights would defeat the purposeto raise funds

3.

To incur, create, or increase bonded indebtedness (38)

Specific Powers 1. To extend or shorten the corporate term (37)

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or

Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Sec 37: extension or shortening of term of existence o Vote required: majority of board o Ratification: vote of at least 2/3 of OCS or members

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sufficiency of the terms thereof. (17a) the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the 4. Sec 38: incur, create, or increase bonded indebtedness o Bonded indebtedness: covers indebtedness of the corporation which are secured by mortgage on real or personal property (does not include debentures) o Vote required: majority vote of the board o Ratification: vote of at least 2/3 OCS or members o Prior approval of SEC required o Appraisal rights? NONE

To deny preemptive right (39)

Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. 5. To sell or otherwise dispose of substantially all its assets (40)

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the

53

corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Sec 40: power to sell, dispose, lease, or encumber all or substantially all assets o Vote required: majority vote of the board o Ratification: vote of at least 2/3 OCS or members o Nature of transactions covered: onerous contracts o Transactions no covered by SH vote: (does not involve the corporate purpose, but the corporate business) Necessary in the usual and regular course of business, or proceeds of disposition is appropriate for the conduct of remaining business o substantially all property/assets: if disposition renders corporation incapable of doing business if disposition renders corporation incapable of accomplishing its purpose in the AOI appraisal right? YES

purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) Sec 41: power to purchase own shares o Corporation must first have unrestricted retained earnings o But redeemable shares may be acquired even without unrestricted retained earnings (Sec 8)

7.

To invest in another corporation or business (42)

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Sec 42: power to invest in another corporation o Vote required: majority of the board o Ratification: vote of at least 2/3 OCS or members EXCEPT: where the investment is reasonably necessary to accomplish its PRIMARY PURPOSE If secondary purpose, ratificatory vote is required

6.

To acquire its own shares (41)

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or

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o o 8.

Effect of ratification: corporation can now legally invest its funds OUTSIDE of its primary purpose, but LIMITED to its secondary purpose Coverage of fundsany corporate property to be used to further its business No ratificatory vote: ULTRA VIRES

o 9.

When it is clear that the retention is necessary under special circumstances Surplus profits in excess of 100%= distribute as dividends

To enter into management contracts (44)

To declare dividends (43)

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Sec 43: power to declare dividends out of restricted retained earnings o Payable in cash, property, or stock o Cash dividends due on unpaid stock shall be applied to the unpaid balance on the subscription plus costs and expenses o Primary of SHs to DEMAND dividends o Vote required: majority of the board o Ratification: vote of at least 2/3 of OCS or members o Cannot retain surplus profits in excess of 100% of paid up capital stock o Exception: When justified by definite corporate expansion projects approved by the board When prohibited under any loan agreement

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

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corporation and that the board of the managing company should devote its affairs to its own corporation Not covered by Sec 44: if managing other corporations is the primary purpose, ratificatory vote is not required! If managing a partnership or individual not a corporation, not covered!

Restated: the management of a corporation has discretionary authority, in the absence of explicit restrictions, to enter into contracts or transactions deemed reasonably necessary or incidental to its business purposes.

c.

Incidental Powers

10. To buy the shares of another corporation (36) provided: a. Reasonably necessary for its lawful business b. The other corporation must be engaged in an allied business or not alien to the purposes of the purchasing corporation (42) This means a corporation can enter into a joint venture with another person, partnership or another corporation But a corporation cannot enter into a partnership contract 11. Power to enter into a partnership GR: corporation cannot enter into partnerships corporations or with individuals Exception: expressly allowed by statute or charter o Joint ventures o Limited partnerships (US Law) with other

Sec 2: powers, attributes, and properties expressly authorized by law or incident to its existence Incidental powers: those that attach to a corporation at the moment of its creation without regard to its express powers or particular primary purpose, and is inherent in it as a legal entity Examples: i. To sue and be sued ii. To grant and receive in the corporate name iii. To purchase hold and convey real and personal property for its purposes iv. To have a corporate seal v. To adopt and amend by-laws for its government vi. To disenfranchise or remove members Powers that go into the very nature and extent of a corporations juridical entity cannot be presumed to be incidental or inherent powers

b.

Implied or Necessary Powers

The Ultra Vires Doctrine Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Sec 45 embodies the ultra vires doctrine Based on two (2) principles: Corporation is a creature of law and has only such powers and privileges as are granted by the State The doctrine upholds the duty of trust and obedience owed by the corporations directors and officers to the SHs

GR: all acts other than those specified in Sec 36-44 and in other special provisions would be ultra vires Exception: those which are:

necessary or incidental to the exercise of the powers so conferred (45), or essential or necessary to carry out its purpose or purposes as stated in the AOI. (38) 1. 2.

Presumption that a corporation can act within its powers and when a contract is not on its face necessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to be valid. Sec 36(11): corporations have the power and capacity to exercise such other powers as may be essential or necessary to carry out its purpose(s) as provided for in the AOI

a.

Defense of ultra vires rests on the violation of trust or duty towards SHs, and should not be entertained where its allowance will do greater wrong to innocent 3rd parties

Three (3) types of ultra vires acts: (1) acts beyond the powers of the corporation as stipulated in the law or AOI. The TEST: logical relation of the act to the corporate purpose:

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W/N the act is in direct and immediate furtherance of the corporations business b. W/N the act is fairly incident to the express powers and reasonably necessary for its exercise (2) acts or contracts entered in behalf of the corporation by persons without corporate authority a. GR: only acts of corporate officers within the scope of their authority are binding on the corporation; acts beyond the authority cannot bind the corporation b. Exception: ratification by the Board or estoppel c. Primary rule: In the absence of an authority from the board, no person, not even the officers, can validly bind the corporation d. Exception: i. Doctrine of apparent authority: in dealing with corporations, the public at large is bound to rely upon outward appearances, and relying on such, if it be found that the directors permitted the agent to hold himself out as having authority to bind or acquiesced in the contract and accepted the benefits therefrom, the corporation will be bound. (Ramirez v Orientalist) 1. Public is not expected to know what goes on inside the boardroom, or cannot be required to look beyond the officers acting for a corporation 2. If the corporation desires to set up the defense of lack of authority, it must plead and prove it 3. but once it discharges that duty, then the burden of proof shifts to the agent to proof that by previous acts of the corporation he had been clothed with apparent authority (3) acts or contracts which are per se illegal a. cannot be given effect and are void i. but in Harden, the Court upheld a patently void contract as between the contracting parties; a narrow exception is made in that since the violation of the particular law pertains to public policy concerns and may only be proceeded through a quo warranto, not by any of the parties ii. thus if no civil wrong was committed, the courts will leave the parties as they were (Harden) b. ultra vires acts which are NOT per se illegal are merely voidable can be ratified by the SHs (Pirovano) i. it cures the infirmity and makes it perfectly valid and enforceable, provided that it prejudices no creditors and if it has been partially executed and not merely executory

a.

1. 2. 3.

ratification may be by express act of the SH (if the act is by the Board) or the Board (if the act is by the officers) or impliedly through acceptance of benefits or through estoppel on the part of the Board or the officers

Corporations are now more of a product of the agreement of the incorporating parties rather than a mere creature of the State: Sec 10 allows 5 or more persons to form a private corporation for any lawful purpose/s Sec 36 par 11 allows every corporation the power to exercise such other powers as may be essential or necessary to carry out the purpose/s in the AOI The corporations powers depends on its purpose in the AOI Since parties are entirely free to insert any number of purposes in its AOI, it follows that the extent of the corporations powers depends largely on their agreement, and not merely on a direct grant from the State, unless of course the purposes are illegal. Instances where an act can or cannot be reasonably implied from the purposes due to poor draftsmanship or lack of foresight of the drafters, the purpose clause may be reasonably stretched to accommodate the new and unexpected situations, otherwise, a proper amendment of the AOI would be necessary.

Legal consequences of acts clearly beyond the powers of the corporation or ultra vires? On the corporation: o if the act is illegal, involuntary dissolution under a quo warranto proceeding by the SolGen o revocation or suspension of the certificate of registration by the SEC On the parties to the ultra vires contract: o Parties are left as they are and no rescission would lie. o Where there has been partial performance by one party, and the other has not, the latter, having benefited from the performance, is estopped from claiming ultra vires On the rights of stockholders: o A stockholder can file an individual or derivative suit to enjoin a threatened ultra vires act or contract or a derivative suit for damages if the contract has been performed o Liability would depend on whether the contracting parties acted in GF and with reasonable diligence; an honest mistake would not give rise to liability

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If action is based on tort, the stockholders cannot set up the defense of ultra vires against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purpose clause.

RP v Acoje Mining. F: Acoje Mining requested the opening of a post office at its mining camp in Zambales to service employees living in the camp. The Director of Posts agreed to set up the office, provided that in the meantime that funds are not available, the company would provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster. He also added that the company shall assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of the dishonesty or negligence of the employee assigned. A Resolution by the Acoje Board of Directors was passed. The postmaster assigned, Hilario Sanchez, went on leave and never returned. It was soon discovered that a shortage was incurred iao P13,867.24, apparently embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability contending that the resolution issued by the board was ultra vires, and its liability if any would only be that of a guarantor. H: It should be noted that it was Acoje itself that requested for the setting up of a post office for the convenience of its employees, which the SC held to cover a subject which is a reasonable and proper adjunct to the conduct of the business of Acoje Mining. An ultra vires act is one committed outside the object for which a corporation is created, but there are certain corporate acts that may be performed outside the scope of the powers expressly conferred if they are necessary to promote the interest and welfare of the corporation. Even in the case of ultra vires acts which are not illegal per se, a corporation cannot be heard to complain that it is not liable for the acts of its board, because of estoppel by representation. The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be invalidated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. In this case, it is fair that the resolution be upheld at least on the ground of estoppel. The defense of ultra vires rests on violation of trust or duty towards the stockholders, and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. The acceptance of benefits arising from the performance of the other party gives rise to an estoppel precluding the repudiation of the contract. Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for stevedoring services with NPC which had already expired. Its PPA permit for

cargo handling services at the NPC Calaca pier had expired as well. Napocor did not renew Sea Lions contract for Stevedoring Services for Coal-Handling Operations at Calaca plant, and took over its stevedoring services pursuant to a provision in its charter, [t[o exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose. Sea Lion sues, alleging that NPC had acted in bad faith and with grave abuse of discretion in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant, and in taking over its stevedoring services. Judge Vera, acting on Sea Lions suit, issued a writ of preliminary injunction enjoining NPC from further undertaking stevedoring and arrastre services in its pier located at the Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to enter into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Sea Lion was also allowed to continue stevedoring and arrastre services at the pier. H: In determining whether or not the act of NPC falls within the purview of the charter which creates it, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives the various shipments of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. The Court holds that NPC is empowered under its Charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. This Court is, guided by the case of Republic of the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. Whether NPC will enter into a contract for stevedoring and arrastre services to handle its coal shipments to its pier, or undertake the services itself, is entirely and exclusively within its corporate discretion. It does not involve a duty the performance of which is enjoined by law. Thus, the courts cannot direct the NPC in the exercise of this prerogative. Madrigal & Co v Zamora. Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is also its sister company, both being owned by the same or practically the same stockholders. The Madrigal Central Office Employees Union sought for the renewal of its collective bargaining agreement

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and proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits. Madrigal requested for a deferment in the negotiations. Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of two alleged resolutions of its stockholders, which was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. The Union filed a case for ULP with the NLRC. Madrigal answered citing operational losses. Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income as the General Manager or Agent" had "ceased operating temporarily. In addition, because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses," it had to reduce its capital stock on two occasions. The labor arbiter, having found that the petitioner "had been making substantial profits in its operation" since 1972 through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile Madrigal tried to terminate the services of Union members citing retrenchment but its application was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE. H: What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits, the unionists had the right to demand for such salary adjustments. That the petitioner made quite handsome profits is clear from the records. We agree with the National Labor Relations Commission that "[t]he dividends received by the company are corporate earnings arising from corporate investment." 42 Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits. 43 Moreover, it is incorrect to say that such profits in the form of dividends are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in

which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees. Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice.

Govt of Philippines v El Hogar. This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last abovementioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81. I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in violation of the law that while corporations may loan funds upon real estate security, they shall dispose of the same within 5 years after receiving title H: the corporation has not been shown to have offended against the law in a manner which would entail forfeiture of its charter. The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land

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was to prevent the revival of the entail or other similar institution by which land could be fettered and its alienation hampered. In the case, El Hogar had in GF disposed of the property at the expiration of the period fixed by law. Under the circumstances the destruction of the corporation would bring irreparable loss upon thousands of innocent shareholders of the corporation without any corresponding benefit to the public. I: W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable requirements and in contravention of the Corpo law that every corporation has the power to purchase hold lease real property as reasonable and necessary required for the transaction of the lawful business H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner. I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically: (1) the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public; (2) the administration and management of properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful. (2) The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take

over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. (3) The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association with a view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort. I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his services rendered by him during the early stages of the organization of the corporation, is unconscionable, excessive, and thus necessitates dissolution H: No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years. If the Melian contract had been clearly ultra vires which is not charged and is certainly untrue its continued performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect. I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with the plan and purposes of building and loan associations,and that these are held by well-to-do people purely for

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investment purposes and not by wage-earners for savings H: The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid. It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments made by him; and no other incentive is necessary to induce inventors to purchase the stock. It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par. From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint

consequently fails also as regards the stated in the ninth cause of action. I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the discretion of its Board, the value of real properties acquired by it at its sales, thereby frustrating the right of SHs to participate annually and equally in the earnings. H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded. I: W/n el Hogars charter should be revoked because it illegally maintains excessive reserve funds and because it pursues a policy, allegedly unlawful, of paying a straight annual dividend of 10% regardless of losses suffered and profits made by the corporation and in violation of the requirement s of the corpo code. H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute. The government insists upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual

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profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit. I: W/n el Hogar illegally departed from its charter because it has made loans which were intended to be used by the borrowers for other purposes than the building of homes. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged. In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. I: W/n the el Hogar charter may be revoked because various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans, and that some of these juridical entities became shareholders merely for the purpose of qualifying themselves to take loans from the association. H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any

person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief. I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold and mortgaged to el Hogar to secure payment of the purchase price, had incurred several outstanding loans, and that that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant. H: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law. The contention of the Government under this head is untenable.

Pirovano v Dela Rama. Under the leadership and management of Enrico Pirovano, president of Del Rama Steamship, the company grew and progressed until it became a multi-million corporation, the assets of which grew and increased from P240K to around P15M. He was insured by the company for P1M. Esteban dela Rama, majority stockholder, distributed his shares among his 5 daughters, including the NDC, to which Dela Rama had an outstanding bonded indebtedness iao P7.5M, through a debt-equity swap arrangement which also gave the NDC representation in the Board. Pirovano was killed by the Japanese during the war, and a Boardres was adopted granting to the Pirovano children

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the proceeds of the insurance policies taken on the life of the late president. However, the policy had lapse because the company was not able to pay the premiums regularly. The BoardRes authorizes the allocation of P400K convertible into 4000 shares of stock ifo of the Pirovano children, as well as a waiver of the preemptive rights of the former owners, the Dela Rama siblings. This was submitted to the stockholders which duly approved the same. It appears, however, that Don Esteban did not realize that the dole out would actually be giving to the Pirovano children more than what they intended to give. This was because the value then of the shares was 3.6 times the par value thereof, thus the donation iao P400K would amount to a total of P1.44M. Thus the voting strength of the Pirovano children would be twice as much as that of the dela Rama sisters. The old Resolution having been nullified, the Board adopted a new BR changing the form of the donation from 4000 shares into a renunciation of the Companys right and title to the life insurance policies of Pirovano. It also provides that the proceeds of the policy be retained by the Company as a loan drawing interest payable to the Pirovano children whenever the company is in a position to meet this financial obligation and after the Company settles its bonded indebtedness ifo NDC. This was ratified by the Dela Rama stockholders. Mrs Pirovano accepted the donation, and buys property in the US. Upon inquiry with the Sec, it was found that the donation was illegal and thus void on the grounds that the corporation acted ultra vires and that it could not dispose of its assets through donation. The stockholders then voted to revoke the donation. Mrs Pirovano sued to demand the credit owed to them by the Company. I: w/n the donation by the corporation of the proceeds of the insurance is an ultra vires act H: Under the AOI of Dela Rama Steamship it is provided under (g) that the company may invest and deal with moneys of the company not immediately required, in such a manner as from time to time may be determined, and under (i) to lend money or to aid in any other manner any person association, or corporation of which any obligation or in which any interest is held by the corporation or in the affairs of prosperity of which the corporation has a lawful interest. The corporation was thus given broad and almost unlimited powers to carry out the purposes for which it was organized. The word deal is broad enough to include any manner of disposition, and thus the donation comes within the scope of this broad power. The company was in fact very much solvent as it was able to declare and issue dividends to its stockholders, and shows that the excess funds which were not needed by the company which was donated to the children was justified under the AOI. Under the second broad power, the corporation knew well its scope such that noone lifted a finger to dispute its validity. The company gave the donation not only because it was indebted to him but also because it was fit and proper to make provisions for the children and out of a sense of gratitude.

Even assuming that the donation was ultra vires, still it cannot be invalidated or declared legally ineffective for that reason alone, it appearing that the donation represents not only the act of the Board but also that of the stockholders themselves since they expressly ratified the resolution. By this ratification, the infirmity of the corporate act, if any, has been obliterated thereby making the act perfectly valid and enforceable, especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be set up against completed or consummated transactions. An ultra vires act may either be an act performed merely outside the scope of the powers granted to the corporation by its AOI or one which is contrary to law or violative of any principle which would void any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable and thus ratifiable by the stockholders. Harden v Benguet. Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new capital to resuscitate its stalled operations. The officers approached the Benguet Mining Co, an entity also engaged in gold mining. A contract was executed, which states that Benguet agrees to construct a milling plant for the Balatoc mine and erect a power plant, in exchange for Balatoc Mining shares valued at P600K and the excess in cash to compensate for the cost of the contract. By the time of the complaint, the value of the stock of Balatoc had soared for a nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc that the Benguet Mining Co held shares of stock in another mining corporation, the Balatoc Mining Company, in violation of a prohibition against mining corporations from owning stock of another mining corporation in the old Corpo law. The shareholders of Balatoc sued Benguet Mining to annul stock certificates of Balatoc issued ifo Benguet and to recover money earned from the transaction. TC dismissed complaint. H: Although the contract between the two mining companies was illegal for contravening the old Corpo Law, the Legislature, in adopting such a provision had the intention that public policy should be controlling in the granting of mining rights. The violation in this case was of such a nature that it can be proceeded upon only by way of a criminal prosecution, or by action quo warranto, which can be maintained only by the State. Insofar as the parties are concerned, no civil wrong had been committed between them, and if public wrong had been committed, then the directors of Balatoc Mining and Harden were the active inducers of that wrong. The contract has in fact been performed on both sides, and there is no possibility of undoing what had been done. Thus even where corporate contracts are illegal per se, when only public or government policy or interests are at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations.

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Corporate powers: WYSIWYG AOI related to relevant code provisions Powers are built-in in the AOI, limited by primary purpose 45: all encompassing powers Necessary and incidental rule: necessary is different from incidental Common denominator contained in AOI Code sets parameters/requirements (36-44) Statute sets parameters (i.e. banks, Gen Banking Act) Specific powers: dealing with SHs and 3rd parties Cannot divorce exercise of corporate powers from control and management Extent of corporate powers would limit control and management Unlimited discretion cannot be exercised for furtherance of secondary purposes in AOI

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Chapter VII Control/Management

Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. (FOR VILLANUEVA NOTES ON CORPORATE POWERS SEE: CHAP 4 CORPORATE POWERS) Allocation of power and control: three levels of control: (1) board of directors or trustees= formulate the corporate policies (2) corporate officers= execute the policies (3) stockholders or members= have residual powers over fundamental corporate changes Rationale of centralized management one of the advantageous features of the corporationacting through centralized management the congruence of authority and responsibility in the same person, committee, or board always promote efficiency

so long as the board acts honestly, in GF, and not in defraud of creditors or abusive of the rights of minority SHs GR: in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation Exception: with respect to 3rd persons, actions of the corporation even without formal board approval may still bind! (ex. Proof of usage, acquiescence of the board despite knowledge of the act, receipt of benefits, implied ratification, estoppel

Primary objective of the Board primary obligation of directors is to seek the maximum amount of profits for the corporation, and characterized the position as a position of trust o in case directors interest conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit o fiduciary or trust relationship is not a matter of statutory or technical law, but springs from the control and guidance of corporate affairs and property and hence the property interest of the SHs 23: Powers of a corporation shall be exercise, all business conducted, and all property of such corporation controlled and held by the board of directors or trustees to be elected from among the holders of stocks or among the members, unless otherwise provided in the Code. 35: Board may delegate to an executive committee or officials or contracted managers, which must be specific purposes, through the by-laws o Delegation makes the execom agents of the corporation, and the rules on agency apply o Not less than 3 members o Can act on specific matters except: Action where SHs approval is required Filing of vacancies in the board Amendment of repeal of by-laws or adoption of new by-laws Amendment or repeal of any board resolution which is expressly unamendable Distribution of cash dividends Term of office of directors: 1 year stockholders or members elect the members, but once elected they have no right to interfere with the boards exercise of powers 138: non-stock corps may designate governing boards

Who exercises corporate powers?

1.

board of directors (for stock corporations) or trustees (for non-stock corporations)

governing body sole authority to determine the policy and conduct the ordinary business of the corporation within the scope of the charter

Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be

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elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Peculiar Agency Role of the board in a manner of speaking, the board acts as an agent of the corporation, and is bound by the rules applying to agency relationship o although the board is an agent of the corporation, since the principal is a mere juridical concept, it realistically is not in a position to countermand the decisions of its agent o unlike in an ordinary principal-agent relationship, the corporate principal does not really have its own mind to allow it to decide matters for itself o the board stands both as an agent of the corporation, and the very personification of the corporation in the commercial and legal world board has sole power to decide whether a corporation could sue, purchase or sell property, enter into a contract, or perform any other act SH resolutions on matters other than the exceptions= not legally effective nor binding on the board; may be treated as merely advisory (Ramirez case) GR: to the SH go the profits, to the board goes the management for educational institutions:

for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) where the board of directors fails to observe reasonable degree of care and diligence, the corporation may be held liable on a tort and may be liable to pay damages

Directors; qualifications every director must own at least one (1) share of the capital stock of the corporation of which he is a director no person shall be elected as trustee unless he is a member o ceases to own one share= ceases to be a director o the fact that a director is only holding the share as nominee of another person does not qualify him as a directorlaw merely requires that he has legal title to the shares o 23: the share of a director shall stand in his name on the books of the corporation majority must be residents of RP nominal SHs can be directors; law requires legal title Gokongwei v SEC: SH has no vested right to be elected to the board o SH is considered to have parted with his personal right or privilege to regulate the disposition of his property which he invested in the capital stock of the corporation Rule on Corporate SHs: o Such entities cannot be qualified to be elected to the board o Corporate SHs cannot also designate an individual representative to be vote into the board o Their representation in the board can be achieved by making their individual representatives trustees of the shares or membership, which would then make them SHs of record (1) board must act as a body in a meeting

Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the

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same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) directors/trustees must act not individually but as a body in a lawful meeting 25: majority of the board shall constitute a quorum o as fixed in the AOI o a decision of at least majority of directors present at a valid meeting shall be valid as a corporate act grant of corporate power is to the board as a body, and not to the individual members thereof, and the corporation can be bound only by the collective act of the board as a general rule, a third person who acts in GF cannot be prejudiced by the fact that the directors did not act in accordance with the requirement of law, if such third person was led to believe or had the right to presume, under the circumstances, that the act involved was duly authorized by the board, without prejudice to the right of any stockholder to question the validity of the act GR: the corporation can be bound only by the collective act or will of the board Exception: can be bound even by the act of its officers, but always because of the act or default of the board An act by the board during the meeting, which was illegal for lack of notice, may be ratified either expressly by the action of the directors in a subsequent legal meeting, or impliedly, by the corporations subsequent conduct o Ramirez v Orientalist: the fact that the power to make corporate contracts is vested in the board does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board can create liability, like an individual, by other means than by a formal expression of its will o In reference to outsiders dealing with the corporation, not all corporate actions need formal board approval.

The fact that the directors know of a particular corporate act or contract, and they stayed silent about it, or worse, allowed the corporation to gain by the transaction or contract, would already bind the corporation o If a corporation knowingly permits one of its officers or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in GF dealt with the corporation through such agents, be estopped from denying his authority two types of meeting of the board: o regular meeting held monthly unless the by-laws provide otherwise o special meeting or those held by the board at any time upon the call of the president may be held at any time upon call may be held anywhere in and outside the RP unless the by-laws provide otherwise president of the corporation presides at board meetings o

Election of the board of directors 24: o o o o requisites for all elections of directors or trustees majority of OCS, either in person or by written proxy by ballot if requested mandatory cumulative votinga SH may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected

Vacancies in the board (for reasons other than removal or expiration of term) 29: any vacancy in the board other than by removal by the SHs or expiration may be filled by the vote of at least a majority of the remaining directors, provided there is a quorum o vote of majority of remaining directors or trustees, provided there is a quorum o no quorum, SHs fill vacancy by vote in a regular or special meeting o only for the unexpired term o if vacancy is due to increase in membership: election by SH only! (2) requirements of meeting Section 53. Regular and special meetings of directors or trustees. - Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any

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time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. (n) Section 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n) meetings: regular or special requirements for board meetings must be complied with otherwise it will be invalid and any action taken may be questioned by an objecting director or stockholder requisites for a valid board meeting: o meeting of director/trustees duly assembled as a board o at a place time and manner provided in the by-laws o presence of the required quorum o decision of the majority of the quorum or in some cases majority of the entire board directors or trustees cannot validly act by proxy directors/trustees cannot delegate their powers or assign duties in abstentions: o GR: abstention is counted in favor of the issue that won the majority vote, since by their abstaining, the directors are deemed to abide by the rule of the majority (Lopez v Ericta) a notice

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) abstention? Ifo majority position

For a valid corporate act: Quorum: (Sec 25) majority of directors/trustees is required for a quorum in directors meetings as fixed in the AOI Vote: at least a majority of directors present at a meeting where there is a quorum For the election of officers: Quorum: presence of ALL directors/trustees Vote: majority of ALL members of the board Director must be personally present and cannot be represented by proxy d Agenda

by-laws can provide for different or additional requirements regarding notice, date, place board must meet once a month by-laws cannot do away completely with notice requirement no notice= a director may question the validity of the meeting and of any matter taken up therein b place of meeting

Notice of meeting must contain purpose Extraordinary matters not mentioned in the notice cannot be validly acted upon against the objection of a director Other matters= only that which are routine and ordinary; significant matters must be expressly stated in the agenda o Exception: if all directors are present and agree to take extraordinary matters up e Presiding officer

if by-laws are silent= board may meet anywhere it pleases c quorum and vote

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President (sec 54)= all directors/trustees meetings and SHs/members meetings But the by-laws may provide for a Chairman of the Board who will preside over the board meeting (3) close corporations

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Section 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. Where innocent third persons are concerned, the corporationclose or otherwiseshould be bound in instances where estoppel or ratification is shown (Zamboanga case) If SHs as directors in a close corp with no board= provisions on meetings of directors would apply to SHs

stock ownership = management composed of a smaller number of persons: o closely related to each other by blood or other common interests, o all or most of whom directly participate in the management Code allows close corps to do away with the board entirely; the SHs shall be treated as or shall become the directors

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors.

Ramirez v Orientalist Co & Fernandez. Orientalist Co, engaged in the theater business, desired to be the exclusive agent of Ramirez, who is based in Paris, for two film outfitsclair Films and Milano films. Through the active involvement and negotiations of Ramon El Presidente Fernandez, a director of Orientalist and also its treasurer, with Ramirez, Orientalist was able to secure an offer, the terms of which were acceptable to the Board as well as to the stockholders. It appears that this acceptance of the terms of the offer was decided during an informal meeting of the board, and conveyed to Ramirez in two letters signed only by Fernandez, both in his individual and his capacity as treasurer of Orientalist. It turns out that the company was not financially capable to comply with the obligations set forth in the agency contract, and about this time films had already been delivered to the company. Two stockholders meetings were

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organized, the first adopted a resolution approving the action of the board on the offer, the second raising the contingency of the lack of funds and the proviso that the four officers involved, including Fernandez would continue importing the films using their own funds. Ramirez sues Orientalist and Fernandez for what is due on the contract. TC ruled Oriental as the principal debtor while Fernandez is subsidiarily liable. H: (1) it was incumbent upon the corporation if it desired to question the authority of Fernandez to bind it, to deny the due execution of the contract made by him. In pleading lack of authority of an officer of a corporation to bind the latter through a contract executed by the former is a special defense which should be specially pleaded and the answer setting up this defense must be verified under oath. The denial shall be specific, and a mere attack on the instrument in general terms is insufficient, even though under oath. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances, and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a competent person to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, is it denies his authority, to state such defense in his answer. This failure of Orientalist to make any issue in its answer with regard to the authority of Ramon Fernandez to bind it and its failure to deny specifically under oath the genuineness of the due execution of the contracts sued upon, have the effect of eliminating the question of his authority from the case. (2) Fernandez had no authority to bind the corporation. Corporate powers is exercised by the board of directors, and is recognized in the bylaws of Orientalist. The fact that the power to make contracts is thus vested in the borad does not always signify that a formal vote of the board must always be taken before contractual liability can be fixed; the board can create liability, like an individual, by other means than by formal expression of its will. It may be established without reference to official records of the proceedings of the board, by proof of the usage to which the company had permitted to grow up in the business, and of the acquiescence of the board charged with the duty of supervising and controlling the companys business. Fernandez was the most active in the effort to secure the films. The negotiations were conducted by him with the knowledge and consent of the other members of the board. The board, before the financial inability of the corporation was revealed, had already recognized the contracts as being in existence and had proceeded to take the steps necessary to utilize the films, particularly the publication of

announcements in the papers. In light of this, the contracts in question were thus inferentially approved by the board and that the company is bound unless the subsequent failure of the stockholders to approve the same had the effect of abrogating the liability created. (3) the action of the stockholders, whatever its character, must be ignored. Stockholders or members resolutions dealing with matters other than the exceptions are not legally effective nor binding on the board, and may be treated as merely advisory or may even be completely disregarded. The functions of the stockholders of a corporation are, of a limited nature. The theory is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives or agents, called the directors, making by-laws, and exercising special powers defined by law. Thus contracts between a corporation and third persons must be made by the directors and not by the stockholders. The corporation is represented by the directors and not the stockholders. Third persons can have little or no information as to what occurs in corporate meetings, and must necessarily rely on external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon in by its agents in accordance with law. If a corporation knowingly permits one of its officers or any other person to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing the power to do these acts, the corporation will be estopped from denying such authority as against anyone who has dealt with the corporation in GF. Lopez v Ericta. Dr Consuelo Blanco was appointed Dean ad interim of the UP College of Education. The Board of Regents met on 26 May and UP President Lopez submitted the ad interim appointment for reconsideration. The minutes of the meeting reveal that the Board voted to defer action on the matter in view of the objections cited by Regent Kalaw, and to further study the same. The matter was referred to the Committee on Personnel. It was extended and made effective 1 May 1970 until 30 April 1971 unless sooner terminated and subject to the approval of the Board of Regents. At the next Board meeting, it appears in the minutes that the Personnel Committee recommended that the UP president review his nomination and that he would discuss with the nominee the possibility of withdrawing her nomination and appointment as Dean. The Committee then withdrew its recommendation, but subjected the Blanco appointment to a vote. The vote was 5-3-4, and not having the necessary number of votes, the Board agreed to expunge the result of the voting from the records, on the condition that the Board suspend action on the matter, which had the effect of the termination of the Blanco ad interim appointment. Blanco questions the action of the Board and the designation of an officer-in-charge of the COE and sues in the TC. Judge Ericta rules info Dr Blanco. I: W/N the 4 abstentions had the effect of a negative vote against the ad interim appointment.

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H: Based on a reading of the minutes and the records of the meeting, it cannot be said that the abstentions were affirmative ifo the ad interim appointment. It is clear that (1) the Blanco appointment was referred for study by the Committee which recommended its rejection; (2) that it should be done in a diplomatic way to avoid embarrassment; (3) the final decision was to ask the UP President to talk to Blanco for the appointment to be withdrawn; (4) a vote was taken which was 5-3-4, and it was unclear what it meant because the rules do not provide for the treatment of abstentions; (5) the Committee withdrew its recommendation; (6) the Board identified the issue of w/n to confirm the ad interim appointment; (7) and that while it will defer action, it considered the appointment to have terminated, and thus a recommendation for nonconfirmation. Thus the votes of abstention can in no way be construed as votes for confirmation of the appointment. There can be no doubt as to the decision of the Personnel Committeeit was for rejection of the appointment. Also, the board resolved, without a vote of dissent to cancel the action taken, including the results of the voting, and to return the case to its original status. In effect, as announced by the Chairman, the Board has not acted on the confirmation either adversely or favorably, but that the ad interim appointment has terminated. Expertravel & Tours v CA and Korean Airlines. F: Korean Airlines, through Atty. Aguinaldo, filed a Complaint against Expertravel with the RTC for the collection of the principal amount of P260,150.00, plus attorneys fees and exemplary damages. The verification and certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. Expertravel filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to execute the verification and certificate of nonforum shopping as required by the Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and was registered as such with the Securities and Exchange Commission (SEC) as required by the CorpoCode, and was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL. Atty. Aguinaldo also claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during a special meeting held on June 25, 1999, wherein the board of directors conducted a special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in that same teleconference, the board of directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy of the aforesaid resolution. TC denies MTD, CA affirms. H: It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that the failure to comply with this requirement cannot be excused. The certification is a peculiar and personal responsibility of the party, an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties, issues and causes of action. Hence,

the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware of such facts. Hence, the requisite certification executed by the plaintiffs counsel will not suffice. In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of the said corporation, by a specifically authorized person, including its retained counsel, who has personal knowledge of the facts required to be established by the documents. The corporation, such as the petitioner, has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly-authorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors. The respondents allegation that its board of directors conducted a teleconference on June 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact that no such allegation was made in the complaint. If the resolution had indeed been approved on June 25, 1999, long before the complaint was filed, the respondent should have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed to do so. It was only on January 28, 2000 that the respondent claimed, for the first time, that there was such a meeting of the Board of Directors held on June 25, 1999; it even represented to the Court that a copy of its resolution was with its main office in Korea, only to allege later that no written copy existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that the meeting of the Board of Directors where the resolution was approved was held via teleconference. Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a Secretarys/Resident Agents Certificate alleging that the board of directors held a teleconference on June 25, 1999. No such certificate was appended to the complaint, which was filed on September 6, 1999. More importantly, the respondent did not explain why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also did not explain its failure to append the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the CA that it submitted the Secretarys/Resident Agents Certificate[30] dated January 10, 2000. The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never took place, and that the resolution allegedly approved by the respondents Board of Directors during the said teleconference was a mere concoction purposefully foisted on the RTC, the CA and this Court, to avert the

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dismissal of its complaint against the petitioner. Citibank NA v Chua. Velez deposited his unfunded personal checks with his current account with the petitioner. But prior to depositing said checks, he would present his personal checks to a bank officer asking the latter to have his personal checks immediately credited as if it were a cash deposit and at the same time assuring the bank officer that his personal checks were fully funded. Having already gained the trust and confidence of the officers of the bank because of his past transactions, the bank's officer would always accommodate his request. After his requests are granted which is done by way of the bank officer affixing his signature on the personal checks, private respondent Cresencio Velez would then deposit his priorly approved personal checks to his current account and at the same time withdraw sums of money from said current account by way of petitioner bank's manager's check. Private respondent would then deposit petitioner bank's manager's check to his various current accounts in other commercial banks to cover his previously deposited unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers never discovered that his personal check deposits were unfunded. On the contrary, it gave the petitioner bank the false impression that private respondent's construction business was doing very well and that he was one big client who could be trusted. This deceptive and criminal scheme he did every banking day without fail from September 4, 1985 up to March 11, 1986. The amounts that he was depositing and withdrawing during this period (September 4, 1985 to March 11, 1986) progressively became bigger. It started at P46,000.00 on September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal already reached over P3,000,000.00. At this point in time (March 11, 1986), the private respondent Cresencio Velez presumably already feeling that sooner or later he would be caught and that he already wanted to cash in on his evil scheme, decided to run away with petitioner's money. On March 11, 1986, he deposited various unfunded personal checks totaling P3,095,000.00 and requested a bank officer that the same be credited as cash and after securing the approval of said bank officer, deposited his various personal checks in the amount of P3,095,000.00 with his current account and at the same time withdrew the sum of P3,244,000.00 in the form of petitioner's manager's check. Instead of using the proceeds of his withdrawals to cover his unfunded personal checks, he ran away with petitioner bank's money. Thus, private respondent Cresencio Velez's personal checks deposited with petitioner bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced. The checks bounced after said personal checks were made the substantial basis of his withdrawing the sum of P3,244,000.00 from his current account with petitioner bank. Citibank sues on the grounds of violation of BP 22. Before pre-trial conference, and in pursuance of the authority granted to him by petitioner bank's by-laws, its Executing Officer appointed William W. Ferguson, a resident alien, as its Attorney-in-Fact empowering the latter, among other things, to represent Citibank in court cases such as the present case. In turn, William W. Ferguson executed a power of attorney in favor of J.P. Garcia & Associates

(petitioner bank's counsel) to represent petitioner bank in the pre-trial conference before the lower court. I: There are thus two issues in this case. First, whether a resolution of the board of directors of a corporation is always necessary for granting authority to an agent to represent the corporation in court cases. H: In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. It is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws or by resolution or other act of the board of directors. In addition, an officer who is not a director may also appoint other agents when so authorized by the by-laws or by the board of directors. Such are referred to as express powers. There are also powers incidental to express powers conferred. It is a fundamental principle in the law of agency that every delegation of authority, whether general or special, carries with it, unless the contrary be express, implied authority to do all of those acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to carry into effect the main authority conferred. Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the pre-trial conference of the case at bar is not necessary because its by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, * to execute a power of attorney to a designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and manage corporate affairs. Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his powers in whole or in part, there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia & Associates and later, of the bank's employees, constitutes a valid delegation of Ferguson's express power (under paragraph XVII above) to represent petitioner bank in the pre-trial conference in the lower court. I: The second issue is whether the by-laws of the petitioner foreign corporation which has previously been granted a license to do business in the Philippines, are effective in this jurisdiction. If the by-laws are valid and a board resolution is

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not necessary as petitioner bank claims, then the declaration of default would have no basis. H: A careful reading of the Sec 46 of Corpo Code would show that a corporation can submit its by-laws, prior to incorporation, or within one month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. When the third paragraph of the above provision mentions "in all cases", it can only refer to these two options; i.e., whether adopted prior to incorporation or within one month after incorporation, the by-laws shall be effective only upon the approval of the SEC. But even more important, said provision starts with the phrase "Every corporation formed under this Code", which can only refer to corporations incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domestic corporations and not to foreign corporations. On the other hand, Section 125 of the same Code requires that a foreign corporation applying for a license to transact business in the Philippines must submit, among other documents, to the SEC, a copy of its articles of incorporation and by-laws, certified in accordance with law. Unless these documents are submitted, the application cannot be acted upon by the SEC. Since under Sec 126 of Corpo Code the SEC will grant a license only when the foreign corporation has complied with all the requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of the foreign corporation's by-laws. It may not have been made in express terms, still it is clearly an approval. Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in the Philippines. Prime White Cement v IAC. Prime White Cement entered into a dealership agreement with one of its directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years, and that a letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered into agreements with several hardware stores for the purchase of the cement. Te then informed Prime White of the orders, but the latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be delivered, and increased the price per bag. It also made the prices subject to change unilaterally and additional conditions on the manner of payment. Te refused to comply and Prime White cancelled the dealership agreement. Te sued for specific performance and damages. TC ruled ifo Te. I: W/N the dealership agreement is a valid and enforceable contract binding on the Corporation. H: No. it is not valid and enforceable. All corporate powers are exercised by the Board. It may also delegate specific powers to its President or other officers. In the absence of express delegation, a contract entered into by the President in behalf of the corporation, may still bind the latter if the board should ratify

expressly or impliedly. In the absence of express or implied ratification, the President may as a general rule bind the corporation through a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are applicable where the President or other officer acting for the corporation is dealing with a third person. The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder; he was a member of the Board and Auditor of the corporation. He is what is often called a self-dealing director. As a director, he holds a position of trust and owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate affairs and property interests of the stockholders. A directors contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. The contract in this case is neither fair nor reasonable. At the time of the contract, the corporation had not yet even started producing the cement. Prices of cement, just like any other commodity, are not stable and expected to rise. Within a period of six years from the date of dealership agreement the prices were certain to rise, and yet the contract pegged the rate to P9.70 per bag. This according to the Court was not fair and reasonable at all, and unduly prejudiced the corporation. The contracts he entered into after the dealership agreement were such as to completely shield him from any increase in the price of cement. The contracts were only for two years at a time, even if the dealership was good for 5. He was attempting to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the dealership agreement. Thus the same was not valid and he cannot be allowed to reap the fruits of his disloyalty. Boyer-Roxas v CA. (Hidden Valley Apocalypse Now case). The corporation, Heirs of Eugenia Roxas Inc, was established to engage in agriculture to develop the properties inherited from Eugenia Roxas and Eufroncio Roxas, which includes the land upon which the Hidden Valley Springs Resort was put up, including various improvements thereon, using corporate funds (used as site for filming Apocalypse Now). The AOI of Heirs Inc was amended for this purpose. Heirs Inc claims that Boyer-Roxas and Guillermo Roxas had been in possession of the various properties and improvements in the resort and only upon the tolerance of the corporation. It was alleged that they committed acts that impeded the corporations expansion and normal operation of the resort. They also did not comply with court and regulatory orders, and thus the corporation adopted a resolution authorizing the ejectment of the defendants. TC grants. CA affirms. Boyer and Roxas contend that, being SHs, their possession of the properties of the corporation must be respected in view of their ownership of an aliquot portion of all properties of the corporation.

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H: Regarding properties owned by the corporation, the SH of Guanzon case says that properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporations property, or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The SH is not a co-owner or tenant in common of the corporate property. The corporation has a personality distinct and separate from its members and transacts business only through its officers or agents. Whatever authority these officers or agents may have derived from the board or other governing body, unless conferred by the charter of the corporation itself. In this case the elder Roxas who then controlled the management of the corporation, being the majority SH, consented to the petitioners use and stay within the properties. The Board did not object and were allowed to stay until it adopted a resolution to the effect of authorizing moves to eject them. Since their stay was merely by tolerance, in deference to the wishes of the majority SH who controlled the corporation, when Roxas died his actions cannot bind the company forever. There is no provision in the by-laws or any other resolution authorizing their continued stay. EPG Construction v CA. EPG undertook the construction of the UP Law Library for around P7.5M. Upon completion, the building was turned over to UP Law. Sometime thereafter, the aircon in the 3rd floor was not functioning properly, and this was reported to EPG. After inspection EPG agreed to repair the same and shoulder the expenses thereof, but for whatever reason the repair was never undertaken despite repeated demands. EPG demanded a hefty sum, which UP claims should be covered by the guarantee provision in their contract. UP then contracts with another repair company, and demands reimbursement from EPG. UP sues EPG and its President, Emmanuel de Guzman. TC ruled ifo UP, and order both the company and its president to pay UP solidarily. The president Guzman claims that as to him, UP was suing him in his official capacity and not in his personal capacity, thus his inclusion as president of the company is superfluous, because his acts were corporate acts imputable to EPG itself as his principal. H: A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a since SH or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate personality. The GM of a corporation cannot be made personally liable for his official acts in behalf of the corporation, with the exception that if he official had acted

maliciously or in BF, which would make him liable personally. Since it was not proven that Guzman acted maliciously or in BF, whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG even though Guzman is the principal officer and controlling SH. Benguet Electric Cooperative v NLRC. Cosalan, GM of the Benguet Electric Cooperative, was informed by COA that cash advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and allowances showed substantial inconsistencies with the directives of the National Electricifcation Administration, and that several irregularities in the utilization of funds released by NEA to Benguet. Cosalan then implemented the remedial measures recommended by COA. Board members of Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary, representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in te ouster of Cosalan as GM. Cosalan nonetheless continued to work as GM, contending that only the NEA can suspend and remove him. The Board then refused to act on Cosalan request to release compensation due him. Cosalan files a complaint with the NLRC against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private capacities. Labor Arbitrer rules ifo Cosalan, holding both the company and the board solidarily liable to Cosalan. NLRC modifies award to Cosalan by declaring Bengeut alone, and not the Board members, was liable to Cosalan. Benguet appeals. H: the Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in GF, do no become liable, civilly or otherwise, for the consequences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred. In this case, the board members obviously wanted to get rid of Cosalan and acted with indecent haste in removing him from his GM position. This shows strong indications that the members of the board had illegally suspended and dismissed him precisely because he was trying the rectify the financial irregularities. The Board members are also liable for damages under Sec 31 of the Corpo Code, which by virtue of Sec 4 thereof, makes it applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are not inconsistent therewith. The Board members are also guilty of gross negligence and BF in directing the affairs of the corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their authority. Woodchild Holdings Inc v Roxas Electric and Construction Co. The respondent posits that Roxas was not so authorized under the May 17, 1991

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Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the deed of absolute sale. H: Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation. Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B1, or to create or convey real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner on such terms and conditions which he deems most reasonable and advantageous. The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally identical with that authorized to be done. In sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it. It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority. There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the respondent had the right to retain the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and

intended to adopt what had been done in his name. Ratification is based on waiver the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act must also be in writing. Since the respondent had not ratified the unauthorized acts of Roxas, the same are unenforceable. Hence, by the respondents retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas. 2. corporate officers and agents 23: the Board may validly delegate some of its functions and powers to individual officers, committees, or agents it appoints Corporate officers are within the business judgment of the board to terminate or delegate or appoint general principles of agency govern the relation between the corporation and its officers or agents a corporate officer or agent may represent and bind the corporation in transactions with third person to the extent that the authority to do so has been conferred upon him, and this includes: o powers which have been intentionally conferred o such powers as in the usual course of business are incidental or implied from the powers conferred o powers added by custom or usage, and o such apparent powers as the corporation has caused persons dealing with the officer or agent

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a

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majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) Three (3) officers which a corporation must have: o President Elected by majority of o Treasurer ALL board members o Secretary By-laws may provide for other officers GM: may be appointed from any of the officer positions o By express provision of the by-laws Officer need not be a director; thus, a non-SH can be an officer o Exception: President. He must be a director (co-terminous with his position as director) No citizenship requirement o Exception: Corporate secretary Industries partially or totally reserved for Filipinos No alien may be an officer but may be a director; proportional to alien equity In close corporations: o May be managed by SHs directly, so long as it is in the AOI No directors SHs appoint or elect the officers o AOI may provide that all or some officers are elected or appointed by the SHs instead of the board In non-stock corporations: o Members are allowed to directly elect the officers Exception: contrary provision in AOI or BLs Officers authority to bind NOT inherent in their office, but derived from: o law o the by-laws o delegation by the Board (express through BoardRes, or impliedly through custom or acquiescence) Corporate Officers are AGENTS of the corporation o GRs on AGENCY as to the binding effect apply o Acts which are within the authority BIND o Acts beyond authority CANNOT BIND Except: Subsequent ratification Estoppel

Lack of authority to bind is a defense which must be specially pleaded (Ramirez case) GR: person dealing with a corporate officer is put on inquiry as to the scope of his authority

Exception: Innocent 3rd person cannot be prejudiced if he had the right to presume under the circumstances the authority of the officer

(1) President Presides over all meetings of the board and SHs o By-laws may delegated that function to Chairman Act of president done in the ordinary course of business is presumably within the scope of his authority Impliedly vested with broad powers o Burden of proof that an act of the president cannot bind= corporation Power to sign and execute corporate contracts o He is authorized to sign in the name of the corporation o but does not include the power to enter into contracts with 3rd persons (thats the Boards function) Capacity to negotiate o but cannot perfect the contract without board authorization cannot also be concurrent Treasurer and Secretary must be a director and SH (2) vice-president no inherent power to bind takes over when president is absent or position becomes vacant (3) secretary keeps corporate records and is the custodian duties are ministerial and cannot bind the corporation without board authorization or appointment as GM must be a resident and a Phil citizen (Sec 25) (4) treasurer appointed at the time of drafting the AOI o Code requires Treasurers affidavit to attest to the fact of compliance with the required incorporation subscription Receive and keep the corporate funds Disburse in accordance with the authority given by the board

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Cannot bind the corporation unless authorized (5) general manager

ratified by Kong Li Po and that although he had no express authority to enter into the contract, since he was general business manager in charge of the printing of the paper and thus had implied authority to employ the petitioners I: W/N CC Chen had the power to bind the corporation through the contract mentioned. H: GR: The power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be expressly or impliedly delegated to other officers or agents of the corporation. EXCEPTION: An officer or agent who has general control and management of the corporations business or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Exception to exception: Where the authority is vested expressly in the BOD. As to the term of employment, a manager has authority to hire an employee for such a period as is customary or proper under the circumstances, but unless he is expressly authorized or held out to have such authority, he cannot make a contract of employment for a long future period, such as for 3 years. There can be no doubt that CC Chen as general manager of the Kong Li Po, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs. But the term of employment is unusually long, and the conditions are otherwise so onerous to the defendant corporation that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. The corporation also did not impliedly ratify the contract, just because the president of Kong Li Po saw the plaintiffs work as printers in the office one day. Before a contract can be ratified, knowledge of its existence must, of course, be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. No such knowledge or circumstances indicating knowledge is shown or proven in the case. Moreover, a ratification by him would have been to no avail; in order to validate a contract, a ratification by the BOD was necessary. The fact that the president was authorized by the by-laws to sign documents evidencing contracts doesnt mean that he had power to make the contracts. Lapulapu Foundation Inc v CA. Elias Q. Tan, then President of the copetitioner Lapulapu Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. As of January 23, 1979, the entire obligation amounted to P493,566.61 and despite demands made on them by the respondent Bank, the petitioners failed to pay the same. The respondent Bank was constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by the petitioners, jointly and solidarily, of the sum of P493,566.61

takes care of day-to-day affairs of the corporation powers are limited to implementing policies laid down by the board GR: can only perform such acts and enter into such contracts as are usual in the ordinary course of business of the corporation (Yu Chuck case) o exception: (deemed within his implied authorityKalaw case) where the board gives him broader authority where the board had acquiesced in the past or had never prevented or prohibited the GM from performing extraordinary acts where the board ratifies (express or implied) after can contract for purchase of ordinary supplies necessary for corporate functions o but no implied power to borrow money even for legitimate purposes without prior approval by the board 3rd person has right to presume that a GM has authority to perform acts or enter into ordinary contracts in the usual course of business o innocent 3rd persons cannot be prejudiced

any officer cannot be held personally liable for the consequences of their acts o except: BF, negligence o in personal capacity= personal liability (6) other agents

may appoint agents for specific purposes o last say will have to be with the board

Yu Chuck v Kong Li Po. Kong Li Po is a corporation engaged in the publication of a Chinese newspaper. Its AOI provide for a president who shall sign all contracts and other instruments of writing, but does not provide for a business or general manager. CC Chen or TC Chen was appointed general business manager of the paper. He then entered into an agreement with Yu Chuck for the printing of the newspaper for P580 per month. Yu Chuck worked for a year until they were discharged by the new manager Tan Tian Hong because CC Chen had left for China. Yu Chuck sues the paper, claiming the the contract was for a period of 3 years, and that discharge without just cause before the expiration of this term entitles them to receive full pay for the remainder of the term. Kong Li Po counters that CC Chen was not authorized to enter into the contract with Yu Chuck. TC ruled ifo of Yu Chuck, concluding that the contract had been impliedly

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representing their loan obligation. Foundation denied incurring indebtedness from the respondent Bank alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own use and benefit and on the strength of the personal information he furnished the respondent Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that the respondent Bank fully knew that the loans contracted were made in petitioner Tans personal capacity and for his own use and that the petitioner Foundation never benefited, directly or indirectly, therefrom. Tan admitted that he contracted the loans from the respondent Bank in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of petitioner Tans shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were covered by promissory notes which were automatically renewable (rolled-over) every year at an amount including unpaid interests, until such time as petitioner Tan was able to pay the same from the proceeds of his aforesaid shares. According to petitioner Tan, the respondent Banks employee required him to affix two signatures on every promissory note, assuring him that the loan documents would be filled out in accordance with their agreement. However, after he signed and delivered the loan documents to the respondent Bank, these were filled out in a manner not in accord with their agreement, such that the petitioner Foundation was included as party thereto. H: The Court particularly finds as incredulous petitioner Tans allegation that he was made to sign blank loan documents and that the phrase IN MY OFFICIAL/PERSONAL CAPACITY was superimposed by the respondent Banks employee despite petitioner Tans protestation. The Court is hard pressed to believe that a businessman of petitioner Tans stature could have been so careless as to sign blank loan documents. In contrast, as found by the CA, the promissory notes clearly showed upon their faces that they are the obligation of the petitioner Foundation, as contracted by petitioner Tan in his official and personal capacity. Moreover, the application for credit accommodation, the signature cards of the two accounts in the name of petitioner Foundation, as well as New Current Account Record, all accompanying the promissory notes, were signed by petitioner Tan for and in the name of the petitioner Foundation. These documentary evidence unequivocally and categorically establish that the loans were solidarily contracted by the petitioner Foundation and petitioner Tan. The evidence shows that Tan has been representing himself as the President of Lapulapu Foundation, Inc. He opened a savings account and a current account in the names of the corporation, and signed the application form as well as the necessary specimen signature cards twice, for himself and for the foundation. He submitted a notarized Secretarys Certificate from the corporation, attesting that he has been authorized, inter alia, to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and other commercial documents; and to initially obtain a loan

for P100,000.00 from any bank. Under these circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf. Per its Secretarys Certificate, the petitioner Foundation had given its President, petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner Tans authority to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Board of Liquidators v Kalaw. Maximo Kalaw is chairman of the board and general manager of the National Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy sell barter export and deal in coconut, copra, and dessicated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of copra. Nature intervened4 typhoons devastated agriculture and copra production. NACOCO was on the verge of sustaining losses and could not be able to make good on the contracts. Sensing this, Kalaw submitted the contracts to the board for approval and made a full disclosure of the situation. No action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO however only partially performed the contracts. One of the contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover this sum, alleging negligence and BF and breach of trust in approving the contracts, by not having them approved by the board. TC dismisses complaint. NACOCO claims that the by-laws provide that prior Board approval is required before the GM can perform or execute in behalf of NACOCO all contracts necessary to accomplish its purpose. I: W/N the Kalaw contracts are valid despite its lack of prior board approval as required by the NACOCO by-laws H: The contracts in question are forward sales contractsa sales agreement entered into, even though the goods are not yet in the hands of the seller. Given the peculiar nature of copra trading, ie copra must be disposed of asap else it would lose weight and would decrease its value, it necessitates a quick turnover and execution of the contract on short notice (w/in 24 hours). It would be difficult if not impractical to call a formal meeting of the board each time a contract is to be executed. NACOCO board met the difficulties attendant to forward sales by leaving the adoption of the means to the sound discretion of Kalaw. Long before the

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contracts came into being, Kalaw already contract by himself alone some 60 such contracts, and NACOCO reaped a gross profit. These contracts were contracted without prior authority from the Board and were known to all the members, but nothing was said by them. Also contracts entered into by Kalaw had been submitted to the board after execution, not before as required by the by-laws. The Board has knowledge of this and did not object to the same. Thus the practice of the corporation has been to allow its GM to negotiate and execute contracts in behalf of NACOCO without prior Board approval, and by its acts and through acquiescence practically laid aside the requirement in the by-law. The contracts are therefore valid. Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified and is equivalent to original authority. The theory of corporate ratfication is predicated upon the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority. Ratification cleanses the contract from all its defects from the moment it was constituted. By corporate confirmation of the contracts in dispute on 20 Jan, the Kalaw contracts are thus purged of whatever vice or defects they may have. Thus even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. There was no BF or breach of trust on the part of Kalaw. The board knew, and Kalaw had so informed it, that the contracts would cause heavy losses. The Court found no trace of any dishonest purpose or moral obliquity or ill will that partakes of the nature of fraud which would consitute BF on the part of Kalaw. The Board did not eventhink of raising their voice in protest against past contracts which brought enormous profits to NACOCO. The ratification was an act of simple justice and fairness to the GM and to the best interest of the corporation whose prestige would have been seriously impaired by a rejection of the board of those contracts which proved disadvantageous. Zamboanga Transportation v Bachrach Motor. The Zamboanga Transpo Corp, a corporation managed by a BOD composed of 5 stockholders, purchased trucks, automobiles and parts from Bachrach Motors Inc. It incurred a balance of P44K due on several White trucks, secured by 2 CMs. As it was in dire financial straits, Zamboanga through its GM, President and Auditor Jose Erquiaga, entered into loan and additional agreements with Jose Clos, Bishop of Zamboanga, who was also the majority stockholder. As security for the financial accommodation, a new CM agreement was executed, wherein goods pledged to Bachrach was also pledged to the Bishop. Erquiaga submitted the mortgage deed to the board for approval. Two directors of Zamboanga expressed their satisfaction with the arrangement. Zamboanga partially complied with the mortgage deed. Bachrach sought the cancellation of the 2 CMs and to have it recorded in the registry of deeds. Erquiaga replied that the cancellations cannot be recorded pending the approval by the board of the mortgage deed. The BoD of Zamboanga then convened and rejected the mortgage deed, because of the

discovery that the mortgage had been registered by Bachrach without the knowledge or consent of Zamboanga and without having first recorded the cancellations of the two previous mortgages. This also prompted the Board to adopt another resolution authorizing legal action to annul the mortgages. Bachrach also sued Zamboanga, and was able to obtain possession of all the chattels and sold the same at public auction. Zamboanga claims that an oral agreement existed such that the mortgage would not be valid without approval by resolution of the board and that it would not be recorded until approval thru resolution was obtained, among other conditions. I: W/N the CMs executed by Erquiaga is valid and binding upon the Zamboanga Transportation Corp after payments have been made to Bachrach and notwithstanding the fact that the CMs were disapproved by the Board of Directors of Zamboanga. H: In his manifold capacity as President, GM, legal counsel, auditor, and majority stockholder, Erquiaga entered into the CM contract with Bachrach by virtue of which Zamboanga obtained greater advantages. While it is true that the last CM contract was not approved by the board, whose approval was needed in order to validate it according to the by-laws, the broad powers vested in Erquiaga, the approval of his acts with the other CMs, the approval of the other directors, and the payments made to Bachrach are equivalent to a tacit approval by the BoD of the CM contract and binds Zamboanga Transport. In truth and in fact Erquiaga was and is the factotum of the corporation and may be said to be the corporation itself. While the chief officers of the corporation are in reality its owners and are permitted to manage the business by the directors, the acts of such officers are binding on the corporation, which cannot escape liability as to third persons dealing with it in GF. Thus when the president of a corporation, who is one of the principal stockholders and at the same time its general manager, auditor, legal counsel, is empowered by the by-laws to enter into CM contracts, subject to the approval of the board, one of whom is also a principal shareholder, and both of whom, together with the president, form a majority and said corporation takes advantage of the benefits afforded by said contract, such acts are equivalent to an implied ratification of said contract by the board and binds the corporation even if not formally approved by the board. 3. board committees

BOD can create committees for the performance of certain functions, so long as the board clearly specifies and limits the functions delegated, and the delegation does not in effect constitute an abdication of its powers vested by law S35 of Corpo Code allows delegation to an Executive Committee of any act within the contemplation of the board with exceptions: o Provided that the delegation is on specific matters and is not a blanket or general one

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Implies that the board executive committee to expressly unamendable or The delegation cannot go free from all responsibility

or by-laws may specifically authorize the study and review a board resolution not unrepealable so far as to render the board powerless and

Section 49. Kinds of meetings. - Meetings of directors, stockholders, or members may be regular or special. (n) o o o

trustees,

Section 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. 4. stockholders or members (Sec 23)

Sec. 50: Regular meeting: annually on a date fixed by the by-laws, or Anytime in April as determined by the board Meeting not required in case of amendment to the AOI, when written assent of ALL the stockholders is sufficient Exceptions: amendment to shorten or extend corporate term or amendment to increase capital stock

Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of

Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. GR: all corporate powers vested in the board of directors Exceptions: otherwise provided in the Code o Where the Code expressly requires the stockholders or members consent to certain matters before any action may be taken o Usually involves the major changes in the corporation o Stockholders or members approval usually expressed during a meeting, which may be regular or special

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extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of nopar stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) (1) requirements of stockholders or members meetings and of voting Jack: Publish notice when it is not sure
that there will be a quorum

notice

Section 50. Regular and special meetings of stockholders or members. -

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Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. By-laws may shorten or extend the time required by the Code for giving notice Board of SMB Workers: Failure to give notice would, as a rule, render any resolution made therein voidable at the instance of an absent stockholder who was not notified of the meeting Attendance by a stockholder despite want of notice operates as a waiver of the requirement If all stockholders are present or duly represented, it will be valid even if no notice at all was sent

Only matters reasonably related to the purpose must be taken up o Sent to last known address Attendance of stockholder is an exercise of his personal right as owner of the stocks of the corporation o

Board of SMB Workers v Tan. Stockholder John del Castillo files an action in court to declare null and void the election of the members of the board of directors and Election Committee of SMB Workers Savings and Loan Assoc Inc. and to compel the board to call for an hold another election in accordance with its by-laws and the Corporation Law, and to restrain the illegally elected directors from exercising the functions of their office. TC grants the petition and declared the election null and void and ordered another election to be held. However, the same members of the Election Committee set the meeting of the members of the association to elect the new members. Del Castillo et al contends that it would be inequitable for them to conduct and supervise again the election. Furthermore, since the notice was posted and sent out only on 26 March, and the election would be held on 28 March, or two days after notice, it is not in accordance with the by-laws which provide that 5 days notice is required. The TC entered an order that the election set for 28 March be cancelled and a committee of three be constituted and appointed to call conduct and supervise the election. H: it appears that the notice was posted on 26 March and 28 March was the date for the election. Therefore the five days previous notice required by the by-laws was not complied with. As regards the creation of a committee of three vested with the authority to call conduct and supervise the election, and the appointment of Viernes as chairman of the Committee, the court in the exercise of its equity jurisdiction may appoint such committee, it having been shown that the Election Committee provided for in the by-laws has been annulled by the TC and would jeopardize the rights of respondents if allowed to act. b place of meeting

Section 51. Place and time of meetings of stockholders of members. Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) Requisites of notice: o Specify time and place of meeting o Purpose

Section 51. Place and time of meetings of stockholders of members. Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein.

Jack: in publicly held corps, notice published in newpaper

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All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) by-laws cannot fix a place of meeting other than that fixed in Sec 51 for non-stock corporations: Sec 93

Section 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n) c quorum

automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) stockholders cannot unjustifiably walk-out, thereby breaking the quorum and defeating the validity of any act proposed and approved by the majority if justified, the meeting cannot be validly continued if the remaining stockholders present do not constitute a quorum

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. (n) GR: quorum is a majority of outstanding capital stock or majority of members of non-stock corporations Exception: o special rules in the Code o by-laws may provide for greater or lesser number to constitute a quorum, stockholders need not be present personally but may be represented by proxies whose vote will be as effective as if they were personally present:

Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n) Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall

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vote

vote required to carry a resolution of the stockholders or members depends on: o the nature of the resolution, and o corresponding rule as required by the code GR: majority vote of the shares or members present or represented, provided that there is a quorum Stock corps: vote is based on number of outstanding shares represented and not on number of stockholders present Non-stock: vote based number of members

(2) (3) (4) (5) (6) (7) (8)

adoption/amendment to the BLs sale, lease, mortgage, etc of all or substantially all corporate assets bonded indebtedness increase/decrease in capital stock merger/consolidation investment in another corporation dissolution

where all stockholders present GR: Meeting VOID If no notice or defective notice, or venue in another place other than in BLs or AOi, Any matter taken up will be voidable at the instance of an objecting SH But presence of ALL SHs, personally or thru representatives, constitutes a waiver of any irregularity or defect

Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) Close corps: AOI can provide for a quorum and voting requirements in stockholders meetings than that provided in Sec 52 o Each member has only one vote unless the by-laws or AOI limit the right or broaden it o By-laws may provide for voting by mail

Section 51. Place and time of meetings of stockholders of members. Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) Johnston v Johnston. Logan, Irene, and Felisa Johnston, and Louis and Rosario Johnston, and Elizabeth Araneta are the majority shareholders of a family stock corporation known as Johnston Lumber Co Inc. A stockholders meeting was scheduled to elect a new set of directors who would in turn choose the new officers of the corporation. Logan presented a proxy by his mother, Felisa, and another proxy by his wife, Irene, which all-in-all represented 1,242 of the 2,462 shares of the corporation. He also requested that the duly endorsed shares of JB Solis be listed in the books for voting purposes. Minority SH Louis Johnston, as Chairman of the board, denied the request. Logan quickly sent for the original owners so that they could vote in his favor. Louis also disallowed Logan from voting the 307 shares of the elder Johnston which he had been voting in his capacity as administrator of the estate because the estate

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. -xXxe non-voting stocks or members

can still vote/are required to vote in the ff: (1) amendment to the AOI

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proceedings were already terminated. Thereafter, and before the existence of a quorum could be declared, Logan et al walked out of the SH meeting and refused to recognize the validity of the meeting. Louis group, the minority carried on and elected themselves directors and officers. Another SH meeting was called by Louis at the instance of Logan, which will cover matters not taken up or not finished during the regular SH meeting. During the meeting Logan moved for the election of a new board, claiming that there was no quorum in the last meeting and thus was not validly held. Louis denied the motion. Logan, who represented majority of the stocks, then nominated his own set of directors, and his group cast their votes in favor of the nominees, which were elected the new members of the board. This action was overruled again by Louis as Chair. Logan Irene and Felisa filed a quo warranto suit alleging that they were the duly elected members of the BOD of Johnston Lumber Co, and were also elected as the corporate officers thereof and praying for the ouster of Louis, Araneta and Rosario Johnston. I: (1) Which of the two factions, the Logan group or the Louis group, was validly elected as directors and officers of the corporation H: The SHs who remained after the group representing the majority walked out without a quorum being declared represented the minority and did no constitute a quorum, and it is clear that they could not have validly transacted further business much less have elected a new set of directors. It follows that if the election of the directors after the withdrawal of Logan was null and void, then the subsequent meeting of the board at which the Louis group was elected was likewise null and void. If the purpose in bolting the meeting was to deliberately defeat the existence of a quorum, the absence of a quorum, then it would produce the effect of nullifying the proceedings that follows. It is to be noted that a SH can, for justifiable reasons, break the quorum by w/drawing from the meeting. Logan walked out because Louis persistently and with reason overruled Logan on his requests to vote the shares of the Silos family, which he validly purchased. That Logan did everything possible to register the stocks in order to vote them was substantial compliance with the charter and the by-laws. The denial by Louis to vote the shares of the minor children of Albert Johnston was likewise unreasonable. The withdrawal of Logan, although it actually defeated the existence of a quorum, was neither unreasonable nor unjustifiable. The second meeting of SH was properly convened. All parties were present. The roll was called and a quorum was declared. The contention of Louis that the 2nd meeting did not amount to an election cannot be sustained. It must be remembered that the Logan group held the majority of stocks when they cast their votes ifo the nominees. The inaction of the Louis faction, did not have the effect of defeating or invalidating the election. It is the essence of all elections that the will of the majority, properly expressed, shall govern. A majority of votes cast will decide, although some SHs who are present may refuse to vote,

and thus the majority of the votes cast may be less than a majority of the persons or stocks present or represented. Neither may the second election be assailed on the ground that notice did not specifically include the election of the new board on the agenda. The notice provided that matters not taken up or finished during the first meeting will be part of the agenda, therefore the SHs knew that Logan would press for the new board and they were prepared for it, having attended the first meeting. Furthermore, all SHs were present either in person or by proxy during the 1 st meeting and whatever defect in the notice was cured b their presence and acquiescence. (2) where no meeting called Sec 50 and 6 of PD 902-A are intended to protect the SHs from a situation where no meeting is called due to the absence of any person authorized to call it or fraudulent or unjustified refusal to call it 50: limited to a situation where there is no person authorized to call a meeting

Section 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer. (24, 26)

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transfers power to authorize the calling of a meeting from the courts to the SEC, and only when NO person is authorized to call a meeting intended to protect stockholders/members from a situation where no meeting is called due to the absence of any person authorized to call the same or due to the neglect of fraudulent refusal o directors to call a meeting for the election of new directors or whenever it is necessary to act on certain matters

o o

right to share in the profits right to participate proportionately, upon dissolution and after payment to creditors, in the distribution of the corporate assets

(1) election of directors or trustees 24: at all elections of directors or trustees, there must present, either in person or by proxy, the owners of the majority of OCS right to vote is a right emanating from ownership this is the only way a stockholder can have a voice in the management of corporate affairs it is the only way members can have a say as to how the purposes of the corporation should be achieved once elected, stockholders relinquish all corporate powers to the board right to vote can be waived in exchange for preferences and privileges, such as the issuance of preferred and redeemable shares as non-voting shares right to vote in certain areas cannot be denied (Sec 6)

Ponce et al v Encarnacion. At a stockholders meeting of the Daguhoy Enterprises Inc, the voluntary dissolution of the corporation and the appointment of Potenciano Gapol, the majority stockholder, as receiver was agreed upon, with a petition for voluntary dissolution drafted and signed by Ponce. Instead of filing the petition, Gapol changed his mind and filed a complaint in court to compel Ponce et al to render an accounting of the funds of the corp, reimburse it for expenses and purchases, and other amounts which were allegedly misspent and misappropriate for Ponces own use. Gapol also sought the removal of Ponce et al as members of the board, and prayed for an order directing him to call a meeting of the stockholders and to preside thereat. 2 days later, without notice to the Ponce group and to the other board members, the TC issued the order prayed for. Ponce only got to know about the order when the bank refused to honor the checks because of its refusal to recognize the new board members. H: The by-laws of the corporation provide in part that its board shall be elected by the stockholders every even year during the month of January. The requirement in the Corp Code that on the showing of good cause therefor does not mean that the petition must be set for hearing with notice served upon the board. The TC was satisfied that there was good cause considering that the chairman had failed, neglected, or refused to perform his duty to call a meeting of the stockholders to elect new sets of directors, in accordance with the bylaws. They had no right to continue as directors unless reelected by the stockholders in a meeting called for that purpose every even year. They had no right to hold-over brought about by the failure to perform the duty incumbent upon any of them. The alleged illegality of the election of one members of the board at the meeting called by Gapol was authorized by the court being subsequent to the order complained of and cannot affect the validity and legality of that order. If it be true that the director elected at the meeting authorized by the court was not qualified in accordance with the by-laws the remedy for the aggrieved party would be a quo warranto.

Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and

5.

instances when stockholder or members action is necessary where board action is insufficient, which includes election of directors/trustees but also major changes in the corporation most significant rights of a stockholder: o right to vote

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Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock;

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a) rules to be followed in the election of directors/trustees:

Section 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. (31a) the above provision requires presence either in person or proxy, implying that a stockholders meeting is required

6. Merger or consolidation of corporation or other corporations;

the

corporation

with

another

7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

Section 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of nonstock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees

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thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members. (n) Section 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n)

if a director disposes all his shares, he ipso facto ceases to be a director and a vacancy is created majority of directors/trustees must be residents of RP citizenship requirements: subject to Constitutional limitations by-laws may not do away with the qualifications required by law, buy may add qualifications or provide for disqualifications

quorum required

Detective & Protective Bureau v Cloribel. Fausto Alberto was managing director of the Detective and Protective Bureau Inc. who illegally seized and took control of the assets and books of the corporation, concealed them illegally and refused to allow any member of the corporation to examine. The stockholders in a meeting removed Alberto as managing director and elected Jose de la Rosa, who did not own a share of stock of the corporation. Alberto refused to vacate and surrender his office and continued to perform unauthorized acts and to use corporate funds. The corporation claimed that Alberto arrogated unto himself the powers of the board because of his refusal to surrender his office despite removal by the stockholders. H: Since de la Rosa did not own a share of stock of the corporation, he cannot become a director in accordance with the Corpo Code. If he could not be director, then it follows that he cannot be managing director. Since he is not qualified, then Alberto cannot be compelled to vacate his office because the bylaws itself provide that directors shall serve until the election and qualification of duly qualified successor. Gokongwei v SEC. This involves two actions in the SEC filed by John Gokongwei, a San Miguel Corporation stockholder by himself and through the URC and CFC, who sued the majority of the SMC BoD (Soriano, Zobel, Roxas, Ortigas, Prieto et al) and SMC itself to declare null and void the amended bylaws and a cancellation of the certificate of filing the amended by-laws. He alleges the following: SMCBOD acted without authority in amending the by-laws without the prescribed 2/3 vote of stockholders holding subscribed and paidup capital stock Some members of the SMCBOD amended the by-laws which state that in determining whether or not a person is engaged in competitive business, the Board may look into factors such as competitive business and family relationship, thus purposely providing for Gokongweis disqualification as director, and effectively disqualified him from being elected as director Gokongwei also files an action in the SEC to compel SMC to allow him to inspect the records of the corporation, including the minutes of the last stockholders meeting, copy of the management contract with ANSCOR, latest financial

for a valid election of directors/trustees= majority of outstanding capital stock or members entitled to vote Campos: quorum also based on the number of outstanding voting stocks or members entitled to vote

manner of voting; cumulative voting

viva voce is sufficient, unless ballot voting is requested in stock corporations, cumulative voting in the election of directors is mandatory right to cumulative voting cannot be curtailed by the by-laws number of voting stockholder votes = product of number of shares owned and the number of directors to be elected o stockholder may distribute them any way he pleases c in close corporations

special privilege in sec 97 d qualifications and disqualifications of directors

S23

no one can be elected director unless he owns at least one share in the corporation, registered in his name on the books

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statements among others, including the authority of the stockholders to invest corporate funds in San Miguel International Inc. The Sorianos counter by alleging that Gokongwei as president and majority stockholder of URC and CFC, conducted bad publicity against the SMC to generate support from the stockholders in his effort to secure a seat in the board. They add the fact Gokongwei was rejected by the stockholders because he was engaged in competitive business and securing a seat would have subjected SMC to grave disadvantages. SEC grants Gokongwei motion but denies the motion to inspect the financial statements and records of San Miguel International as he is not a stockholder thereof. SEC also allowed him to run as director but cannot sit as long as the validity of the by-laws has been settled. Meanwhile the SMCBOD submitted the amended by-laws to the stockholders, who ratified the same. I: were the amended by-laws valid and reasonable H: In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended bylaws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. I: Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable H: Gokongwei claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board, at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director. Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that the exclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise. Under US corporate law, corporations have the power to make by-laws declaring

a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... [A]n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." In the Philippines, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. I: W/N Gokongwei, as SH of SMC, has a vested right to be voted as director in the corporation. H: It is further argued by SMC that there is no vested right of any stockholder under Philippine Law to be voted as director of a corporation. Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that

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of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." The ordinary trust relationship of directors of a corporation and stockholders", according to Ashaman v. Miller," is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof. I: Whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors. H: It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation. According to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. The CFCRobina group was in direct competition on product lines which, for SMC, represented sales amounting to more than P478 million. In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority..." It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. e term of director or trustee

23: in stock corporations= 1 year but directors may hold-over as directors until the annual election is held 92 and 108: in non-stock corps, unless AOI provide otherwise, the term of trustee is 3 years except education corporations (5 years) f vacancies in the board

29: vacancies in the board are to be filled by the SHs in a meeting: no quorum removal expiration of term increase in number of directors may occur by reason of death, resignation, removal, expiration of term, or abandonment

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 mere withdrawal insufficientthere must be clear intention to resign Mead: abandonment of office may be implied when the director has accepted a position outside of the RP where his work would require his continuous presence, making it incompatible with his position as director of corporation if thru removal or expiration of term: majority of remaining directors (2) removal of directors only SHs have the power to remove directors under the procedures in 28 removal of director before expiry of his term, even without cause, is a right granted to the SHs for their protection against fraud, incompetence or abuse NOTE: no cumulative voting in the removal of directorsas fast as the minority elects a director by exercising their right to cumulate their votes, the latter can be removed by 2/3 vote OCS Vacancy can be filled in the same meeting where the removal is effected; NO need for notice Vote required: 2/3 OCS in stock corps; 2/3 members entitled to vote in non-stock corps Roxas v Dela Rosa. The majority SHs of Binalbagan Estate Inc formed a voting trust, wherein the trustees (Fisher, Laguda, and Monteblanco) were authorized to represent and vote the shares pertaining to the majority SHs. During the SH meeting the trustees were able to elect a board to their liking without opposition from the minotiry. Various substitutions have been made in the personnel of the voting trust, such that the present composition wanted to oust the officers of Binalbagan elected by the voting trust previously, without waiting the termination of their official term or after one year from date of their election. The trust then called a special general meeting of the SHs for the election of the board, amendment of by-laws, and other business. A board member and a single SH sued the trustees to enjoin them from holding said meeting. TC granted the petition. H: Under the law the directors of a corporation can only be removed from office by a vote of the SH representing 2/3 of the subscribed capital stock entitled to vote, while vacanies in the board can only be filled by mere majority vote. While the trust controls a majority of the stock, it does not have a clear 2/3 majority. It was therefore impolitic for the trust, in forcing the call for the meeting, to come out frankly and say in the notice that one of the purposes of the meeting was to remove the directors of the corporation. Instead the call was limited to the election of the board, it being the evident intention to elect a new board as if the directorate had been then vacant. Since the present directors were regularly

elected, the proposal to elect another directorate, if carried into effect, would result in the election of a rival set of directors, who would need a court order of quo warranto to install them in office. Thus the TC was correct in forestalling that eventuality and to enjoin the second election. Angeles v Santos. Angeles et al were minority SHs, while Santos et al were the majority SHs of Paranaque Rice Mills Inc. At an extraordinary SH meeting the SH appointed an investigation committee to investigate and determine the properties, assets, and losses of the corporation. Santos denied access to the properties and the records and books of the corporation. Santos took the records and books and appropriated for his own benefit the properties and funds of the corporation. He also refused to issue a certificate of stock for Angeles, and refused to call a SH meeting and a board meeting, as well as disposed of the properties of the corporation without authority. Santos also called no meeting of the board or of the SH thus enabling him to continue holding without any election, the position of president and GM. Angeles et al sought a court order to appoint a receiver, to order Santos to render an accounting, to issue to certificate of stock ifo Angeles, and to remove the present board and hold a special SH meeting to elect a new board. H: There is ample evidence to show that Santos et al have been guilty of breach of trust as directors of the corporation. The Board is a creation of the SH by delegation of the SH. But the board, or the majority thereof, occupies a position of trusteeship in relation to the minority of stock in the sense that the board should exercise GF, care, and diligence in the administration of the affairs of the corporation. And should protect not only the interests of the majority but also those of the minority of the stock. Where the majority of the board performs ultra vires acts or commits fraud or wrongful harm to the corporation, the court, in its exercise of equity jurisdiction, and upon showing that an intracorporate remedy is unavailing, will entertain a suit for and in behalf of the corporation to redress the injuries of the minority SHs against wrong by the majority. Where corporate directors are guilty of a breach of trustnot of mere error of judgment or abuse of discretionand intracorporate remedy is futile or useless, a SH may institute a suit in behalf of himself and other SH and for the benefit of the corporation. GR: SH cannot ordinarily sue in equity to redress wrongs done to the corporation, but the action must be brought by the board Exception: If the corporation is under the complete control of the wrongful members of the board, or where a demand or suit would be useless and futile The appointment of a receiver upon application of the minority SH is a power to be exercised with great caution. This does not mean that the rights of the minority SH may be entirely disregarded, and that where necessity has arisen, the appointment of a receiver for a corporation is a matter resting largely in the sound discretion of the court.

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As to the contention that it was wrong for the TC to order the removal of the directors and members of the board upon application by the minority SHs, the law does no confer expressly upon the courts the power to remove a director. But if the court has acquired jurisdiction to appoint a receiver because of the mismanagement and resulting injury caused by the members of the board, these may thereafter be removed and others appointed in their place by the same court in the exercise of its equity jurisdiction. In the present case, the properties and assets of the corporation are amply protected by the appointment of a receiver and thus the removal of the directors is unnecessary and unwarranted. Campbell v Leow Inc. Two factions have been fighting for control of Leows Inc the Tomlinson (majority SH) Faction, and the Vogel (president) Faction. At the SH meeting each nominated 6 directors and a neutral director, or 13 directors in all. 2 of the 6 Vogel directors, a Tomlinson director, and the neutral director resigned, making it 5-4 ifo Tomlinson. A quorum is 7. Only the 5 Tomlinson directors attended a directors meeting to fill the vacancies in the board. Before the meeting, Vogel as president called a SH meeting to fill director vacancies, amend the by-laws to increase the number of board members from 13 to 19, to increase the quorum from 7 to 10, and to elect 6 additional directors, as well as to remove 2 Tomlinson directors. A proxy statement was sent out by Vogel soliciting SH support for the agenda in the notice of the Vogel meeting and to fill the board with Vogel nominees. Tomlinson sued. He claims the president had no authority to call a special meeting of SH to act upon policy matters which have not been defined by the board. He also alleges that the president had no authority, without board imprimatur, to propose an amendment of the by-laws to enlarge the board. H: Vogel as president had authority to call the special meeting of SH, although the purposes of the meeting were not in furtherance of the routine business of the corporation, because it is expressly granted by the by-laws. Nonetheless, the SH, by permitting the by-laws to stand, have given the president power to state these broad purposes in his call for a meeting. The call of the Sh meeting is not of the character that would impinge on the power given directors by the statute. A by-law giving the president power to submit matters for SH action presumably only embraced matters which are appropriate for SH action. So construed the by-laws do not impinge on the statutory right and duty of the board to manage the business of the corporation. As to the enlargement of the board, although a radical change in corporate management and could be determinative of control, the wording of the by-law authorizes such action. As to the call of meeting for filing newly created directorships, which plaintiff claims is invalid, the SHs have the inherent right between annual meetings to fill newly created directorships. It would take strong by-law language to warrant the conclusion that those adopting the by-laws intended to prohibit the SHs from filing new directorships.

As to the removal of directors by the SH even for cause, which is not authorized by state law, the court ruled that the SH have such power. This power must be implied when we consider that otherwise a director who is guilty of the worst sort of violation of his duty would nevertheless remain on the board. Considering the damage a director might be able to inflict upon his corporation, the doubt must be resolved by construing the statute and by-laws as leaving untouched the question of director removal for cause. This power exists even where there is a provision for cumulative voting. If a directors presence or action is clearly damaging the corporation and its SH in a substantial way, it is difficult to see why that director should be free to continue such damage merely because he was elected under a cumulative voting system. However, a SH has standing and the right to challenge the legal propriety of action proposed to remove a member of the board, and can attack procedures adopted to remove directors for cause where the procedure is invalid in its face. (3) fundamental changes in the following basic changes in the corporation, although usually initiated by the board, its decision is not final, and therefore approval of the SH would be necessary. o Non-voting stocks or non-voting members will be entitled to vote (Sec 6) o Vote required: 2/3 of outstanding capital stock or 2/3 of members entitled to vote For amendment of by-laws: simple majority Unanimous vote never required a amendment of AOI

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

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stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. AOI embodies the basic agreement of the SHs; thus any change requires their consent Note: no requirement of SH or members meeting; written assent is sufficient o Secs 37 38 39 40 42 43 and 44 however require a meeting first Extension (or shortening) of term and increase (or decrease) of capital stock also involve an amendment of the AOI but are covered by Sec 37 and 38 Amendment of certain matters:

oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Note that such an amendment in sec 103 would make a corporation a close one. Any amendment to these would in effect change the status of the corporation as a close one, and will deprive it of special privileges accorded by the Code to ordinary corporations This must prevail over the general provision of Sec 16 which does not require a SH meeting b sale or other disposition of substantially all assets

Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. -- x X x -Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or

sale of all or substantially all assets is not just an act of mgtit is an act of ownership, and therefore SH approval is necessary requires a meeting duly called and notice to SHs

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

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After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.

capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: -- x X x -7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; Dela Rama et al v Ma-ao Sugar. Derivative suit by 4 minority SHs against the Ma-ao Sugar Central, its president and 3 other directors. The minority SHs contend that the president subscribed for P3M worth of capital stock of the Phil Fiber Co Inc, a company making sugar bags, making 2 payments without any board resolution authorizing the investment at the time, but only after the investment was already made. They claim that the transaction is still wanting in legality, since no resolution was approved by affirmative vote of 2/3 of SHs. H: a private corporation, in order to accomplish its purpose as state in its AOI, and subject to the limitations of the Code, has to power to acquire, hold, mortgage shares, bonds, and other debt instruments of any domestic corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the Shs, but when the purchase of shares of another corporation is done solely for investment and not to accomplish its purpose, the vote of approval of the SH is necessary. When the investment is necessary to accomplish its purpose in the AOI, the approval of SHs is not necessary. Gokongwei v SEC. I: W/N the SH of a corporation may ratify the investment of corporate funds in a foreign corporation. H: If the investment is made in pursuance of the corporate purpose, it does not need approval of the SH. It is only when the purchase of shares in another

investment in another business or corporation (compare with 36)

42 adopts the ruling in Dela Rama that where the investment by the corporation is reasonably necessary to accomplish its primary purpose in the AOI, the approval of SHs is NOT necessary. However In 36: expressly limits such investment to one which may be reasonable and necessarily required by the lawful business of the corporation, which would make any other kind of investment ultra vires! Campos: The power to invest in another business other than its primary purpose must therefore be expressly allowed by the AOI! If not, and the corporation wants to make such an investment, it should amend its AOI. In either case: SHs approval is mandatory 42 and 36 are based on the principle that the SHs have a right to decide how their funds will be invested

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding

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corporation is done sholey for investment and not to accomplish the purpose of the corporation that the vote of approval of 2/3 of SH is necessary. In this case, the purchase of beer manufacturing facilities by SMC was an investment in the same business as stated in its AOI, which is to manufacture or market beer. Even assuming that the board of SMC had no authority to make the investment, there is no question that a corporation, like an individual, may ratify and render binding upon it the originally unauthorized acts of its officers or other agents. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe the requirement of law the a vote of 2/3 of SH holding voting stock. This requirement is for the benefit of the SHs. Thus only they may ratify the investment, and such ratification obliterates any defect which it may have had at the time of investment.

boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n)

APPRAISAL RIGHT (cf Appraisal Right sidebar in Amendments to Charter)

merger and Combinations)

consolidation

(cf

Mergers

and

merger: the union of two or more corporations by virtue of which one of them absorbs all the others o juridical personalities are extinguished, except only that of the absorbing corporation consolidation: union of two or more corporations with the formation of a new corporation, extinguishing all the constituent corporations in the process

appraisal right: a SH who dissented and voted against the proposed corporate action may choose to get out of the corporation by demanding payment of the fair value of his shares the SH is granted by law the appraisal right in any of the four fundamental changes (amendment of AOI; sale or other disposition of substantially all assets; investment in another business/corporation; merger/consolidation) GR: a SH cannot just pull out his investment, other than selling his shares to a willing buyer, which he subjects to all the risks of the business of the corporation, and will have to wait until dissolution of the corporation. o Exception: in specified and specific major changes in his contract of investment o The law presumes that the SH did not foresee the changes when he bought the shares or made the investment

Section 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n) all instances of amendment of the AOI gives rise to a SHs appraisal right

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o o

changes that affect or restrict the rights of any SH gives rise to his appraisal right ex. Mere change in name or principal office not sufficient to invoke the appraisal right

and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n) Section 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. (n) Effect of the demand for the fair value: if the corporation refuses or fails to pay the fair value w/in 30 days of the award, SH is restored to all his rights ipso facto o even if the inability to pay is due to insufficient unrestricted retained earnings same effect: o corporate action is abandoned or rescinded o necessary approval of SEC cannot be obtained o SEC decides that SH is not entitled to appraisal right o SH withdraws demand for fair value of shares with consent of corporation

Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) if SH was absent during the meeting or if present, abstained in the voting on the approval of a corporate action, then he does not have the appraisal right one very important condition: the corporation must have unrestricted retained earnings. This is intended to protect both corporate creditors and the remaining SHs costs and expenses of appraisal are borne by the corporation, unless the fair value ascertained by the corporation is approximately the same as the price which the corporation may have offered to pay the SH

Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n) Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred,

Section 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting

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and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n) If dissenting SH sells his shares before getting paid, his right to payment ceases, and transferee acquires all rights of a regular SH

Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. A situation where the SH can still get back his investment from the corporation before dissolution Refers only to SHs of close corporations Sec 105 makes the close corporation very much like a partnership where a partner, even without just cause, can leave the business at any time and effect a dissolution Withdrawal of SH does not cause the dissolution of the corporation Corporate creditors are protectedthe code requires that the assets of the corporation be sufficient to cover its debts and liabilities exclusive of capital stock o Note difference between the above condition and the requirement in Sec 82 (i.e. existence of unrestricted retained earnings)

Vote required: majority OCS Power to amend BLs can be delegated to the board by 2/3 vote OCS Q: Will delegation continue to be effective even if the capital stock has been greatly increased thereafter? (Gokongwei) Campos: YES. Under 48, if the present SHs wish to revoke the board delegated authority, they can do so in a meeting called for the purpose, thru a majority vote Non-voting stocks cannot vote here Amendments effective only after SEC issuance of certification

Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of twothirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) (4) other instances requiring stockholders action

increase and decrease of capital stock; creation or increase of bonded indebtedness (cf Financing) (Sec 38 supra)

declaration of stock dividends (cf Dividends)

adoption, amendment, and repeal of by-laws (cf Amendments of Charter)

Code does not consider amendment of BLs as a major change in the corporation, therefore SHs have NO appraisal right

43: no stock dividend may be issued without the approval of at least 2/3 OCS stock dividends deprive the SHs of the right to participate in the current profits of the corporation stock dividends are ploughed back into the capital and made part of the capital stock, exposing it to risk

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management contracts (cf Corporate Powers)

non-voting stocks have no right to participate in the voting under Sec 6

defn of mgt contract: one entered into between 2 corporations by virtue of which one agrees that its corporate affairs will be managed by the other 44: SHs of BOTH corporations must give their consentmajority vote at a meeting duly called NOTE: non-voting stocks have no say in the approval of mgt contracts

Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation.

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

fixing consideration for Consideration for Shares)

no-par

shares

(cf

vote: majority OCS right to vote the fixing of consideration arises only when the AOI does not fix it and the board is not authorized by the AOI or BLs

The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16)

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fixing compensation of directors

appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. Right to vote Sec 6: no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares, and there shall ALWAYS be a class of shares which have complete voting rights Non-voting shares are entitled to vote in certain matters enumerated in Sec 6

Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n) e deadlocks in close corporations

AOI of a close corporation may provide for a greater quorum and voting requirement in board and SH meetings AOI of a close corporation may provide that the mgt of the corporation shall be done by the SHs, which shall be deemed directors This makes chances of deadlock greater and balance of control more precarious SEC may intervene, even on the action of only one SH regardless of the number of his shares, with the power to prohibit the directors or SHs from performing any corporate act and even to dissolve the corporation SEC can also appoint a provisional director

Devices affecting control GR: extent of control would be proportional to the number of shares a stockholder owns i.e. the more shares, the greater the possibility of control Except, that it is possible for a person or group owning only a minority of shares can obtain control by successfully electing the majority of directors, through devises Common problem in devises: effect of transfer of some or all stocks by one of the parties to the voting agreement 1. the proxy device Corpo Code expressly allows voting by proxy in all stockholders and members meetings

Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5)

Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid

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and effective for a period longer than five (5) years at any one time. (n) two meanings of proxy: o person duly authorized by the stockholder to vote in his behalf at a stockholders meeting is actually an agent for a special purpose rules on agency apply to the relationship o the actual document evidencing this authority types of proxy: o general proxygives the power to vote for directors and on all ordinary matters which may be properly be taken in an SH meeting does not include the power to vote for an amendment to the AOI or other unusual transactions o limited proxyrestricts the authority to vote to specified matters only and may direct the vote to be case in a certain way Nature of proxy: a special form of agency governed by the laws on agency o Strictly fiduciary relation, and therefore as a GR, revocable in nature despite contrary stipulations o Exception: coupled with an interest Includes where the proxy has parted with the value or incurred liability at the SHs request which would mean to it is NOT the giving of onerous consideration that makes a proxy one that is coupled with an interest, but that the proxy is an integral part of the security by which a loan is to be paid requisites for valid proxy (58) o in writing o signed by SH or member o filed before the scheduled meeting term of proxy: o proxy may fix the period it may be used, but cannot exceed 5 years, renewable for not more than 5 years per renewal o no period specified: expires after the meeting for which it was given and cannot be used for another meeting unless it is renewed who may be appointed proxy? o Stock: no limitation, and BL restrictions on SH right to appoint a proxy will be VOID o Non-stock: 89: AOI or BL may restrict right to appoint proxy revocability: o GR revocable even before the period has expired and even if it expressly provides for irrevocability

Exception: coupled with an interest Irrevocable for the period fixed Upon expiry, proxy automatically ceases to be effective unless renewed What constitutes sufficient interest? Depends from case to case Procedure/practice: o management usually sends a proxy form with notice of the annual stockholders meeting o persons suggested as proxies have been selected by the incumbent directors and are sometimes referred to as the proxy committee o the existing management who may own only a small portion of the corporations shares can retain its control over corporate affairs for as long as they can obtain the necessary number of proxies from absentee stockholders o proxies may not be appointed orally and the written proxy should be filed with the corporate secretary before the meeting failure to comply will render the proxy void and ineffective vote or presence counted on the basis of a void proxy may result in the invalidation of any action, unless the number of shares required for quorum or voting is present o when a group of SH feel dissatisfied with management, they may seek control to correct such mismanagement by soliciting proxies for the next election of directors o each block of SH will seek proxies of absentee SHs o since management has the right to defend its present policies, it can as a rule, use corporate funds and facilities in solicitation, as long as: it acts in GF, the expenses are reasonable under the circumstances and the proxy war is not a personal one GR: when the right to vote by proxy is given by statute, a stockholder cannot be deprived of it by any by-law Exception: non-stock corpsCode allows for a waiver of the right provided this is made in the AOI or by-laws By-laws may also impose reasonable conditions as to the form and manner of voting by proxy o

In re Giant Portland Cement. H: Stock transferred on the books of the corporation within 20 days prior to a stockholders meeting, for the election of directors, is temporarily disenfranchised, and cannot be voted either by the transferor or by the transferee. The persons on whose proxies the SH meeting

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were the SH of record within the provision of the statute, although they were not real beneficial or equitable owners of the stock. The right to vote shares of corporate stock, having voting powers, has always been incident to its legal ownership. Whatever the rights of the mere unrecorded assignee of the stock certificate might be in the absence of a by-law or other contract provision requiring all transfers of shares to be recorded on the books of the corporation, it is not contended that such a provision is not authorized or is not binding as between SHs and the corporation. As between the transferor and the unrecorded transferee to the stock certificate, the legal title passes to the latter. A very different rule applies between the corporation and the mere unrecorded assignee of the certificate of stock. That is because limited contract restrictions relating to stock transfers, are for the benefit of the corporation, and to enable it to ascertain from its records who its members of SHs are. So far as the corporation is concerned, until such a by-law is complied with, the record owner must therefore be regarded as the real owner of the stock, with the consequent general right to vote it by proxy or otherwise. When considered from a legal standpoint, there is no privity of contract between the mere holder of the certificate and the corporation, and he is not a real member of that organization until the transfer is recorded. Until that time, the possible legal rights of the holder of the certificate are of an inchoate nature. In other words, a real novation, whereby a new contract between the mere holder of the certificate and the corporation is substituted for the prior contract of the record owner, can only be brought about by complying with the corporate regulation relating to transfers of stock. The record owner may, therefore, be the mere nominal owner, or technically a trustee for the holder of the certificate, but legally he is still a stockholder in the corporation, and so far as the corporation is concerned, like the usual trustee, ordinarily has the right to vote the stock standing in his name. In cases of this nature, when nothing more than a mere dry trust is involved the owners of the certificates can usually protect their rights by recording the transfers and having the new certificates issued; but even though that could not be done in this case because the corporate transfer books were closed at the time of the assignments, they could have compelled the record owners to give them proxies to vote the stock standing in their names. A mere nominal owner naturally owes some duties to the real beneficial owner or equitable owner of the stock, and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is perhaps answerable in damages in some cases. It can hardly be contended that the actual consent of the holder of the certificate is ordinarily essential to the right of the record owners to vote stock standing in their names. When the right and power of a mere record owner to vote is questioned, some ultra vires, negligent, or improper willful act or omission on the part of the corporation or its agents is relied upon and must appear. In some cases the court may also reject votes cast by the record owners, which are regarded as improper, solely because of some peculiar inequitable circumstances affecting the relation between such apparent owners and the transferee of the certificates.

Conceding that as between a transferor who has parted will all the beneficial interest in stock and his transferee, the board equities are all in favor of the latter in the matter of its voting. State ex rel Everett Trust v Pacific Wax. I: W/N the proxy to vote the stock owned by Paine-Mitchell and Jordan was revocable H: The rules against perpetuities is usually stated as prohibiting the creation of future interest or estates, which by possibility may not become vested within a life or lives in being and 21 years the rule however applies only to the vesting of future estates and does not apply to vested estates. The option agreement did not create a future estate or interest to become vested at some future time. It was a promise by an owner of stock in a corporation that if at any time during the next 20 years he desired to sell his stock he would give the promissee the first opportunity for a period of 15 days to purchase it a such price and upon such terms and conditions as the promisor offered. It was in effect a promise to give an option in the even the promisor desired to sell his stock. GR: a proxy given by a SH to vote his corporate stock at a meeting of the SHs of a corporation is revocable by him even though the proxy by its terms is expressly made irrevocable. Exceptions: (1) where authority or power is coupled with an interesta power coupled with an interest is a power or authority to do an act, accompanied by or connected with an interest in the subject or thing itself upon which the power is to be exercised, the power and interest being united in the same person. The interest is not limited to the thing itself upon which the power is to be exercised, but is also included the subject upon which the power is to be exercised. It is however sufficient that the proxy holder have an interest in the subject matter upon which the power is to be exercised. The thing itself may refer to tangible shares or certificates of stock, but the subject matter may refer to the intangible voting right and the incidental control of the corporation. (2) where authority is given as part of a security or is necessary to effectuate a securityin such a case the interest of an agent is something more than an interest in being permitted to exercise the power, yet something less than an estate in the subject matter or thing upon which the power is to be exercised. It is clear from the proxy agreement that the parties agreed that Paine Mitchell stock should be used in conjunction with the stock owned by Engle so that the policies of the respondent should be thus controlled. In this situation Engle was more than a mere agent. In voting stock he served purposes of his own in maintaining control of the corporation by his choice of directors and the determination of policies and business affairs of the corporation. This voting of the stock for these purposes was the subject matter of the agency. Engle acquired an interest in the subject matter of the power given to him and this interest was coupled with such power. The power to vote the stock was necessary in order to make Engles control of the corporation secure. The mutual agreement as a whole created something like a community of interest in the

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stockholdings of the parties having for its purpose the use of their stock as a unit and the effect of which was to give both parties an interest in the voting of the stock, although the power to vote was to be exercised by Engle after the death of Jordan or by Paine-Mitchell after the death of Engle. This power was couple with an interest and by the entire agreement between the parties the power was intended to be and became a security to effectuate the main purpose of the agency. The parties did no more than promise to give each other an option to purchase in the even either had a proposal to buy his or its stock; but the option agreement must be considered with the proxy agreement in determining the intention of the parties and whether Engle had an irrevocable proxy. The conclusion is that Engle had a power coupled with an interest and that the authority was given to him as part of a security and was necessary to effectuate such security and therefore the proxy was not revocable by the appellant. A proxy in favor of the pledgee of the shares subject of the proxy is sufficient interest to render the proxy irrevocable Alejandrino v de Leon. Pambul Inc was organized by the controlling stockholders of Pampanga Sugar as a scheme to perpetuate their monopoly of the directorship and executive positions of Pampanga sugar by loaning money to its SHs at as low a rate of interest as 7% per annum on the security of their shares of stock, the amount of the loans being as high as 90% of the par value of the shares, thereby inducing the SHs to avail themselves of the loan and thereby enabling the management of Pampanga Sugar through Pambul to secure sufficient proxies for their purpose, and as a result the pledgors-stockholders could do nothing even if they should make use of their right to vote when and if the management should commit corporate abuses, excesses, and mistakes. H: We do not think such alleged circumstances are sufficient in law or equity to vitiate or invalidate or render revocable the irrevocable proxies in question. The desire and design of a majority of SHs of a corporation to control its management and operation is legitimate per se, and is in fact the universal practice in the business world. The SH who own a majority of the stock of a corporation may elect themselves directors or appoint themselves its agents, or form and carry into effect policies of management as freely as if the business were their own, so long as they act honestly and do not devote the corporate assets or business to their own private gain or to the prejudice of other stockholders, and no one can question their acts, which are surely intra vires. The allegations of monopoly positions in a corporation, without any allegation of fraud or irregularity resulting therefrom to the prejudice of any stockholder, is not actionable per se. The SH owning 30% of the outstanding stock of a corporation cannot secure its control without the willingness, adherence, cooperation, or support of other SHs. Assuming that the two families owning 30% of the capital stock have been able to procure such support by organizing Pambul for the purposes above indicated, it would be admitted that the organization of Pambul was accomplished by vote of the majority and not of only

30% of capital stock of Pampanga Sugar. It cannot be assumed that the meeting in which the organization of Pambul was agreed upon the SHs other than the two families referred to were deprived of their vote by means of the proxies now assailed, because said proxies could not have existed before Pambul was organized. Even now the SHs of Pambul are also the SHs of Pampanga Sugar, the former cannot be said to be under the control of the said two families because the latter are not alleged from the facts. In other words, Pambul SHs are free to vote their stock and elect the directors they want; and the board of directors of Pambul is at liberty to change any or all of the onditions of the contract of pledge in question. Even assuming that respondent de Leon controls Pampanga Sugar, it would not necessarily follow that he or the company also hold voting proxies on the shares of stock of Pambul. Therefore the SHs of Pambul are free to vote their shares at the election of its directors. It is thus clear that if the alleged minority SHs of Pampanga Sugar cannot or do not elect even one candidate to represent them in its BOD, nothing appears to prevent them from doing so except their own volition. Nobody forces them to pledge their stock to Pambul. They must either be satisfied with the management or indifferent with regard to voting. Only Alejandrino, as one of the minority SHs, owning 112 shares, has come before the court to assail the contracts of pledged entered into by 18 other SHs and in which he is not even a party. To vote at a meeting of the SHs of a corporation is, unlike a political franchise, but an exercise of the right of ownership involving no public interest. To call the transfer of such right bribery is to distort the meaning of the word; it can no more be called bribery than the payment by the purchaser of the price of goods bought by him may be considered a bribe to the seller Would it not, rather, be morally wrong to permit a SH to obtain a liberal loan of pledging and transferring his stock and the right to vote it and then repudiate the proxy to vote without paying the loan? Would it be fair to convert the pledgee or its representative into a mere voting puppet of the pledgor when the former accepted the pledge from the latter in GF and in the belief that the security for its investment could be protected by it by exercising the right to manage the property through the voting proxy. Campbell v Leows Inc. Action to restrain Loews Inc from using corporate funds, employees, and facilities for solicitation of proxies for the Vogel group and from voting proxies so solicited. Campbell contends that the Vogel Group, by calling the meeting and by using corporate funds and facilities, are usurping the authority of the BOD, and that the president is in effect in using his corporate authority and the corporate resources to deny the will of the BOD and to maintain himself in office. The by-laws provide for 13 directors. 7 is a quorum. Due to 4 resignations there are now 9 directors in office. 5 of 9 are of the Tomlinson Faction while the remaining 4 are of the Vogel Faction. Since the Vogel Group will not attend directors meetings, it follows that the Tomlinson Group is unable to muster a quorum of the BOD and is thus unable to take action on behalf of the Board.

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H: The BOD acting as a board must be recognized as the only group authorized to speak for management in the sense that under the statute they are responsible for the management of the corporation. Since the Vogel Group, being in physical possession of the records and facilities of the corporation, treated the request of the directors for a stockholders list as though it were to be judged by standards applicable to a mere SHs request, they violated the duty owed such directors as directors. The fact the Vogel, as president, had the power to call a SH meeting to elect directors and is so to speak, in physical control of the corporation, cannot obscure the fact that the possible proxy fight is between two sets of directors. Vogel has no legal standing to make his faction the exclusive voice of Loews in the forthcoming election. On the issue of how the two groups should be classified for purposes of determining the rights of the Vogel Group in connection with the use of corporate money and facilities for proxy solicitation at the SH meetingw/n the SH approve of a record made by one group and opposed by another group. While the Tomlinson Group has 5 of 9 directors, it would be most misleading to have them represent to the SH that they are management in the sense that they have been responsible for corporate policy and administration. It is apparent that the Vogel Group is entitled to solicit proxies, not as representing a majority of the board, but as representing those who have been and are now responsible for corporate policy and administration. Whereas the Tomlinson Group, while not management in the sense that it is able to take effective director action, is representative of the majority of the incumbent directors and is entitled to so represent to the SHs if it decides to solicit proxies. Since Vogel is entitled to expend reasonable sums of corporate funds in the solicitation of proxies, it follows that the request for an injunction against such us will be denied. On the issue of the entitlement of the Vogel group to use corporate facilities and employees, because such action would carry the intracorporate strife even deeper within the corporation and there is no practical way to ensure equal treatment for both factions where only one group (Vogel) is in control of the physical facilities, Vogel should thus by enjoined from using corporate facilities and personnel in soliciting proxies. On the issue of w/n Vogel, in soliciting proxies, misrepresented himself as management and thus the proxies should not be voted, the evidence presented by Tomlinson Group are not so misleading as to void the proxies. Since the meeting was validly called by the president, there was nothing misleading in the creation of the impression that the meeting and the material were initiated by the company. The whole impact of the proxy material conveyed to the average reader the impression that there is a bitter fight between the president and his faction and another faction on the board. The overall result is no so misleading as to justify the nullification of the proxies for any purpose. 2. voting trust agreement

Defn: a trust agreement whereby a stockholder transfers his shares to a trustee who will exercise his voting rights. Under this arrangement, the stockholder remains the beneficial or equitable owner of the shares, but legal ownership is transferred to the trustee. Essence of voting trust: real ownership is separated from the voting rights Involves the complete surrender by the SH of his voting rights to a trustee or trustees Voting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of voting upon stocks that he does not own Transferring SH ceases to become SH of record but retains the right of inspection of corporate books During the period of the agreement, it is irrevocable for as long as the trustee has not violated the trust by his misconduct or fraud. Conditions for the use of voting trustsSec 59:

Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or

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o trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) Requisites of a valid voting trust: (59) o In writing and notarized o Certified copy filed with the corporation and the SEC o Period not longer than 5 years, but renewable each time for not more than 5 years Exception: where the voting trust is a condition of a loan agreement, in which case it may be for a longer period but not beyond the time when the loan is fully paid o Certificates of stock is to be cancelled, and new ones issued to the trustee stating that it is issued in pursuance of a voting trust agreement o Transfer must be entered in the corporate books o Trustee should issue voting trust certificates in favor of transferring SHs o Not for an illegal purpose, or for the benefit only of the trustee without any obligation to perform any useful service for the protection of the stockholders or creditors of the corporation it must have a legitimate business purpose to promote the best interest of the corporation or even to protect the legitimate interests of others in the corporation creation of voting trust: o transferring SHs receive transferable voting trust certificates as evidence of their rights rights other than voting rights may also be transferred to the trustee o but the SH ceases to be a SH and his rights are now against the trustee in accordance with the agreement o SH has the express right to inspect corporate books and records

o o

Trustee is also qualified to become a director, since he is the registered owner of the shares and fulfills the qualifications of the Code that at least one share is owned to become qualified as director No voting trust agreement may be kept secret among the parties thereto; it must be open to examination No voting trust agreement may be exclusive, since the law gives a SH the right to transfer his shares to the trustee upon the same terms and conditions in the agreement

Abercrombie v Davis. 6 stockholders, led by Davies (president) of the American Independent Oil Company took steps to form a coalition, in order to ensure the smooth functioning of its board considering that not one SH holds a majority of the stock of the corp, and no one SH is represented by more than four directors. The Davies 6 hold 54.5% of the corporate shares and is represented on the board by 8 of 15 directors. An agreement was executed between the 8 directors representing the Davies group and are called agents, and the Davies 6 to achieve effective control of the board and control of corporate policy. Motive was to prevent acquisition of control by Philipps, the largest single SH holding 1/3 of the stock. The agreement provides that it transfers voting conrol of the stock of the Davies 6 to the 8 agents for a period of 10 years. An agreement of 7 of the 8 agents is required to vote the stock and in case of disagreement an arbitrator will be designated. Abercrombie (one of the organizers of the company), Philips et al sued Davies and the agents, claiming that the agreement is invalid. In substance it is a voting trust but since it did not comply with the voting trust statute it should be void. Davies contends that it was never intended to be a voting trust but a mere pooling agreement. H: The agreement is a voting trust. If any SH agreement provided for joint or concerted voting is so drawn as in effect to occupy the field reserved for the voting trust, it is illegal, whatever the mechanics may be devised to attain the result. Definition of voting trust: a device whereby two or more persons owning stock with voting powers, divorce the voting rights thereof from the ownership, retaining to all intents and purposes the latter in themselves and transferring the former to trustees in whom the voting rights of all depositors in the trust are pooled. The principal object of such trust is voting control. The agents agreement effectively divorces the voting rights of the pooled stock from its beneficial ownership, transfers the rights to the agents through irrevocable proxies for 10 years, pools the stocks in the agents as a group through the proxy devise with no SH retaining the right to vote, and its principal object is the voting control of the company. These elements are elements of a voting trust. The provision in the agreement which gives the agents the power to withdraw the stock from escrow and transform the agreement into a voting trust merely added only the special mechanics of a voting trust that the statute

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requires, the substance of the voting trust having already existed in the agreement. Since the voting trust statute was not complied with i.e. shares were not transferred in the books and a copy not furnished to corporation, it effectively created a secret voting trust. The statutory requirement is for the benefit of all SHs and all beneficiaries of the trust, who are entitled to know where voting control of the corporation resides. This failure to transfer stock on the books is not a sufficient reason for holding the agents agreement not a voting trust. The stock here was endorsed in blank and delivered to the agents for deposit in escrow with irrevocable proxies. Transfer on the books is not essential to effect an irrevocable transfer of voting rights to fiduciaries. It is such a transfer which is characteristic of a voting trust. The fact that the agents are subject to control by their respective principals does not prevent the agreement from constituting a voting trust. The stock is voted by the agents as a group. No one SH retains complete control over the voting. It cannot vote its own stock directly; all it can do is direct its agent how to vote on a decision to be made by the agents as a group/ in effect, each SH participating in the agreement reserves the right to name and remove the fiduciary representing him. Such a provision is not inconsistent with a voting trust. Davies cites the ruling in Ringling Bros v Ringling in arguing that their agreement is only a pooling agreement. As a pooling agreement in substance and purpose approaches more and more nearly the substance and purpose of the voting trust statute, there comes a point which if the statute is not complied with, it is illegal. A pooling agreement may not escape the statutory controls by calling the trustees agents and giving to the SH receipts instead of voting trust certificates. Everett v Asia Banking. Teal & Company is indebted to HW Peabody & Co. for P300K for tractors, plows, and parts delivered, of which it has paid P150K. Asia Banking Corp held drafts accepted by Teal under the HW Peabodys guarantee. Tractors were returned to HW Peabody due to its being unsellable due to financial and agricultural depression in the RP. Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment was delayed until the rescission of the credit of Teal with Asia Bank. Yet Smith still delivered the order, and Teal at the request and advice of the Bank accepted the drafts and stored the same. Asia bank persuaded Teal, Peabody, and Smith Kirkpatrick to enter into a creditors agreement wherein it was mutually agreed that neither of the parties should take action to collect its debts from Teal for 2 years. Teal soon became indebted to Asia Bank for P750,000, secured by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it was advisable that the Bank should temporarily obtain control of the management and affairs of the company. To this end, it was necessary for the SHs to place their shares in a voting trust to be held by the Bank, then the Bank would finance Teal under its own supervision. The Teal SHs were thus induced to enter into the Voting Trust Agreement, with the purpose that the agreement will be intended for the protection of all parties from outside creditors. Shortly after the execution and

delivery of the voting trust and the MOA, Mullen as GM of the Bank, caused the displacement and removal SH representatives in the Board and the substitution in their place of the Banks employees or representatives. The new Board, who have not purchased any share of stock of Teal, proceeded to remove the Corp Secretary, discharge all the old managers and displace them with creatures of their own choosing whose interest consisted wholly in pleasing themselves and the Bank, and who were wholly foreign to the stockholders. Right of transferring SHs to set aside the trust agreement when their rights are trampled upon by the trustee. Corpo Code now provides that no VTA will be used for purposes of fraud.

Mackin v Nicollete Hotel. Dixon was the owner of a leasehold interest in a tract of land in Minneapolis upon which stood what was known as the Nicollet Hotel. Nicollet Hotel Inc was organized for the purpose of adding to the hotel accommodation of that city. Arrangements were made to have Dixon take 2500 shares for his lease and to erect an new Nicollet Hotel upon this property. Cost was $3M, to be raised by the sale of $1M mortgage bonds and $1.25M of preferred stock. The Minnesota Loan and Trust Co approved the loan application of Nicollet for $1.8M secured by the said mortgaged bond. The loan agreement stipulates that a voting trust agreement is entered covering the common stock of Nicollet. The State Securities Commission approved Nicollets application for the license to sell its preferred stock, provided that the common stock is to be trusted with three trustees for 10 years for the protection of preferred SHs. Thereafter a voting trust agreement was entered with Dixon et al as voting trustees. Mackin is the owner of a trust certificate representing 80 shares of common stock, alleging that the voting trust is void and that the trustees and directors appointed have mismanaged the company and have caused large losses. The agreement also allegedly denied them the right to inspect the books, and they ask the court to declare the same null and void and appoint a receiver until the beneficial owners can elect a new set of directors. I: W/N the voting trust is valid H: Voting trusts are not illegal per se. In the instances where the voting trust has been held void, there existed invalidating circumstances such as want of consideration, voting power not coupled with an interest, fraud, illegal purpose, and so on. In this case there was no charge of illegality or fraud, nor of any invalidating circumstance. The voting power of the three trustees is coupled with an interest because of one of the trustees is a substantial owner of the common stock, and all are charged with the duty of protecting and conserving property for the benefit of those who became purchasers of preferred stock and bonds. The whole purpose of the agreement is legitimate and wholesome. It was a matter of civic pride and to make this possible, it involved the invitation of combinations of capital in substantial amounts, which could only be secured by having those who invested their money assured of the fact that there would be a continuity of management during a period of years until such time that the new enterprise would have an opportunity to justify a successful financial future. It

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would be a manifest injustice to the large number of holders of bonds and preferred stocks, not to the parties to the suit, to adjudge and hold illegal a trust agreement upon the strength of which they had invested their money in the enterprise. It also appears that Mackin purchase the certificates of trust after the creation of the trust agreement and are presumed to have full knowledge of the limitation of their rights. NIDC v Aquino. Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy. It entered in to a Financial Agreement with PNB for additional operating capital for its 3 processing mills and to pay its other debts to other banks. Under the agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of preferred shares convertible within 5 years into common stock to pay off the other debts and the balance to pay off its own due with PNB. PNB also granted various credit accommodations. Batjak as part of the deal, mortgaged all its properties in the province. A 5-year voting trust agreement was executed ifo NIDC by the SHs representing 60% outstanding stock of Batjak. Years later, PNB instituted foreclosure proceedings against the mortgaged properties due to Batjaks insolvency, and soon became owner of the properties. Batjak failed to exercise its right to redeem within the period allowed and PNB transferred ownership of the 2 oil mills to NIDC. 3 years later, Batjak represented by majority SHs, inquired with NIDC if it was still interested in negotiating the renewal of the voting trust agreement. NIDC replied that its was no longer interested and requested turn-over of all Batjak assets and properties. Batjak demanded an accounting of all assets and properties and operations but NIDC refused to comply. Batjak then filed an action for mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of the properties of Batjak, and allowed Batjak to inspect the same. Batjak then moved for the appointment of a receiver. NIDC and PNB opposes, but overruled by CFI. MRs denied. H: Batjak premises its right to possession through the receivership of the 3 oil mills in the voting trust agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets, management, and operations of Batjak, and that due to expiration of the agreement, NIDC should turn over the assets to Batjak. What was assigned to NIDC was the power to vote the shares of stock representing 60% of SHs, who are signatories to the agreement. Nowhere in the agreement is mention made of any transfer or assignment to NIDC of Batjaks assets operations and management. NIDC was constituted as trustee only of the voting rights of 60% of outstanding shares. What was to be returned by NIDC as trustee to Batjaks SHs upon termination of the agreement, was the certificates of stock, not the properties or assets which were never delivered to NIDC in the first place. The acquisition of PNB and NIDC of the properties was not in its capacity as trustee but as a creditor in accordance with the financing agreement. SC failed to appreciate the fact that the voting trust was obtained from the SHs of the borrowing corporation precisely to allow PNB-NIDC to have

management and undertake control in the operations of the borrowing corporation In this case, the VTA was part and parcel of the loan arrangement, and should have been considered by the Court as a means by which the lending institution obtains control over the management or operation of the borrowing corporation, and not merely as a transfer only of voting or other rights pertaining to the shares

VTA as part of Loan Agreement VTA as part of loan agreement can exceed 5 years as an exception to the rule that VTAs cannot be for more than 5 years VTA as part of loan agreement ensures that the lending institution would have a controlling interest in corporate votes Constitutes further security to the lending institution In reality, the lending institution would have very little interest in the operations of the corporation as to require a voting trust

3.

pooling and voting agreements Definition: an agreement between two or more SHs to vote their shares the same way. Through this kind of agreement, SHs who individually own only a minority of the shares but together represent the majority, can obtain control of the management of the corporation. Usually relates to the election of directors, which may either specify the name of the nominees to be voted for, or the number shares to be voted as a unit In case of disagreement: arbitration Since pooling agreements personal obligations to do, then although valid it cannot be enforced by action for specific performance These agreements have been upheld as valid provided they do not limit the discretion of the board or work fraud against the other SHs o Ex. An agreement that directors once elected must vote for certain persons as officers would be void, since the choice of officers is vested in law in the board Voting agreement vs. voting trust: VA does not involve a transfer of stocks but is merely a private agreement between and among SHs to vote the same way. Breach would therefore give rise to liability for damages. In close corporations: Sec 100:

Section 100. Agreements by stockholders. -

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1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Para 1: SH agreements in general. Pre-incorporation agreements among SHs remains effective even after incorporation if so intended and even if not reflected in AOI, except matters required by the Code to appear in AOI Para 2: refers to pooling and voting agreements in particular. There is no reason for denying SHs other than those in close corporations the right to enter into voting or pooling agreements to protect their interest, as long as no wrong or fraud is committed or intended to be committed on other SHs not parties

Para 3: gives close corps freedom to operate as a partnership between and among the SHs, but remaining a corp with respect to 3 rd persons. Note: SHs who are parties assume liabilities of directors

Ringling v Ringling Bros. Involves an action contesting the validity of the election of directors and officers of Ringling Bros-Barnum & Bailey Combined Shows Inc. Edith Ringling and Aubrey Haley, two of three majority SHs, entered into an agreement (valid for 10 years) that neither party will sell any shares or VTCs without first making a written offer to the other for the same price and under the same conditions, allowing a period of within 180 days to accept the offer. Each party will consult with the other and act jointly in exercising voting rights, and in case of disagreement, an arbitrator (Loos) will intervene, and his decision shall be binding on the parties. It also provides that each will enter into VTAs or other agreements as deemed advisable. From 1943-45 both parties voted together in accordance with the agreement and elected 5 of 7 directors in each occasion. James Haley, as proxy for Mrs Haley, refused to follow the instructions of the arbitrator Loos on a particular manner of voting the shares (i.e. vote for adjournment and vote for 5 named nominees for director) by voting all his wifes shares for the election of Aubrey Haley and James Haley. I: W/N the contested agreement is an agreement to agree thus not having any binding obligations H: The mutual promises in the agreement certainly constitute sufficient consideration to support it. But did the parties agree to agree? Certainly the parties agree as to how they would vote their stock, but they also provided that they shall be bound by the decision of the arbitrator. The agreement to agree therefore has provisions which are capable of being enforced with respect to particular facts. The very nature and object of the agreement render it impossible to do more than agree to agree, and is sufficiently definite in terms of the duties and obligations imposed on the parties to be legally enforceable. I: W/N the agreement is a voting trust agreement. If not, does it violate any public policy? H: The SHs under the present agreement vote their own stock at all times, which is the antithesis of a voting trust because the latter has for its chief attribute the severance of the voting rights from the other attributes of ownership. In cases where the parties cannot reach an accord as to how they will vote, and are directed by the arbitrator to vote in a certain way, the substance of the matter may be said not to differ in effect from a voting trust agreement, however, there is this substantial distinctionthe right of the arbitrator to direct the vote is limited to those particular cases where a SHs vote is called for and the parties cannot agree. In a voting trust, the trustees in the first instance determine policy and implement it by their votes, and have continuous voting control for

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the period stipulated in the voting trust. The agreement in question is actually a variation of the stock pooling agreement and the voting trust. Generally agreements and combinations to vote stock or control corporate action and policy are valid, if they seek without fraud to accomplish only what the parties might do as SHs and do not attempt it by illegal proxies, trust, or other means. The objects and purposes in the agreement are lawful and constitute no constitutional or public policy infirmity, and thus the stock held thereunder should have been voted pursuant to the direction of the arbitrator. When a party refuse to comply with the arbitrator, then the agreement constitutes the willing party to the agreement an implied agent possessing the irrevocable proxy of the recalcitrant party for the purpose of casting the particular vote. Here an implied agency based on an irrevocable proxy is fully justified to implement the agreement without doing violence to its terms. The provisions make it clear that the proxy may be treated as one coupled with an interest so as to render it irrevocable under the circumstances. The nature of the Agreement also does not preclude the granting of specific performance, because to deny it would be tantamount to declaring the agreement invalid. E K Buck Retail Store v Harkert. Suit for declaratory judgment to test the validity of a corporation control agreement entered by the parties in their capacities as SHs of Harkert House. Harkert, the sole owner of a chain of restaurants and burger chains, sought financial aid from EK Buck, and entered into 4 purchase and resale agreements prior to the incorporation of Harkerts restaurants. These involve the selling of equipment and fixtures of a designated outlet or stand to an investor for cahs and entering into an agreement to buy back the same at the end of 5 years for a higher price. Harkert then incorporated his business, with its net worth estimated at $47,504.38, which Buck knew. Harkert was then obligated on the repurchase agreements to persons other than Buck. Harkert, also indebted to Buck, entered into another agreement where buck would cancel the gross amount of indebtedness and pay in cash into the business for which he was to receive as consideration 40% of the stock and equal board representation. Buck invested around $90K into the Harkert Houses. In the agreement, the parties agree that the number of board members of Harkert be reduced from 5 to 4, which would include Buck and Devor (of the EK Buck Retail Stores), and at all times 2 nominees shall come from each party (Buck group and Harkert group). It was also agreed between the parties that at all SH meetings all of the shares of the parties be voted in such a manner by the directors elected. EK Buck Retail thus became owner of 1198 shares to Harkerts 1437. The contract was between the parties as SHs. They involved no action on the part of the corporation. The board, offices, or other SH had no knowledge of the transactions. Harkert claims that an agreement between SHs as to how stock shall be voted at the election of directors ipso facto changes the manner of election prescribed by the Constitution. He adds that although a SH may vote as he pleases, public policy

forbids the enforcement of a contract by which a SH undertakes to bargain away his right to vote for directors according to his best judgment. Buck counters that no public policy is violated in the making of an agreement between the majority and minority SHs to cause voting rights in the corporation to be equal when it is beneficial to the corporation for the purpose of brining fresh money into the business. H: GR: an agreement purporting to control the actions of directors after they are elected, in handling the ordinary business of the corporation, is void. This is because the law imposes the business management of the corporation on its directors, who represent all the SHs and creditors, and they cannot enter into agreements among themselves to abdicate their independent judgment. But the correct rule is that SH control agreements are valid where it is for the benefit of the corporation, where it works no fraud upon creditors or other SHs, and where it violates no statute or recognized public policy. The court upheld the validity of a SH agreement for voting trust, applying as a test the conclusion that there was no wrong to the corporation or no special benefit to the parties to the contract and no turning over of management to strangers. Applied in the present case, the agreement would be valid. Furthermore, the agreement does not place Buck Retail, as the owner of 40% of stock, in control of the corporation. It does give him veto power. But Buck would not have cancelled the gross indebtedness of $55K and paid in fresh money without the stock agreement being made. It must be assumed that the purpose of the agreement was to prevent the corporation from getting into financial distress. The difficulties of Harkert and Buck only arose after 11 years of successful operations on the very policy which Buck sought to have maintained when he brought in the fresh capital into the business by purchasing 40% of the stock. SH control agreements are not invalid per se. If they are based on a sufficient consideration between contracting SH they are valid and binding if they do not contravene any express constitutional or statutory provision or contemplate any fraud, oppression, or wrong against creditors or other SHs. It is not illegal or against public policy for 2 or more SH owning majority shares to unity upon a course of corporate policy, or upon the officers or directors whom they will elect. Clark v Dodge. Action for specific performance between Clark and Dodge, SHs of two New Jersey corporations, Bell & Co and Hollings-Smith Co, engaged in the business of manufacturing medicinal preparations by secret formulae. Clark owned 25% and Dodge 75% of each corporation. Dodge, a director, took no active part in the business but controlled the other directors of both corporations. Clark was a director, treasurer and GM of Bell but was in charge of a major part of the business of Hollings-Smith. The secret formulae were known to Clark alone. Both entered into an agreement that Clark should continue in the management and control of Bell so long as he remained faithful and competent, and that he should not be the sole custodian of the formulae but share his

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knowledge with Dodges son. The agreement also provides that Dodge during his lifetime and after death, a trustee to be appointed by him in his will would vote his stock and so vote as director that Clark would continue to be a director and GM and receive of the net income of the corporations, among others. Clark agreed to share the formula to Dodges son and instruct him on the methods of manufacturing. Clark accuses Dodge of breach and his failure to use his control of the stock to continue Clark as director and GM, and even prevented Clark from receiving a proportion of the income as stipulated in the agreement. I: W/N the contract in question is illegal as against public policy H: GR: the business of the corporation shall be managed by its board. If the enforcement of a particular contract damages nobodynot even the publicone sees no reason for holding it illegal, even though it impinges on the general rule stated above. Damage suffered or threatened is a logical and practical test. Where the directors are the sole SHs, there seems to be no objection to enforcing an agreement among them to vote for certain people as officers. The rule that all SHs by their universal consent may do as they choose with corporate concerns and assets, provided the interests of creditors are not affected, because they are the complete owners of the corporation, cannot apply in a case where the SHs are not parties to the agreement in question. So when the public is not affected, the parties in interest might, by their original agreement of incorporation, limit their respective rights and powers. As the parties are the complete owners of the corporation, there is no reason why the exercise of power and discretion of the directors cannot be controlled by valid agreement between themselves, provided that the interests of creditors are not affected. The agreement here in question was legal and that the complaint states a cause of action. The only restrictions on Dodge were that he should vote for Clark as director, and that as director he should continue Clark as GM, so long he proved faithful, efficient and competent, and entitlement to of the income. These are all perfectly legal contractual stipulations. If there was an invasion of powers of the board, it is so slight as to be negligible; and certainly there is no damage suffered or threatened to anybody. NOTE: Although the GR is that pooling or voting agreement cannot limit the discretion of directors, this principle has not been applied strictly to close corporations, as illustrated by the Clark case. This variation is incorporated in sec 100. The Clark case also illustrates that the remedy of specific performance is available in case of violation of a voting agreement.

the system of cumulative voting gives the minority an opportunity to elect a representative to the board it is vital to both the majority and the minority to cumulate their votes so that they can get as many seats as possible classification of shares (Sec 6 supra; cf Financing Corporate Capital Structure) device of classification of shares can be used to achieve the allocation of control desired by the parties if shares are classified into common voting and preferred non-voting shares, the management of corporate affairs will be controlled by whoever owns the majority of the common voting, even though it may only be a minority of the total number of shares (voting and non-voting) control would depend not on the amount of investment, but on the number of voting shares acquired if non-voting shares are non-redeemable, the prospect that the investor may get back his investment at some future time before dissolution would be a compensating factor SEC: to prevent abuses, it requires where no dividends are declared for 3 consecutive years despite available profits, that preferred stocks be given the right to vote for directors until dividends are declared

5.

In a close corporation, it is allowed to classify its directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock

Gottschalk v Avalon Realty. I: W/N the provisions authorizing the holders of the 1st and 2nd preferred stock to vote whenever default should exist in the payment of dividends constitute a denial of the right to vote H: Yes. The AOI deny the right to vote of the first and second preferred SHs. The provision that such stock may vote upon the happening of such contingencies clearly implies that it may not until such contingencies occur. The right to vote may be denied by implication, such as a provision that sole voting power shall reside in the holders of common stock. Such a denial may exist expressly or by necessary implication. A denial may exist under an express provision even though the denial may not be expressed. Unless a denial is clearly manifested, it should not be given effect, but in this case, it should be given effect even though it is not express.

6.
4. cumulative voting

restriction on transfer of shares (cf Transfer of Shares)

common example: a restriction which gives a first option to other SHs and/or the corporation to acquire the shares of a SH who wishes to sell o peculiar to close corps

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SEC approval

7.

prescribing qualifications for directors; founders shares

definition of the qualifications of directors or trustees may be provided in the by-laws

Section 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. (31a) examples: o a by-law provision that only SHs with a stated minimum number of shares fully paid up may be elected as directors is valid (Govt v El Hogar) o a by-law that disqualify a SH who is competing with the corporation, as the corporation has the right to protect itself from persons who may use inside information to its prejudice (Gokongwei v SEC) o a by-law that only holders of founders shares may qualify for directorship (Sec 7) exception to Sec 6 that non-voting shares shall be limited to preferred and redeemable shares 5 year period non-extendible

Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (n) 8. management contracts

BOD may decide to enter into mgt contracts with another corporation The managing corporation will then perform all the managerial functions usually pertaining to a GM BOD must still retain control of the basic corporate policies and power to recall the contract where the corporations interest would greatly suffer from its continuance

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

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be entered into for such periods as may be provided by the pertinent laws or regulations. (n) Not an exception to Sec 23 which lays down the fundamental principle that all corporate powers shall be exercised by the BOD BOD cannot abdicate its responsibility to act as a governing body by giving absolute powers to offices or others by way of management contracts The management contract is therefore a mere contract to manage the day-to-day affairs of the corporation just like a GM It is one for lease of services and is not of agency

usually involves the formation of a corporation which has clearly efined majority and minority blocks. o In exchange for the numerical majority in the board, the minority might bargain for a provision in the AOI giving them strong veto power in mjor corporate decisions In close corps, a requirement in the AOI that unanimous vote of all SHs is necessary would only have the effect of maintaining the status quo.

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. A provision requiring a higher quorum or voting requirement cannot be amended except by the vote of SHs representing such higher voting requirement, whether voting or non-voting

Sherman & Ellis v Indiana Mutual Casualty Co. F: Indiana Mutual Casualty Co was organized to take over the business of an unincorporated association engaged in writing policies covering risks created by the Indiana Workmens Compensation Law. It ratified an agreement with Sherman & Ellis by which the management of the casualty company was conferred upon Sherman Ellis for 20 years. Indiana Mutual terminated its contract after some difficulties arose between Sherman Ellis and the Indiana state department in which the latter tried to appoint a receiver for Indiana Mutual. Sherman sues for specific performance to enforce the contract. H: the contract provides that the underwriting and executive management for Indiana Mutual will be performed by Ellis, president of Sherman Ellis, and may appoint another officer to be the chief executive head and underwriting manager of the company. It also provides that the managing company (Sherman Ellis) shall have general supervision and charge of underwriting affairs and shall be entitled to 10% of the net earned premiums collected from all policyholders. The grant of corporate power by a state is upon the hypothesis that these powers shall be exercised by the corporations officers, annually elected by the SHs and not by the officers of another corporation. Although generally corporations may for a limited period delegate to a stranger certain duties performed by the officers, there are duties the performance of which may not be delegated to outsiders. In this case the period of control of the managing corporation is 20 years. Nothing of importance was left for the BOD but the mere ministerial duties. The agreement contemplated the substitution of Sherman Ells for the officers of Indiana Mutual. The principal business of Indiana was write casualty insurance, which is now solely exercised by Sherman Ellis. No other conclusion can be drawn other than that Indiana Mutual was to be an instrumentality through which Sherman Ellis was to conduct a casualty business in the state of Indiana. 9. unusual voting and quorum requirements

Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.

a device which in effect increases the veto power of the minority

Benintendi v Kenton Hotel. 2 men owned in equal amounts all the stock of a domestic business corporation, made an agreement to vote for and adopt the by-laws of the corporation, providing that no action should be taken by the SHs except by unanimous vote of the SH present in person or by proxy should be sufficient, that the directors of the corporation should be the 3 person receiving the unanimous vote of all SHs, that no action shall be taken by the directors

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except by unanimous vote of all directors. The minority SHs sued to have the by-laws adjudged valid and to enjoin the majority from doing anything inconsistent therewith. H: the device is intrinsically unlawful because it contravenes an essential part of State policy. But a requirement, that there shall be no election of directors unless every single vote be cast for the same nominees is in direct opposition to the rule that the receipt of plurality of votes entitles a nominee to election. The by-law which requires unanimous action of SHs to pass any resolution or take action of any kind, is equally obnoxious to the statutory scheme of stock corporation management. The whole concept of a representative government in a corporation, with voting conducted conformably to statute, and with the power of decision lodged in certain fractions of the stock, is destroyed when the SHs by agreement or by-law or AOI provision as to unanimous action, give the minority interest an absolute, permanent and all-inclusive power of veto. The last by-law makes it impossible for the directors to act on any matter except by unanimous vote of all of them. Such a by-law is almost unworkable and unenforceable because, prima facie in all acts done by a corporation, the major number must bind the lesser, or else differences could never be determined. Every corporation is given the privilege of enacting a by-law fixing its own quorum requirement at a fraction not less than that mandated by law. But the very idea of a quorum is that when that required number of persons goes into session as a body, the votes of a majority thereof are sufficient of binding action. Dissent: While the 2 by-laws are indeed invalid because it is violative of the statutes, the courts should nonetheless enforce against either SH the agreement made by both of them which finds expression in those by-laws.

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BOD: Majority to convene mtg Majority of majority to vote for binding corporate act SHs ratification GR: 2/3 vote; Exceptions: 50%+1 Removal of directors: difficult to remove, SHs limited right to vote, difficult to personally sue, therefore law grants protection for SHs Holdover of directors occurs when you cannot convene a meeting for want of quorum In Roxas: election as mode of removal Angeles: appointment of receiver as mode of removal Campbell: outright removal, then elect new directors Personal action may also be instituted, but difficult

Devices affecting controlcommon denominator is the contractual obligation SHs NOT of record: CANNOT vote, CANNOT be vote for Once voting rights are exercised by another, voting rights of the owner of shares are already impaired Proxies: proxy holder is an agent Does it affect ownership rights? No. Registration of shares? No Why do I need them? No distinct and clear majority to collate enough votes to form majority Biggest SHs; Shares are so widely held/dispersed 5-year term of proxies only applies to revocable proxies voting trusts and proxies coupled with an interest (security for obligations) in Alejandrino: deemed to have sufficient interest pledgor-pledgee: interest of pledgee in ensuring that the value of stock used as security may not be impaired, and may be sold at a premium to 3rd parties at public auction in case obligors/debtors default Voting trust: beneficial owner is SH; legal ownership is trustee Registration with SEC and corporation of stock certificate (effect is constructive notice to 3rd parties) All stock certificates issued in name of participating SHs are presented for cancellation and issuance of new ones; voting trust certificates are issued by the trustee Orig SHs are delisted; replaced by trustees with notation that it holds stocks of orig SHs walang pakialam and korporasyon sa relasyon ng SH at ng trustee SH still has naked title; he can still sell the shares by selling the VTC. But trustee is now SH of record! Total divorce of voting rights Voting rights: trustee; Economic rights: SH VTA is binding on participants even if there is disposition of the VTC Can trustee sell shares? NO! it holds it in trust Can transferee of VTC vote the shares? NO! only the trustee Only binding arrangement would be the fiduciary arrangement In proxies without an interest and pooing agreements, NO fiduciary nature! Key to determining w/n VTAs exist: trustee exercises DISCRETION as to the vote, but it may also be consensual, i.e. trustees can agree among themselves who to vote There is also delegation of authority; It is not the corporation constituting the VTA, it is the SHs! Pooling agreements: reciprocal arrangement of those who reach a consensus to exercise right to vote separately, but shares remain with SHs Consideration for voting devices sufficient consideration: In Clark, IPR, services, secret formula; In Harkert, loan/investment; In Ringling, RFR; in Avalon, PS with econ rights So long as consideration is in place, obligation satisfactorily performed, voting agreement is justified, enforceability should be there! Management contracts: Is the manager/managing corp a trustee? NO covered by contract Effect of higher quorum or voting requirements Controlling interest of the corporation can be vetoed by the minority Would affect disposition of corporate assets Controlling interest has the authority to formulate the policies Anarchy/tyranny of the majority

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