01barops Corp 1to84

CORPORATION LAW
Chapter I
INTRODUCTION
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)
A corporation is a creature of:
A general enabling statute
(requirements of the law must be
complied with); and
The agreement of individuals who
seek to incorporate (internal
contractual arrangements: articles
of incorporation and by-laws)
Four attributes of a corporation
An artificial being
!. a "uridical person capable of having
rights and obligations, w# a
personality separate and distinct
fro$ its $e$bers or stoc%holders
2. hence, stoc%holders are not
personally liable for corp. obligations
and cannot be held liable to third
persons who have clai$s against the
corp. beyond their agreed
contribution to the corporate capital
(paid-up capital and unpaid
subscriptions)
Created by operation of law
!. $ere consent of the parties to for$
a corp. is not sufficient the &tate
$ust give its consent either through
a special law (in the case of a gov't
corp.) or a general law (for a private
corp.)
2. the general law under w#c a private
corp. $ay be for$ed or organized is
the Corporation Code
(as the right of succession
!. its continued existence during the
ter$ stated in its articles of incorp.
cannot be affected by any change in
the $e$bers or stoc%holders
2. nor is it affected by the transfer of
shares by a stoc%holder to a )
rd
person
(as the powers, attributes and properties
expressly authorized by law or incident to its
existence as it is a $ere creature of the law,
it can exercise only such powers as the law
$ay choose to grant it, either expressly or
i$pliedly
Advantages of corporate
organizations
!) &trong separate "uridical personality *
personality separate and distinct fro$
individual stoc%holders and $e$bers
2) +i$ited liability to investors * stoc%holders
are liable only to the extent of their
contribution
,eneral rule -here a corporation
buys all the shares of another
corporation, this will not operate to
dissolve the other corporation and as
the two corporations still $aintain
their separate corporate entities, one
will not answer for the debts of the
other. ./ell v 0acific 1ar$s2
3xceptions
o 4f there is an express assu$ption
of liabilities5
o 6here is a consolidation or
$erger5
o 4f the purchase was in fraud of
creditors5
o 4f the purchaser beco$es a
continuation of the seller5
o 4f there are unpaid subscriptions
(stoc%holder is liable for the
unpaid balance).
)) 1ree transferability of units of ownership *
stoc%holders hold their shares as personal
property with rights to dispose, assign or
encu$ber the$ as they $ay desire (!"#)
7) Centralized 8anage$ent * all corporate
powers are vested in the board of
directors (!$#)
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1
Partnership vs. Corporation
!. partners are personally liable for the
debts of the partnership5
stoc%holders cannot be $ade to
personally answer to corporate
creditors
2. $ere agree$ent of the parties, w#c
can be co$posed of "ust 2 persons,
gives rise to the "uridical personality
of the partnership, whether or not
registered w# the &3C (Art. !@AB,
/CC)5 a corp., w# a $ini$u$ of C
incorporators, derives its "uridical
personality fro$ the certificate
issued by the &3C (!%&)
). in $ost cases, all the owners in a
partnership actively participate in
$anage$ent, w# capacity to bind it
by any usual contract (Art. !B!B,
/CC)5 in a corp., $anage$ent is
centralized in the board of directors
w#c has exclusive power to bind the
corp. (!$#)
7. partnership is based on $utual trust
and confidence (delectus personae)
so that its existence is precarious
because of the facility w# which it
can be dissolved (i.e. through the
death or unilateral act of a partner)5
a corp. has $ore stability as it
en"oys the right of succession and is
not affected by the death or
insolvency of a stoc%holder5 also,
dissolution before a corp.'s ter$
reDuires a 2#)rds vote of the stoc%
(&ecs. !!B and !!E, Corp. Code),
always sub"ect to &3C intervention
overnment !egulation of Corporations
:y the +egislature
:asis police power of the state (/orthern >y
Co. v. &tate of -ashington, )FF G.&. !C7)
and the fact that corporations owe their
existence to the state
8anner by a$ending or repealing the Corp.
Code or any part thereof
"DC v Phil #eterans $an% &'(()*
0; !@!@ ordered the rehabilitation of the
Agrix ,roup of Co$panies to be
ad$inistered by /;C. &ec 7(!) provides that
all $ortgages and liens presently attached
be extinguished, and that all accrued
obligations shall not bear interest. A$ong
those ordered extinguished was a lien in
favor of 0hil ?eterans :an% over prop in +:.
/;C filed to foreclose the $ortgage.
(3+; /ew Agrix was created by special
decree even if !E@) Consti $andates that
:atasang 0a$bansa, cannot, except by
general law, provide for for$ation,
organization and regulation of private corps,
unless for ,HCCs.
/;C was only $andated to extend loan and
to $anage co$pany. /ew Agrix was entirely
private and should have been organized
under Corp +aw.
:y the &3C
:asis &ec. ), 0; EF2IA and 'ec (%(a))
*A+,&&. 6he Co$$ission shall have absolute
"urisdiction, supervision and control over all
corporations, partnerships or associations,
who are the grantees of pri$ary franchises
and#or licenses or per$its granted by the
govern$ent, to operate in the 0hilippines5 xxx
-ote: .nder 'ec ($ of *A+,&&) '/01s
2urisdiction over all cases enumerated under
'ec () 34 &5$-A was transferred to the
*egional Trial 0ourt which has 2urisdiction
over the principal office of the corporation)
partnership or association concerned
According to the 6nterim *ules of 3rocedure
for 6ntra-0orporate 0ontroversies (A7 -o
5%-$-58-'0)) which took effect on April %)
$55%) the *egional Trial 0ourt has 2urisdiction
over cases involving the following:
% 4evices or schemes employed by) or
any act of) the 9:4) business
associates) officers or partners)
amounting to fraud or
misrepresentation which may be
detrimental to the interest of the
public and;or of the stockholders)
partners or members of any
corporation) partnership) or
association;
$ 0ontroversies arising out of intra-
corporate) partnership) or association
relations) between and among
stockholders) members or
associates; and between) any or all
of them and the corporation)
2
partnership) or association of which
they are stockholders) members or
associates) respectively;
# 0ontroversies in the election or
appointment of directors) trustees)
officers) or managers of
corporations) partnerships) or
associations;
8 4erivative suits; and
( 6nspection of corporate books
+orato v CA &August, -)).*
0etitioners, stoc%holders of 61 ?entures,
4nc., filed a petition with the &3C against
private respondents for the declaration of
nullity of stoc%holders' and directors'
$eetings and da$ages. 6hey assail the
validity of the notice and stoc%holders'
$eeting of 61 ?entures, 4nc. and the
organizational $eeting of the $e$bers of
the :H;. 6he petition was referred to the
&ecurities 4nvestigation and Clearing
;epart$ent (&4C;) of the &3C for
investigation and resolution.
8eanwhile, one of the private respondents
(8atsura, Chair$an of the :H;), wrote a
letter to the 3xa$iners and Appraisers ;ept
of the &3C, reDuesting for an exa$ination of
the basis for the capital increase of 6.1.
?entures, 4nc. fro$ 0!F,FFF,FFF to
0!FF,FFF,FFF, alleging the co$$ission of
devices, sche$es and cri$inal acts. 6he
letter was forwarded by the &3C to the
0rosecution and 3nforce$ent ;ept (03;).
0etitioners contended that with the filing of
the letterIpetition with the 03;, 8atsura
resorted to foru$ shopping.
(3+; 8atsura is not guilty of foru$
shopping. 6here is no identity of causes of
action or identity of rights asserted by the
parties in both cases. 4n this case, &3C Case
is pending before the &4C;, which has
exclusive "urisdiction to investigate and
resolve intraIcorporate disputes. 6he
respondent's letterIpetition, on the other
hand, was referred by the &3C to the 03;
and is pending before the 0rosecution and
3nforce$ent ;epart$ent of the &3C.
&ection B of 0.;. /o. EF2IA, as
a$ended, provides
&3C64H/ B. 6he 0rosecution
and 3nforce$ent ;epart$ent shall
have, sub"ect to the Co$$ission's
control and supervision, the
exclusive authority to investigate,
on co$plaint or motu propio, any
act or o$ission of the :oard of
;irectors#6rustees of corporations,
or of partnerships, or other
associations, or of their
stoc%holders, officers or partners,
including any fraudulent devices,
sche$es or representations, in
violation of any law or rules and
regulations ad$inistered and
enforced by the Co$$ission5 to
file and prosecute in accordance
with law and rules and regulations
issued by the Co$$ission and in
appropriate cases, the
corresponding cri$inal or civil case
before the Co$$ission or the
proper court or body upon prima
facie finding of violation of any
laws or rules and regulations
ad$inistered and enforced by the
Co$$ission5 and to perfor$ such
other powers and functions as $ay
be provided by law or duly
delegated to it by the Co$$ission.
0rosecution under this ;ecree
or any Act, +aw, >ules and
>egulations enforced and
ad$inistered by the Co$$ission
shall be without pre"udice to any
liability for violation of any
provision of the >evised 0enal
Code.
Gnder the said provision, the &3C,
through the 03;, is vested with authority to
investigate, either motu proprio or upon
co$plaint, any act or o$ission, fraudulent
sche$es, devices or $isrepresentations in
violation of any law, rules or regulations,
ad$inistered and enforced by the &3C, and
to file and prosecute appropriate civil or
cri$inal cases upon a prima facie finding of
violation of such laws, rules or regulations.
6he petitioners, in the &3C case, sought the
nullification of the /otice for the Annual
&toc%holders' 8eeting, the stoc%holders'
$eeting and organizational $eeting held on
&epte$ber 22, !EE@, on their clai$ that the
holding of the sa$e was in violation of the
Corporation Code and the :yI+aws of the
petitioner corporation. 4n his answer to the
petition, the respondent asserted the validity
of the said $eeting and prayed, by way of
counterclai$, for the nullification of the
Hctober 2F, !EE@ $eeting of the petitioners,
and for da$ages. 4n contrast, the
respondent alleged in his letterIpetition in
the 03; case that the petitioners were
engaged in fraudulent sche$es, devices or
3
$isrepresentations in violation of the law,
and &3C rules and regulations. 6he
co$plainant 8atsuura as%ed the 03; to
investigate the co$plaint and file the
corresponding ad$inistrative, civil or
cri$inal cases before the &3C, the proper
court or body, for violation of the laws, rules
or regulations ad$inistered and enforced by
the &3C. 6he fact that the &4C; has not yet
resolved the &3C case does not constitute a
bar to the resolution of the 03; case. 6he
proceedings in the said cases are
independent and separate of each other and
$ay thus proceed separately.
/ote that while this case was pending in the
&C, >A B@EE, &ecurities >egulation Code,
too% effect on August B, 2FFF. &ection C.2
of the law provides that &3C's "urisdiction
over all cases under &ec C of 0; EF2IA is
transferred to the >6Cs.
A$ong the powers and functions of the &3C
which were transferred to the >6C include
the following (a) "urisdiction and supervision
over all corporations, partnerships or
associations who are the grantees of pri$ary
franchises and#or a license or per$it issued
by the ,overn$ent5 (b) the approval,
re"ection, suspension, revocation or
reDuire$ent for registration state$ents, and
registration and licensing applications5 (c)
the regulation, investigation or supervision of
the activities of persons to ensure
co$pliance5 (d) the supervision, $onitoring,
suspension or ta%e over the activities of
exchanges, clearing agencies and other
&>Hs5 (e) the i$position of sanctions for the
violation of laws and the rules, regulations
and orders issued pursuant thereto5 (f) the
issuance of ceaseIandIdesist orders to
prevent fraud or in"ury to the investing
public5 (g) the co$pulsion of the officers of
any registered corporation or association to
call $eetings of stoc%holders or $e$bers
thereof under its supervision5 and, (h) the
exercise of such other powers as $ay be
provided by law as well as those which $ay
be i$plied fro$, or which are necessary or
incidental to the carrying out of, the express
powers granted the Co$$ission to achieve
the ob"ectives and purposes of these laws.
(owever, &ection B of 0.;. /o. EF2IA, as
a$ended, has already been repealed, as
provided for in &ection @A of >A B@EE.
6hus, under the new law, the 03; ceased to
exist. (owever, the &3C retains "urisdiction
to continue with its investigation of the
letterIpetition of respondent 8atsuura.
-hen >A B@EE too% effect, the &3C case had
not yet been sub$itted for decision by the
&3C. (ence, the said case should be
transferred to the >6C of 8a%ati City, to be
raffled to the appropriate branch thereof
assigned to try such cases. ;espite the
repeal of &ection B of 0.;. /o. EF2IA and the
abolition of the 03;, the &3C $ay continue
with its investigation of the letterIpetition of
respondent 8atsuura.
The 'andiganbayan has 2urisdiction over
presidents) directors or trustees) or
managers of government-owned or
controlled corporations organi<ed and
incorporated under the 0orporation 0ode
for purposes of the provisions of *A #5%&)
otherwise known as the Anti-=raft and
0orrupt 3ractices Act 9asis: 'ec 8) *A
+$8& (3eople v 'andiganbayan) $55()
Chapter II
CLASSIFICATION OF PRIVATE
CORPORATIONS
eneral Classification under /01
!. &toc% corporation
Hne which has a capital stoc% divided
into shares and is authorized to
distribute to the holders of such
shares dividends or allot$ents of the
surplus profits (i.e., retained earnings
on the basis of the shares held ())
4t is organized for profit.
6he governing body of a stoc%
corporation is usually the :oard of
;irectors.
2. /onIstoc% corporation
All other corporations are nonIstoc%
corporations ())
Hne where no part of the inco$e is
distributable as dividends to its
$e$bers, trustees, or officers,
4
sub"ect to the provisions of the Code
on dissolution. 0rovided that any
profit which a nonIstoc% corporation
$ay obtain as an incident to its
operation shall whenever necessary
or proper be used for the
furtherance of the purpose or
purposes for which the corporation
was organized. (B@)
/ot organized for profit.
4ts governing body is usually the
:oard of 6rustees.
C2! vs. Club Filipino, 2nc de Cebu
&'(3-*
Club 1ilipino is a civic corporation organized
to develop and cultivate sport of all class and
deno$ination for the healthful recreation and
entertain$ent of its &( and $e$bers. 4ts
AH4 and byIlaws are silent as to dividends
and their distribution but it was provided
that upon its dissolution, the Club's
re$aining assets after paying debts shall be
donated to a charitable 0hil. 4nstitution.
(3+; Club 1ilipino is a nonIstoc%
corporation. According to &ection ) of the
Corporation Code, there are two ele$ents
for a stoc% corporation to exist !) capital
stoc% divided into shares, and 2) an
authority to distribute to the holders of such
shares, dividends or allot$ents of the
surplus profits on the basis of shares held.
/owhere in Club 1ilipino's AH4 or :+ could be
found an authority for the distribution of its
dividends or surplus profits.
4ther %inds of corporations1
!. 3ublic corporation I Hne for$ed or
organized for the govern$ent or a
particular state. 4ts purpose is for the
general good and welfare.
2. 3rivate corporation I Hne for$ed for
so$e private purpose, benefit, ai$ or
end
). 0lose corporation (EA) * Hne whose
Articles of 4ncorporation provide that
a) all of the corporation's issued stoc%
of all classes, exclusive of treasury
shares, shall be held of record by
not $ore that a specified nu$ber of
persons, not exceeding 2F
b) all of the issued stoc% of all classes
shall be sub"ect to one or $ore
specified restrictions on transfer
per$itted by the Code
c) the corporation shall not list in any
stoc% exchange or $a%e any public
offering of any of its stoc% of any class
d) at least 2#) of its voting stoc% $ust
not be owned or controlled by another
corporation which is not a close
e) $ust not be a $ining or oil co$pany,
stoc% exchange, ban%, insurance
co$pany, public utility, educational
institution or corporation vested with
public interest
7. /ducational corporation (/!FA) I 6hose
corporations which are organized for
educational purposes. 6his type of
corporation is governed by &ection !FA of
the Corporation Code
C. *eligious sole and aggregate (/!!F, !!!
(2), !2))
A corporation sole is one for$ed for
the purpose of ad$inistering and
$anaging, as trustee, the affairs,
property and te$poralities of any
religious deno$ination, sect, or church,
by the chief archbishop, bishop, priest,
rabbi, or other presiding elder of such
religious deno$ination, sect or church.
(/!!F)
6he corporation sole is an exception to
the general rule that at least five (C)
$e$bers are reDuired for a corporation
to exist. (ere, there is only one (!)
incorporator. 6his is applicable to
religious co$$unities the regulations
of which provide that the co$$unity's
properties are to be placed in the na$e
of the head and ad$inistered by hi$.
(/!!!(2))
A corporation aggregate is a religious
corporation incorporated by $ore than
one person.
A. /leemosynary corporation * Hne
organized for a charitable purpose
@. 4omestic corporation * A do$estic
corporation is one for$ed, organized, or
existing under the laws of the 0hilippines
B. >oreign corporation * Hne for$ed,
organized or existing under any laws other
than those of the 0hilippines and whose
law allows 1ilipino citizens and
corporations to do business in its own
country and state. (!2))
E. 0orporation created by special laws or
charter (7)
Corporations which are governed
pri$arily by the provisions of the
special law or charter creating the$
(/7)
Corporation Code is suppletory in so
far as they are applicable (4bid)
5
!F. 'ubsidiary corporation * one in which
control, usually in the for$ of ownership
of $a"ority of its shares, is in another
corporation (the parent corporation)
!!. 3arent corporation * its control lies in its
power to elect the subsidiary's directors
thus controlling its $anage$ent policies
Chapter III
FORMATION AND ORGANIZATION
OF CORPORATION
Any nu$ber of natural persons not less than
five (C) but not $ore than fifteen (!C), all of
legal age and a $a"ority of who$ are
residents of the 0hilippines, $ay for$ a
private corporation for any lawful purpose or
purposes. 3ach of the incorporators of a
stoc% corporation $ust own or be a
subscriber to at least one (!) share of capital
stoc% of the corporation. (!F)
5ho may form a corporation
!) /atural persons
Corporations and partnerships
cannot be incorporators, but $ay be
stoc%holders. 6his prevents
JlayeringK which $ay harbour
cri$inals and will $a%e the
corporation a tool for defrauding the
public.
4ncorporators are those stoc%holders
or $e$bers $entioned in the
articles as originally for$ing and
co$posing the corporation and who
are signatories thereof.
Corporators are stoc%holders or
$e$bers who "oin the corporation
after its incorporation.
Hriginal subscribers are persons
whose na$es are $entioned in the
Articles, but not as incorporators.
6hey do not sign the Articles.
2) At least five incorporators but not $ore
than fifteen
6hey $ust sign the articles of
incorporation.
,3/G4/3 4/63>3&6 3ach
incorporator $ust own or subscribe
to at least one share of stoc% of the
corporation.
)) 8a"ority of the incorporators $ust be
residents of the 0hilippines
=eneral rule: need not be a citi<en
/?ceptions: public utilities (Art @66)
'ec %% 0onsti)) schools (Art @6A) 'ec
8($)) 0onsti)) banks (=eneral 9anking
Act)) retail trade (*A %%+5)) savings
and loan associations (*A #,&&))
investment houses ('ec () 34 %$&))
and other areas of investment as
congress may by law provide (Art @66)
'ec %5) 0onsti)
3ven though there are no legal
restrictions as to alien ownership,
where L 7FM of the outstanding
capital stoc% will be owned and
controlled by aliens, $ust get written
authorization fro$ :H4 before it can
register with &3C. (purpose is to
enable :H4 to deter$ine whether
such corporation wherein aliens own a
substantial nu$ber of shares would
contribute to the sound and balanced
develop$ent of the national
econo$y)
7) 4ncorporators $ust be of legal age
Conditions Precedent for Incorporation
0onsent or agreement of at least (
natural persons with respect to:
% 0ompliance with the 0orp 0ode;
$ 0ontribution;pooling of resources
B delivered to and held in trust by
a designated trustee;
# =overnance of:
0ontributions;
4istribution of
contributions;
4ivision of profits;sharing
of losses;
3ursuit of
purpose;ob2ectives;
0orporate combination;
and
Transactions with third
parties; and
8 0ontinuity or termination of
e?istence
7andatory *equirements of the 0ode:
% /?ecution of constitutive
documents (A:6) 9y-laws);
6
$ 3ayment;delivery of
contributions B delivered to and
held in trust by a designated
trustee;
# 'ubmission of constitutive
documents to '/0 for review or
evaluation; and
8 '/0 action B issuance of
certificate of registration
-ote that once contributions are made
before incorporation) such subscriptions are
irrevocable for a period of " months (general
rule)
/?ceptions:
% Chen all of the other subscribers
consent to the revocation; or
$ Chen the incorporation fails to
materiali<e ('ec "%)
Steps in the formation of a corporation
A. 0>H8H64H/
6he Jpro$oterK brings together
persons interested in the business
enterprise and sets in $otion the
$achinery that leads to the
for$ation of the corporation.
J0ro$oterK is a person who, acting
alone or with others, ta%es initiative
in founding and organizing the
business or enterprise of the issuer
and receives consideration therefor.
!
:. ;>A164/, H1 A>64C+3& H1
4/CH>0H>A64H/ * these constitute the
charter of the corporation

!. CH>0H>A63 /A83
/o corporate na$e $ay be
allowed by the &3C if the
proposed na$e is identical or
deceptively or confusingly
si$ilar to that of any existing
corporation or to any other
na$e already protected by law
or is patently deceptive,
confusing or contrary to existing
laws. (!B)
A corporate name is essential to
the corporation1s acquisition of
2uridical personality
Change of corporate na$e shall
reDuire the approval of the &3C.
&3C will issue a$ended
1
Sec. 3.10, The Securities Regulation Code (RA 8!!"
certificate of incorporation under
the a$ended na$e (4bid)
A change in corporate name
involves an amendment of the
Articles) which requires a ma2ority
vote of the board and the vote or
written assent of stockholders
holding $;# of the outstanding
capital stock (!%")
6t is the sole means of identifying
the corporation from its members
or stockholders) and from other
entities and corporations
Amendment in a corp1s A:6
changing its corporate name does
not e?tinguish the personality of
the original corporation The corp
upon such change of its name) is
in no sense a new entity) nor the
successor of the original corp it
is the same corp with a different
name) and its character is not
changed 0onsequently) the
DnewE corp is still liable for the
debts and obligations of the DoldE
corp (*epublic 3lanters 9ank v
0A) %&&$)
6his is essential because through
it, corporation can sue and be
sued
&3C $ay allow incorporators to
reserve the na$e for a particular
period
6o distinguish fro$ partnerships
and other business orgs, the law
reDuires corporations to append
the word JCorporationK or J4ncK to
its chosen na$e
A corporation should transact
business only through its chosen
na$e
Philips 6xport $# &P6$#* v CA &'((-*
03:? is a foreign corp under the law of
/etherlands, although not engaged in
business in the 0hils. 4t is the registered
owner of the 0hilips trade$ar%, and owns
two local co$panies with the na$e 0hilips
also.
03:? as%ed the cancellation of the word
0hilips fro$ &tandard 0hilips, a local
$anufacturer, alleging infringe$ent of its
exclusive right to use the sa$e. &3C and CA
ruled for &td 0hilips, saying there was no
confusion (unli%e in Converse case).
(eld
Corp's right to use its corp and trade na$e is
a property right, a right in re$.

,eneral >ule Corp $ust have a na$e by
which it is to sue and be sued and do all
legal acts.
Accdg to Corp Code, no corp na$e $ay be
allowed
!) if co$plainant corp acDuired a prior
right over na$e and
2) proposed na$e is
a) identical or
b) deceptively or confusingly
si$ilar or
c) patently deceptive,
confusing or contrary to
existing law
03:?'s local co$panies were incorporated 2A
yrs before &td 0hilips.
63&6 H1 CH/1G&4/, &484+A>46= 4/ CH>0
/A83& -hether si$ilarity is such as to
$islead a person using ordinary care and
discri$ination
0hilips is the do$inant word. /o need to
prove that there was actual confusion, as
long as probable or li%ely to occur. &td
0hilips' purpose, as per its articles of incorp
also includes sale and $anufacture of
electrical products, which is 03:?'s line of
business. 3ven if &3C guidelines $andate
that a corp could add 2 other words to
proposed na$e, only one word J&tdK was
added. JCorpK not counted.
/ote A prior user can consent to the use of
its na$e
2. 0G>0H&3 C+AG&3
-here a corporation has $ore
than ! purpose, the AH4 shall
state which is the pri$ary
purpose and which is secondary
(!7(2))
A nonIstoc% corporation $ay
not include those which
contradict or change its nature
(4bid)
&3C can re"ect or disapprove
the AH4 if the stated purpose is
patently unconstitutional, illegal,
i$$oral, contrary to
govern$ent rules and
regulations.(!@ (2))
0urpose clause confers as well
as li$its the powers which a
corporation $ay exercise
A corporation only has such
powers as are expressly granted
to it by law and by its AH4,
those which $ay be incidental to
such conferred powers (7C),
those reasonably necessary to
acco$plish its purposes, and
those which $ay be incident to its
existence (2).
>easons for purpose clause
o so that a stoc%holder
conte$plating an invest$ent
will %now what lines of
business his $oney is to be
ris%ed
o so that $anage$ent will
%now what lines of business it
is authorized to act
o so that anyone who transacts
with the corporation $ay
ascertain whether a
transaction he is entering is
one with the general
authority of the $anage$ent
Gnder &ec !7(2) a corporation
can have as $any purposes as it
wants provided
o AH4 specify the corporation's
pri$ary and secondary
purposes which need not be
related to each other
o Corporation for which special
provisions are $ade can only
have the purpose peculiar to
the$
o 0urposes $ust be lawful
4f purpose is lawful, &3C is not
authorized to inDuire whether
corporation has hidden $otives
and $anda$us will lie to co$pel
it to issue certificate
0; EF2IA, 'ec "(h) gives &3C,
after consultation with :H4,
/3;A, or other appropriate
govern$ent agency, the power to
refuse or deny the application for
registration of any corporation if
its establish$ent, organization,
operation will not be consistent
with the declared national
econo$ic policies
A corporation may not be formed
for the purpose of practicing a
profession
). 0>4/C40A+ H114C3
8ust be within the 0hilippines
(!7 ()))
AH4 $ust specify both province or
city or town where it is located
4$portant in (!) deter$ining
venue in an action by or against
the corporation (2) deter$ining
8
the province where a chattel
$ortgage of shares should be
registered (Chua ,an v
&a$ahang 8agsasa%a)
6he state$ent of the principal
office establishes the residence
of the corporation
7. 63>8 H1 3N4&63/C3
-hen a corporation is
organized, the $axi$u$ life
that can be stipulated in the AH4
is CF years. :ut during the life
of the corporation, the life or
ter$ can be extended to
another CF years at any one
instance (!!)
:ut such extension of the life a
corporation cannot be $ade
earlier than C years before the
end of its original ter$.
3xception where there are
"ustifiable reasons for an earlier
extension as $ay be deter$ined
by the &3C. (4bid)
3xception Condo$iniu$
corporations can be organized
for a period of 2FF years
/?tension involves an
amendment of the A:6 Thus)
the requisites under !%" must
be complied with Any
dissenting stockholder may
e?ercise his appraisal right
(!#,)
C. 4/CH>0H>A6H>& A/; ;4>3C6H>&5
/G8:3> A/; OGA+414CA64H/&
J;irectorsK is used for stoc%
corporations, while JtrusteesK is
used for stoc% corporations.
,3/3>A+ >G+3 not less than C
but not $ore than !C
3NC3064H/&
i) /onIstoc% corporations *
articles or byIlaws $ay
provide for $ore than !C
trustees (E2).
/?ception: /ducational
non-stock corporations
B trustees may not
e?ceed %( Fowever)
the number of trustees
shall be in multiples of
( (!%5+)
ii) 8erger of ban%s * new
board is allowed to have
such nu$ber of directors as
is eDuivalent to the total
nu$ber of directors of the
$erging ban%s, though it $ay
exceed fifteen (=eneral
9anking Act) as amended).
4ncorporators and directors of a
stoc% corporation $ust own at
least one share of stoc% of the
corporation. 4n a nonIstoc%
corporation, a trustee $ust be a
$e$ber thereof.
4n nationalized industries, aliens
$ay be directors of a corporation
only in such nu$ber as $ay be
proportional to their allowable
ownership of shares,
2
e.g. if the
articles provide for !F directors,
and alien ownership is li$ited to
7FM of the capital, then aliens
$ay occupy a $axi$u$ of 7
board seats.
A. CA046A+ &6HCP5 &G:&C>4064H/5
0A=83/6
0apital stock
o 0apital stock is the amount fi?ed
in the A:6) to be subscribed and
paid in or secured to be paid in by
the shareholders of a corporation)
either in money or property) labor
or services) at the organi<ation of
the corporation or afterwards and
upon which is to conduct its
operation
o The capital stock limits the
ma?imum amount or number of
shares that may be issued by the
corporation without formal
amendment of the A:6 6t
remains the same even though
the actual value of the shares as
determined by the assets of the
corporation is diminished or
increased
Authori<ed capital stock
o A0' is synonymous with capital
stock where the shares of the
corporation have par value 6f
the shares of stock have no par
value) the corporation has no
A0') but it has capital stock the
amount of which is not specified
in the A:6 as it cannot be
determined until all the shares
have been issued 6n this case)
the two terms are not
synonymous (4e Geon)
2
Sec. 2#A, CA 108 (Anti#$u%%& 'a(" as a%ended )& *$
16.
!
o &tate the authorized capital
stoc% in lawful $oney of the
0hilippines, the nu$ber of
shares into which the AC& is
divided, and the par value of
each par value shares (!7(B),
!C(@))
o &toc% corporations are not
reDuired to have any $ini$u$
authorized capital stoc% except
when special laws provide
otherwise (!2)
'ubscribed capital stock
o 6t is the amount of the capital
stock subscribed whether fully
paid or not 6t connotes an
original subscription contract for
the acquisition by a subscriber
of unissued shares in a
corporation (AF,A!)
o At least 2CM of authorized
capital stoc% $ust be subscribed
(!))
o &ubscription * $utual
agree$ent of the subscribers to
ta%e and pay for the stoc% of a
corporation
o 0reIincorporation subscription *
a$ount which each incorporator
or stoc%holder agrees to
contribute to a proposed
corporation
:utstanding capital stock
o 6t is the portion of the capital
stock which is issued and held
by persons other than the
corporation itself .nder %#,)
it is the total shares of stock
issued under the binding
subscription agreements to
subscribers or stockholders)
whether or not fully or partially
paid) e?cept treasury shares 6t
is thus broader than
DsubscribedE capital stock
o The terms Dsubscribed capital
stockE and DissuedE or
DoutstandingE capital stock are
used synonymously since
subscribed capital stock) as
distinguished from the
certificate of stock) can be
issued even if not fully paid
9ut while every subscribed
share (assuming there is a
binding subscription agreement)
is Doutstanding)E an issued
share may not have the status
of outstanding share (as in the
case of treasury shares)
o 0reIincorporation subscription *
a$ount which each incorporator
or stoc%holder agrees to
contribute to a proposed
corporation
3aid-up capital
o 2CM of subscribed capital stoc%
$ust be paidIup for the purpose
of incorporation, but in no case
shall be less than 0 CFFF (!))
o 0ortion of the authorized capital
stoc% which has been subscribed
and paid. /ot all funds or assets
received by the corporation can
be considered paidIup capital, for
this ter$ has a technical
signification in corporation law.
&uch $ust fro$ part of the
authorized capital stoc% of the
corporation, subscribed and then
actually paidIup. .8&C4I/ACG&40
+ocal Chapter v. /ational -ages
and 0roductivity Co$$ission2
o 8ust be in the for$ of (a) cash
deposited in a ban% or (b)
property which $ay be used or
actually needed by the
corporation in its operations
o Capital can't consist or be
invested in $oney $ar%et
place$ent
o Corporations with $ore stringent
capital reDuire$ents
4nsurance corporations *
$ust have paidIup capital
stoc% of at least 0 C 8
(6nsurance 0ode) 'ec %++)
:an%s * $onetary board fixes
$ini$u$ paidIup capital
reDuire$ents for the different
classes of ban%s (0entral
9ank Act and =eneral
9anking Act).
.nissued capital stock
o 6t is that portion of the capital
stock that is not issued or
subscribed 6t does not vote and
draws no dividends
Gegal capital
o 6t is the amount equal to the
aggregate par vale and;or issued
value of the outstanding capital
stock Chen par value shares are
issued above par) the premium or
e?cess is not to be considered as
10
part of the legal capital (0f!8#)
6n the case of no par value
shares) the entire consideration
received forms part of legal
capital and shall not be
available for distribution of
dividends (!") par #)
0apital
o 6t is used broadly to indicate the
entire property or assets of the
corporation 6t includes the
amount invested by the
stockholders plus the
undistributed earnings less
losses and e?penses
o 6n the strict sense) it refers to
that portion of the net assets
paid by the stockholders as
consideration for the shares
issued to them) which is utili<ed
for the prosecution of the
business of the corporation (4e
Geon)
@. 6>3A&G>3>I4/ 6>G&6
6he person elected by the
subscribers as 6reasurer of the
corporation at the ti$e of the
incorporation, who is na$ed as such
in the AH4 and who has been
authorized to receive for and in the
na$e and for the benefit of the
corporation, all subscriptions, fees,
contributions or donations paid or
given by the subscribers or
$e$bers
B. 6>3A&G>3>'& A114;A?46
6he sworn state$ent of the
6reasurer elected by the subscribers
stating at least 2CM of the
authorized capital stoc% of the
corporation has been subscribed and
that at least 2CM of the total
subscription has been fully paid to
hi$ in actual cash and#or property,
the fair valuation of which is eDual
to at least 2CM of the said
subscription, such paidIup capital
being not less than C,FFF.FF (!7)
E. H6(3> 8A663>&
Classes of shares, as well as the
preferences or restrictions on
any such class (A)
;enial or restriction of preI
e$ptive right ()E)
0rohibition against transfer of
stoc% which would reduce stoc%
ownership to less than the
reDuired $ini$u$ in the case of a
nationalized business or activity
(!C(!!))
C. 14+4/, H1 A>64C+3& A/; 0A=83/6 H1
133&
Corporations governed by special laws
have to sub$it a reco$$endation
fro$ the appropriate govern$ent
agency to the effect that such articles
are in accordance with law.
a) ban%s, ban%ing and DuasiIban%ing
institutions,
b) building and loan associations,
c) trust co$panies and other
financial inter$ediaries,
d) insurance co$panies,
e) public utilities,
f) educational institutions, and
g) other corporations governed by
special laws
/onIstoc% corporations that intend to
solicit gifts, donations, and
contributions fro$ the public at large
for the benefit of an indefinite nu$ber
of persons $ust secure a Certificate
of >egistration fro$ the 4nsurance
Co$$issioner.
1ailure to file AH4 will prevent due
incorporation of the proposed
corporation and will not give rise to its
"uridical personality (!E). 4t will not
even be a de facto corporation (2F)
;. 3NA84/A64H/ H1 A>64C+3& := &3C5
A00>H?A+ H> >3<3C64H/
6he &3C $ay re"ect any AH4 thereto if
the sa$e is not in co$pliance with the
reDuire$ents of this Code (!@)
6he &3C shall give the incorporators a
reasonable ti$e within which to
correct or $odify the ob"ectionable
portions of the articles or a$end$ent.
rounds for disapproving
articles of incorporation
&/'7*
a) AH4 does not substantially the for$
prescribed
b) 0urpose is patently unconstitutional,
illegal, i$$oral, contrary to
govern$ent rules and regulations
c) 6reasurer's Affidavit is false
11
d) 0ercentage reDuire$ent of
ownership as reDuired by the
Constitution not co$plied with.
After consulting with :H4, /3;A,
appropriate govern$ent agency,
&3C $ay deny registration of any
corporation if its establish$ent will
not be consistent with declared
national policies
Certificate of authority reDuired of
the following
a) 4nsurance Co$paniesI
4nsurance Co$$ission
b) :an%s, :uilding and +oan
Associations, 1inance
Co$paniesI 8onetary :oard
c) 3ducational 4nstitutionsI
&ecretary of 3ducation
d) 0ublic GtilitiesI :oard of
0ower, :oard of
6ransportation, /ational
6eleco$$unication
Co$$ission, etc..
>e$edy in case of re"ection of AH4
by petition for review in accordance
with the >ules of Court (A, last
par., 0; EF2IA)
3. 4&&GA/C3 H1 C3>6414CA63 H1
4/CH>0H>A64H/
A private corporation for$ed or
organized under this Code
co$$ences to have corporate
existence and "uridical personality
and is dee$ed incorporated fro$
the date the &ecurities and
3xchange Co$$ission issues a
certificate of incorporation under its
official seal (!E)
6hereupon the incorporators,
stoc%holders#$e$bers and their
successors shall constitute a body
politic and corporate under the
na$e stated in the articles of
incorporation for the period of ti$e
$entioned therein, unless said
period is extended or the
corporation is sooner dissolved in
accordance with law. (4bid)
4f incorporators are found guilty of
fraud in procuring Certificate of
4ncorporation, &3C $ay revo%e the
sa$e after proper notice and
hearing (A(4), 0; EF2IA)
Defective Attempts to 2ncorporate
A. ;3 1AC6H CH>0H>A64H/& * a
corporation where there exists a flaw in its
incorporation
*equisites of a de facto corporation
a) Aalid statute * there is an apparently
valid statue under which the
corporation with its purposes $ay be
for$ed. 6here can be no de facto
corporation under a statue
subseDuently declared
unconstitutional
+unicipality of +alabang vs. $enito &-7
8C!A 900*
6he $unicipality of :alabagan was created
by 3H )BA of 0resident ,arcia out of barrios
and sitios of 8alabang. 6he petitioners see%
to nullify the 3H. 6hey rely on the 3elae<
ruling that the 0resident's power to create
$unicipalities under &ec. AB of the
Ad$inistrative Code is unconstitutional.
>espondents argue that the 3elae< ruling is
inapplicable because :alabagan is a de facto
corporation.
(3+; 6he 8unicipality of :alabagan was
not a de facto corporation. 6he color of
authority reDuisite to a de facto $unicipal
corporation $ay be an unconstitutional law,
valid on its face, which has either
a. :een upheld for a ti$e by the
courts5 or
b. /ot yet been declared void5
provided that a warrant for its
creation can be found in so$e
other valid law or in the
recognition of its potential
existence in the general
constitution of the state.
6he $ere fact that :alabagan was organized
before the statute was invalidated cannot
$a%e it a de facto corporation because,
independently of the Ad$inistrative Code,
there is no other valid statute to give color of
authority to its creation. 6his doesn't $ean
that the acts done by :alabagan in the
exercise of its corporate powers are a nullity.
6he existence of 3H )BA is an Joperative fact
which cannot be "ustly ignored.K
b) .ser of corporate powers * there has
been so$e user of corporate powers,
the transaction of business in so$e
way as if it were a corporation
not necessary that dealings
between the parties should have
been on a corporate basis
12
election of directors and officers
would not be user of corporate
powers since these acts are "ust
indicative of a $ere association
ta%ing subscriptions to and
issuing shares of stoc%, buying
lot, constructing, and leasing a
building on it will constitute
sufficient user of corporate
powers to constitute a de facto
corporation
c) 0olorable compliance I there has
been colorable co$pliance with legal
reDuire$ents in ,HH; 1A46(
while the corporation is still in
the process of incorporation, it
is Duite clear that there can be
no substantial or colorable
co$pliance and therefore it
cannot be at such a stage a de
facto corporation
A corporation which has not yet
been issued a certificate of
incorporation cannot clai$ Jin
good faithK to be a corporation.
6hus, it cannot be a de facto
corporation .(all v. 0iccio BA
0hil AF)2
Co$pliance with the above conditions would
$a%e the corporation de facto whose
incorporation cannot be attac%ed collaterally.
4t $ay only be attac%ed directly by the &tate
in a Duo warranto proceeding
Co$pliance with the above
conditions would $a%e the
corporation de facto whose
incorporation cannot be attac%ed
collaterally. 4t $ay only be attac%ed
directly by the &tate in a Duo
warranto proceeding (2F)
;e facto doctrine grew out of the
necessity to pro$ote the security of
business transactions and to
eli$inate Duibbling over
irregularities
The de facto doctrine is the
e?ception to the general rule that
when there is no corp entity to talk
about) it is the natural persons who
are liable
-here corporations are neither de
"ure or de facto, associates $ay be
held liable as partners unless
estoppel applies
/o articles and no byIlaws no de
facto corp. 6here's no colorable
co$pliance at all
;e facto corp is li%e a de "ure corp,
has all the powers and liabilities of de
facto corp
6(3 H/+= ;411 its incorporation can
be attac%ed by &tate in Duo warranto
action
>atio Hnly &tate can give it legal
existence, so only the &tate is
wronged
:. CH>0H>A64H/ := 3&6H003+
4t is a status acDuired by persons who
assu$e to act as a corporation
%nowing it to be without authority.
&uch persons shall be liable as
general partners for all debts,
liabilities and da$ages incurred or
arising as a result thereof. (2!)
-hen such ostensible corporation is
sued on any transaction entered by it
as a corporation or any act co$$itted
by it as such, it shall not be allowed to
use as a defense as lac% of corporate
personality (2!)
Hne who assu$es an obligation to an
ostensible corporation as such, cannot
resist perfor$ance thereof on the
ground that there was in fact no
corporation (2!)
-ote that an unincorporated
corporation is not barred from
transacting business before the
commencement of corporate
e?istence Gimit: personal liability
0omplication: when the corporation
did not come about
Against whom will estoppel lieH Cho
committed the active
misrepresentationH
Chere a person convinces other
parties to invest money for the
formation of a corporation) but which
has never duly incorporated) there
can be no resulting partnership
among them) and the mere passive
investors cannot be held liable to
share in the losses suffered by the
business enterprise (3ioneer 'urety v
0A) %&+&)
Chen applicable:
% 3ersons assuming to act as corp
are liable as gen partners;
$ #
rd
party who had dealt with an
unincorporated association as a
corp may be precluded from
denying its corporate e?istence
on a suit brought by the alleged
corp B person deemed to have
13
admitted the e?istence of the
corp
# alleged corp that has entered
into a contract by virtue of
which it has received
advantages and benefits
Fowever) if business associates
fraudulently misrepresent the
e?istence of a corp) #
rd
party can
sue them as gen partners #
rd
party
is not estopped from asserting their
liability because he had recogni<ed
the corporation1s e?istence *atio:
They cannot profit by their own
misrepresentation
Fence) if associates did not know of
thee defective incorp) they can1t be
personally held liable by innocent #
rd
party (0f 'alvaierra v =arlitos)
%&(+)
9ut if #
rd
party knew of defects of
incorp) he is estopped from
recovering from individual
associates) but must recover only
from corp assets
:ozano vs. delos 8antos &'((7*
6his case involved two incorporated drivers'
associations that decided to unite and elect
one set of officers to be given authority to
collect the daily dues of the drivers who are
$e$bers of the consolidated association.
(3+; ;octrine of estoppel applies when
persons assu$e to for$ a corporation and
exercise corporate functions and enter into
business relations with third persons. -here
there are no third persons involved and the
conflict arises only a$ong those assu$ing to
for$ a corporation, who therefore %now that
it has not been registered, there is no
corporation by estoppel.
2nternational 6xpress ;ravel v. CA
6he doctrine of corporation by estoppel $ay
apply to
o a third party I a )
rd
party
who had dealt with an unincorporated
association as a corporation $ay be
precluded fro$ denying its corporate
existence on a suit brought by the
alleged corporation on the contract
even if he did not %now of the defective
incorporation. )
rd
party is considered to
have ad$itted the existence of a
corporation by the fact that he dealt
with it as a corporation
o the alleged corporation I
when a third person has entered into a
contract with an association which
represented itself to be a corporation,
the association is estopped fro$
denying its corporate capacity in a suit
against it by such )
rd
person. 4t cannot
allege lac% of personality to be sued to
evade responsibility on a contract it has
entered into and by virtue of which it
has received advantages and benefits
o associates as partners I
when business associates fraudulently
$isrepresents the existence of a
corporation and the )
rd
party contacts
with the association as a corporation
without %nowing the serious defects in
its incorporation, such )
rd
party $ay
sue associates as general partners.
-here both the associates and the )
rd
party were ignorant of the defective
incoroporation, )
rd
party cant hold the
associates liable since they were in
good faith. 4f )
rd
party %new of defects
in incorporation and still dealt with the
corporation, he $ust be dee$ed to
have chosen to deal with the
corporation as such and should be
li$ited in his recovery to the corporate
assets.
2nternal 4rganization of the Corporation
A. A00>H?A+ H1 :=I+A-&
!. ;efinition of by-laws
6hese are regulations,
ordinances, rules or laws adopted
by an association or corporation
or the li%e for its internal
governance. :yI laws define the
rights and obligations of various
officers, persons or groups within
the corporate structure and
provide rules for routine $atters
such as calling $eetings.
3very corporation under this code
shall have the power and
capacity to adopt byIlaws not
contrary to law, $orals, or public
policy, and to a$end or repeal
the sa$e in accordance with this
code ()A)
These are subordinate to the A:6)
0orp 0ode) and other statutes
2. -hen to adopt byIlaws (7A)
3very corporation for$ed under
this code $ust within ! $onth
after receipt of official notice of
the issuance of its certificate of
14
incorporation by the &3C adopt
a code of byIlaws for its
govern$ent not inconsistent
with this code.
8ay be adopted and filed prior
to incorporation, in such case,
shall be approved and signed by
all incorporators sub$itted to
&3C together with AH4
1ailure to file :yIlaws on ti$e
Loyola Grand Villas Homeowners Assn
v. CA
6he &upre$e Court held that although the
Corporation Code reDuires the filing of byI
laws within one $onth after the issuance of
the Certificate of 4ncorporation, it does not
expressly provide for the conseDuences of
nonIfiling within the said period. 1ailure to
file the byIlaws within that period does not
i$ply the Qde$iseQ of the corporation. :yI
laws $ay be reDuired by law for an orderly
governance and $anage$ent of corporations
but they are not essential to corporate birth.
6herefore, failure to file the$ within the
period reDuired by law by no $eans tolls the
auto$atic dissolution of a corporation.
). (ow filed (7A)
8ust be approved by the
affir$ative vote of the
stoc%holders representing the
$a"ority of the outstanding
capital stoc% or $a"ority of
$e$bers (if filed prior to
incorporation) must be
approved and signed by all
incorporators)
8ust be signed by the
stoc%holders or $e$bers voting
for it
8ust be filed with the &3C
certified by the $a"ority of
directors#trustees and
countersigned by the secretary
of the corporation which shall be
attached to original AH4
7. -here %ept (7A)
8ust be %ept in the principal
office of the corporation5 sub"ect
to inspection of stoc%holder or
$e$ber during office hours (0f
!,8)
C. 3ffectivity of byIlaws
3ffective only fro$ the issuance
of &3C of certification that bylaw
are not inconsistent with the Code
9y-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 must be
accompanied by a certificate of
the appropriate gov1t agency to
the effect that such by-laws are
in accordance with law
Cannot bind stoc%holders or
corporation pending approval
:yIlaws, li%e AH4 are contracts of
adhesion. 6hey will bind the
corporation and stoc%holders
including those who vote against
as well as those who beca$e
$e$bers after approval
Contracts entered into without
strict co$pliance with byIlaws
$ay be binding on the
corporation due to long
acDuiescence and usage
:yIlaws are $ere internal rules
a$ong stoc%holders and cannot
affect or pre"udice )
rd
persons
who deal with the corporation
unless they have %nowledge of
the sa$e (0hina 9anking 0orp v
0A) %&&,)
A. Contents (7@)
&ub"ect to the provisions of the
Constitution, this Code, other
special laws, and the articles of
incorporation, a private
corporation $ay provide in its byI
laws for
a) 6he ti$e, place and $anner
of calling and conducting
regular or special $eetings of
the directors or trustees5
b) 6he ti$e and $anner of
calling and conducting regular
or special $eetings of the
stoc%holders or $e$bers5
c) 6he reDuired Duoru$ in
$eetings of stoc%holders or
15
$e$bers and the $anner
of voting therein5
d) 6he for$ for proxies of
stoc%holders and $e$bers
and the $anner of voting
the$5
e) 6he Dualifications, duties
and co$pensation of
directors or trustees,
officers and e$ployees5
f) 6he ti$e for holding the
annual election of directors
of trustees and the $ode or
$anner of giving notice
thereof5
g) 6he $anner of election or
appoint$ent and the ter$
of office of all officers other
than directors or trustees5
h) 6he penalties for violation of
the byIlaws5
i) 4n the case of stoc%
corporations, the $anner of
issuing stoc% certificates5
and
") &uch other $atters as $ay
be necessary for the proper
or convenient transaction of
its corporate business and
affairs.
The contents may be subdivided
into two ma2or headings:
a) 8anage$ent and control of
the corporate entity5 and
b) *ights and obligations of
stockholders
, Amendment or repeal (!8+)
7a2ority vote of the members of
the 9oard and ma2ority vote of
the outstanding capital stock or
ma2ority of members) in a
meeting duly called for the
purpose; or
$;# of the outstanding capital
stock or members may delegate
to the 9:4 the power to amend
or repeal any by-laws or adopt
new by-laws (such power may
be revoked by ma2ority vote
only)
6n all other respects) the
procedure for adopting the
original by-laws shall be the
same in amending or repealing
by-laws or adoption of a new
set of by-laws
:. 3+3C64H/ H1 ;4>3C6H>& * discussed in
Chapter ?44
C. CH883/C383/6 H1 :G&4/3&&
6ffects of non<use of charter=continuous
inoperation
!. /onIuser for 2 years (nonIuse of
charter)I when the corporation does
not for$ally organize and co$$ence
the transaction of its business or the
construction of its wor%s within 2
years fro$ the date of its
incorporation. 4ts corporate powers
cease and the corporation shall be
dee$ed dissolved (auto$atic)
1or$al organization * $ay consist
in the election of new board of
directors or trustees and
corporate officer
Co$$ence$ent of business *
$ay ta%e the for$ of contracting
for lease or sale of properties to
be used as business site of the
corporation and other preparatory
acts geared towards fulfill$ent of
the purpose for which the
corporation was established
2. /onIuser for C years (continuous
inoperation)I when the corporation
has co$$enced the transaction of its
business but subseDuently beco$es
continuously inoperative for a period
of at least C years. 6he sa$e shall be
a ground for the suspension or
revocation of its corporate franchise
or Certificate of 4ncorporation (not
auto$atic). /otice and hearing is
reDuired.
). 3xception cause or nonIuse or
operation was due to causes beyond
the control of the corporation as
deter$ined by &3C (ex. 8ineral lands
to be developed by the corporation as
per its purpose are the ob"ect of court
litigation and a court in"unction
against the corporate activities has
been issued)
A//GA+ 14/A/C4A+ &6A6383/6& * filed with
&3C annually
Chapter IV
THE CORPORATE ENTITY
Doctrine of separate >uridical
personality
16
A corporation has a personality separate
and distinct fro$ that of its stoc%holders
and $e$bers and is not affected by the
personal rights, obligations, and
transactions of the latter. &ince
corporate property is owned by the
corporation as a "uridical person, the
stoc%holders have no clai$ on it as
owners, but have $erely an expectancy
or inchoate right to the sa$e should any
of it re$ain upon dissolution of the
corporation after all corporate creditors
have been paid. &uch right is li$ited
only to their eDuity interest.
Although stockholder1s interest in the
corp may be attached by his personal
creditor) corp property cannot be used
to satisfy his claim
=eneral *ule &eparate personality is
vested to a corporate entity when it is
issued the certificate of incorporation by
the &3C. 6he e?ceptions are
a. de facto corporation
b. corporation by estoppel
As a separate 2uridical personality) a
corporation can be held liable for torts
committed by its officers for corporate
purpose (3-9 v 0A) %&,+)
6t can1t be held criminally liable for a
crime committed by its officers (3eople
v Tan 9oon Iong) %&#5)
0orporate entities are entitled to the
following constitutional rights: due
process) equal protection) and
protection against unreasonable
searches and sei<ures Fowever) a corp
is not entitled to the privilege against
self-incrimination (9ataan 'hipyard J
/ng1g 0o v 30==) %&+,)
A corporation is not entitled to moral
damages (G90 /?press) 6nc v 0A)
Kuridical personality of the corporation
ends when liquidation ends (payment of
debts and distribution of assets) and
inchoate rights or e?pectancies of
stockholders are reali<ed .ntil such
conveyance is made) title over the
assets remains with the corporation
Piercing the veil of corporate
fiction
!. -ature of the piercing doctrine
0iercing the veil of corporate entity
reDuires the court to see through
the protective shroud which
exe$pts its stoc%holders fro$
liabilities that ordinarily they could
be sub"ect to, or distinguishes one
corporation fro$ a see$ingly
separate one, were it not for the
existing corporate fiction .Gim v 0A)
$555L. :ut to do this, the court $ust
be sure that the corporate fiction was
$isused, to such an extent that
in"ustice, fraud or cri$e was
co$$itted upon another,
disregarding, their, his, her or its
rights. 4t is the protection of the
interests of innocent third persons
dealing with the corporate entity
which the law see%s to protect by this
doctrine. .Traders *oyal 9ank v 0A2
-hether the existence of the
corporation should be pierced
depends on Duestions of facts,
appropriately pleaded. 8ere
allegation that a corporation is the
alter ego of the individual
stoc%holders is insufficient. 6he
presu$ption is that the stoc%holders
or officers are distinct entities. 6he
burden of proving otherwise is on the
party see%ing to have the court pierce
the veil of corporate entity. .*amoso
v AA2
0iercing the veil of corporate entity is
$erely an eDuitable re$edy, and $ay
be awarded only in cases when the
corporate fiction is used to defeat
public convenience, "ustify wrong,
protect fraud or defend cri$e or
where the corporation is a $ere alter
ego or business conduit of a person.
Chen it comes to applying the
doctrine) the first point to consider is
the liability of obligation of the
individual (the one who is being
sought to be liable) Cithout such
liability) everything would have been
in compliance with statutes
6n case of wholly-owned corporations)
corporations with common
stockholders) or corporations having a
parent-subsidiary relationship) the
following are the Dinevitable
consequencesE:
a) 0ontrol and management of the
corporation;
b) 6nterlocking directors;
c) 0ommon access to the use of
resources) services) and #
rd
-party
providers; and
d) 6ntra-corporate dealings
4n the above conseDuences, there is no
necessity for applying the doctrine of
piercing the corporate veil unless there is
a particular act by the corporation,
stoc%holder, or :H; that gives rise to a
1
liability. 4f there's a liability to spea% of,
such conseDuences $ay be considered
as a $eans of evading such thus the
need for the piercing.
4n applying the doctrine, deter$ine
first the rights and obligations of the
parties. 6hen, deter$ine the
possibility of nonIenforce$ent of
such rights and obligations because
of the shield or veil. +astly, loo%
into the circu$stances and
underlying purpose of putting up the
corporation
2. /?tent of the legal effects of piercing
6he application of the piercing
doctrine to a particular case does
not deny the corporation of legal
personality for any and all purposes,
but only for the particular
transaction or instance for which the
doctrine was applied. .Ioppel 3hil
6nc v Matco2
0iercing is not allowed unless the
re$edy sought is to $a%e the officer
or another corporation pecuniarily
liable for corporate debts
). 6llustrative 0ases where piercing the veil
is allowed
4f done to defraud the govern$ent
of taxes due it
4f done to evade pay$ent of civil
liability
4f done by a corporation which is
$erely a conduit or alter ego of
another corporation
4f done to evade co$pliance with
contractual obligations
4f done to evade financial obligation
to its e$ployees
7. 3arent-subsidiary relationship
6he $ere fact that a corporation
owns all or substantially all of the
stoc%s of another corporation is not
sufficient to "ustify their being
treated as one entity. 4f used to
perfor$ legiti$ate functions, the
subsidiary's separate existence $ay
be respected. (owever, to prevent
abuses of the separate entity
privilege, the court will pierce the
veil of corporate entity and regard
the two corporations as one.
Circu$stances which if present in
the proper co$bination renders the
subsidiary an instru$entality
a) 6he parent corporation owns all or
$ost of the subsidiary's capital
stoc%
b) 6he parent and subsidiary
corporations have co$$on
directors or officers
c) 6he parent corporation finances
the subsidiary
d) 6he parent corporation subscribes
to all the capital stoc% of the
subsidiary or otherwise causes its
incorporation
e) 6he subsidiary has grossly
inadeDuate capital
f) 6he parent corporation pays the
salaries and other expenses or
losses of the subsidiary
g) 6he subsidiary has substantially
no business except with parent
corporation or no assets except
those conveyed to or by the
parent corporation
h) 4n the papers of the parent
corporation or in the state$ents
of its officers, the subsidiary is
described as a depart$ent or
division of the parent corporation
or its business or financial
responsibility is referred to as the
parent corporation's own
i) 6he parent corporation uses the
property of the subsidiary as its
own
") 6he directors or executives of the
subsidiary do not act
independently in the interest of
the subsidiary but ta%e their
orders fro$ the parent
corporation in the latter's interest
%) 6he for$al ledger reDuire$ents of
the subsidiary are not observed
(3-9 v *itratto =roup) $55%).
6he subsidiary cannot be considered a
$ere instru$entality of the parent
corporation "ust by the co$bination of
the !! signs listed above. 1or the veil
of corporate entity of the subsidiary to
be pierced so that it is considered "ust
an instru$entality, the act Duestioned
$ust have an illegal or unfair purpose
which results to pre"udice to third
persons who $ay see% redress fro$
the corporate entity
De :eon vs. ":!C, ! ''-33', +ay 0),
-))'
1AC6& 14&4 contracted with 16C for security
services. &ubseDuently, the stoc%holders of
14&4 sold all their participation in the
corporation to a new set of stoc%holders which
18
rena$ed the corporation 84&4. Afterwards,
16C preter$inated its contract of security
services with 84&4 causing petitioner security
guards to lose their e$ploy$ent and file G+0
case against 16C, 14&4 and 84&4.
(3+; 6here was 3>I33 relationship
between 16C and petitioners. 4t was shown
that 14&4 was a $ere ad"unct of 16C.
>ecords show that 14&4 and 16C have the
sa$e owners and business address, and 14&4
provided security services only to 16C. 6he
purported sale of the shares of the for$er
stoc%holders to a new set of stoc%holders
who changed the na$e of the corporation to
84&4 appears to be part of a sche$e to
ter$inate the services of 14&4Rs security
guards posted at the pre$ises of 16C and
bust their newlyIorganized union which was
then beginning to beco$e active in
de$anding the co$panyRs co$pliance with
+abor &tandards laws. Gnder these
circu$stances, the Court cannot allow 16C to
use its separate corporate personality to
shield itself fro$ liability for illegal acts
co$$itted against its e$ployees.
Francisco vs. +e>ia, ! '.'3'7, Aug '.,
-))'
-ith specific regard to corporate officers, the
general rule is that the officer cannot be held
personally liable with the corporation,
whether civilly or otherwise, for the
conseDuences of his acts, if he acted for and
in behalf of the corporation, within the scope
of his authority and in good faith. 4n such
cases, the officerRs acts are properly
attributed to the corporation. (owever, if it
is proven that the officer has used the
corporate fiction to defraud a third party, or
that he has acted negligently, $aliciously or
in bad faith, then the corporate veil shall be
lifted and he shall be held personally liable
for the particular corporate obligation
involved.
"ationality of the
corporation
!. 6he corporation is a national of the
country under whose laws it is organized
or incorporated the place of
incorporation test (!%$#) .
;o$estic corporations * organized
and governed under and by
0hilippine laws
1oreign corporations * organized
under laws other than those of the
0hilippines an can operate only in
the territory of the state under whose
laws it was for$ed. (owever, they
$ay be licensed to do business here.
2. /ationality of the Corporation as
deter$ined by the J0ontrol TestK
3xploitation of /atural >esources I
&ection 2, Art. N44 CH/&6. Jonly
1ilipino Citizens or Corporations whose
capital stoc% are at least AFM owed
by 1ilipinos can Dualify to exploit
natural resources.K
0ublic Gtilities I &ec. !!, Art N44,
CH/&6. Jxxx no franchise, certificate
or any other for$ of authorization for
the operation of a public utility shall
be granted except to citizens of the
0hilippines or to corporations or
associations organized under the laws
of the 0hilippines at least AFM of
whose capital is owned by such
citizens. J
-arIti$e 6est I 4f the controlling
stoc%holders are ene$ies, then the
nationality of the corporation will be
base on the citizenship of the $a"ority
stoc%holders in ti$es of war (>ilipinas
0ompania de 'eguros v 0hristian
Fuenfeld) %&(%) .
4nvest$ent 6est I &ec. )(a) and (b),
1oreign 4nvest$ents Act of !EE!
(>A@F72). 4t considers for purpose of
invest$ent a J0hilippine /ationalK as
a corporation organized under the
laws of the 0hilippines of which at
least AFM of the capital stoc%
outstanding and entitled to vote is
owned and held by citizens of the
0hilippines, or a trustee of the funds
for pension or other e$ployee
retire$ent or separation benefits,
where the trustee is a 0hilippine
national and at least AFM of the fund
will accrue to the benefit of 0hilippine
nationals.
). =randfather rule
Gsed to deter$ine the nationality of a
corporation by which the percentage of
1ilipino eDuity in corporations engaged in
nationalized and#or partly nationalized
areas of activities, provided for under the
constitution and other nationalization
laws, is co$puted, in cases where
corporate shareholders are present in the
situation, by attributing the nationality of
the second or even subseDuent tier of
ownership to deter$ine the nationality of
the corporate stoc%holder.
1!
'/0 formula
J&hares belonging to corporations or
partnerships at least AFM of the
capital of which is owned by 1ilipino
citizens shall be considered as of
0hilippine nationality, but if the
percentage of 1ilipino ownership in
the corporation or partnership is less
than AFM only the nu$ber of shares
corresponding to such percentage
shall be considered as of 0hilippine
nationality.K
Chapter V
PROMOTERS CONTRACTS
PRIOR TO INCORPORATION
Functions of Promoters
:rgani<e and establish corporation
'olicit or pool capital contributions
/?ercise;identify;consummate
opportunities
7ake available capital
contributions;investments (underwrite)
7anage;control
-ote: may be done prior or after
incorporation 0omplications arise if
performed prior to incorporation >or
whom was the promoter acting in behalf
ofH (no 2uridical entity yet)
5hat are Promoter?s Contracts@
0ontracts prior to e?istence of
corporation thus the corporation could
not have been a party to it
Fowever) the corporation may make the
contracts its own and may become
bound on such contracts if after
incorporation) it accepts or ratifies the
same) or accepts its benefits with
knowledge of the terms thereof
*atification may be e?press by board
resolution or implied by acts of the
board or acceptance of benefits
:iability of Corporation for Promoter?s
Contracts
>ules on the liability of the corp. on
pro$oters' contracts
!. ,en. >ule Corp. is not bound by the
contract * &ince the corp. did not yet exist
at the ti$e of the contract, it could not
have had an agent who could legally bind
it.
2. 3xception Corp. $ay be bound by the
contract if it $a%es the contract its own
(owS
a. Adoption or ratification
:y express resolution
4$plied fro$ the acts of
responsible officers of the corp.
T 6he corp. cannot adopt only the part
of the contract which $ay be
beneficial to it U then discard the part
that is burdenso$e.
T 6he contract to be capable of adoption
or ratification, $ust be one within the
powers of the corp. to enter.
b. Acceptance of benefits under the
contract with %nowledge of the ter$s
thereof
Personal :iability of Promoter on Pre<
2ncorporation Contracts
6here are three possible situations intended
by the pro$oter and the other party in preI
incorp. contracts
1. 0ro$oter ta%es a continuing H113> on
behalf of the corp, which if accepted by
the corp. beco$es a contract 0ro$oter
does not assu$e any personal liability,
whether or not the offer is accepted by
the corp.
2. 0ro$oter $a%es a contract at the ti$e
binding hi$self with the G/;3>&6A/;4/,
that if the corp., once for$ed, accepts or
adopts the contract, the pro$oter will be
relieved of all responsibilities
). 0ro$oter binds hi$self 03>&H/A++= U
assu$es the responsibility of loo%ing to
the proposed corp. for rei$burse$ent
4n the absence of any express or i$plied
agree$ent to the contrary, the )
rd
situation
will be presu$ed and the pro$oter will be
20
considered personally liable for the
contracts. 6hus, the corp.'s adoption or
ratification of the contract will not release
the pro$oter fro$ personal liability unless a
novation was intended. /?ception: Nuaker v
Fill case 6n this case) Nuaker looked to the
uincorporated entity when making the
contract Thus) the promoter was not liable
Compensation of Promoters
=en rule * the corporation is not liable to
pay co$pensation because this would be an
i$position on innocent investors.
/?ceptions
if after it is for$ed, corporation
expressly pro$ises to do so
&ervices done partly before and partly
after incorporation and the corporation
ta%es the benefits thereof
6he Corp. Code does not contain any
provision as to the co$pensation of
pro$oters. :ut the &ecurities Act authorizes
a pro$otion fee 41 it is provided for in the
registration state$ent of the securities
involved.
Fiduciary !elationship between
Corporation A Promoter
6he pro$oters, being responsible for the
financing U organization of the corp., are
under duty to exercise good faith U fairness
in all their acts U transactions.
3xa$ple 0ro$oters often have to ta%e
options or title to property in their na$e but
for the benefit of the corp. 4n such cases,
they should not $a%e secret profits in
passing title to the corp. 4f they do, they
would have to account for all such profits to
the corp. when for$ed.
Chapter VI
CORPORATE POWERS
eneral powers of corporations ()A)
!. 6o sue and be sued in its corporate
na$e5
2. &uccession by its corporate na$e for the
period of ti$e stated in the articles of
incorporation and the certificate of
incorporation5
). 6o adopt and use a corporate seal5
7. 6o a$end its articles of incorporation in
accordance with the provisions of this
Code5
C. 6o adopt byIlaws, not contrary to law,
$orals, or public policy, and to a$end or
repeal the sa$e in accordance with this
Code5
A. 4n case of stoc% corporations, to issue or
sell stoc%s to subscribers and to sell
stoc%s to subscribers and to sell treasury
stoc%s in accordance with the provisions of
this Code5 and to ad$it $e$bers to the
corporation if it be a nonIstoc%
corporation5
@. 6o purchase, receive, ta%e or grant, hold,
convey, sell, lease, pledge, $ortgage 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 $ay
reasonably and necessarily reDuire,
sub"ect to the li$itations prescribed by
law and the Constitution5
B. 6o enter into $erger or consolidation with
other corporations as provided in this
Code5
E. 6o $a%e reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or
si$ilar purposes 0rovided, 6hat no
corporation, do$estic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity5
!F. 6o establish pension, retire$ent, and
other plans for the benefit of its directors,
trustees, officers and e$ployees5 and
!!. 6o exercise such other powers as $ay be
essential or necessary to carry out its
purpose or purposes as stated in the
articles of incorporation. (in the purpose
clause)
&ources of power (repositories)
o &ection )A (0orp 0ode and other
applicable statutes)
o 0urpose clause (A:6) supplemented
by by-laws)
&ec )B par !! grants such power as are
essential or necessary to carry out its
purpose or purposes as stated in the AH4.
A corporation is presu$ed to act within its
powers and when a contract is not on its
face necessarily beyond its authority, it
21
will, in the absence of proof to the
contrary, presu$ed valid
The general powers are to be e?ercised
by the 9:4 Fowever) the power to
amend A:6 is to be e?ercised by the
stockholders or members
2 general restrictions on the power of
the corporation to acDuire and hold
properties
o that the property $ust be
reasonably and necessarily reDuired
by the transactions of its lawful
business
o that the power shall be sub"ect to
the li$itations prescribed by other
special laws and the constitution
(corporation $ay not acDuire $ore
than )FM of voting stoc%s of a
ban%5 corporations are restricted
fro$ acDuiring public lands except
by lease of not $ore than !FFF
hectares)
8pecific Powers < 6C: 0;A 4;8 (;40 CA:
8;6)
3xtend or shorten the corporate ;er$
4ncrease or decrease Capital stoc%
4ncur, create or increase $onded
indebtedness
;eny Pree$ptive right
&ell or otherwise Dispose of substantially
all its assets
AcDuire its own shares
2nvest in another corporation or
business
Declare dividends
6nter into 8anage$ent contracts
2mplied Powers
6hese i$plied powers are dee$ed to exist
because of the following provisions
!. except such as are necessary or
incidental to the exercise of the powers
so conferred ()A)
2. such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the AH4 * catch-all
phrase (7C)
>e$e$ber
!. A corporation is presu$ed to act
within its powers.
2. -hen a contract, entered into by
the corporation, is not on its face
necessarily beyond its authority, it will be
presu$ed valid.
;he Bltra #ires Doctrine &/.9*
4efinition * 6hese are acts which a
corporation is not e$powered to do or
perfor$ because they are not based on the
powers conferred by its AH4 or by the
Corporation Code on corporations in general,
or because they are not necessary or
incidental to the exercise of the powers so
conferred.
*ule * /o 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.
An ultra vires act, if not illegal, can be
re$edied (by ratification)
Atrium v. CA
Atriu$ 8anage$ent Corporation filed with
>6C an action for collection of the 7
postdated chec%s issued by the (iIce$ent
Corporation, though its signatories de +eon,
treasurer, and delas Alas, chair$an of the
corporation to a certain 36 (enry, and Co,
which the latter endorsed to Atriu$ for
rediscounting.
(3+; 6he act of issuing was well within the
a$bit of a valid corporate act, for it was
for securing a loan to finance the
activities of the corporation, hence, not
an ultra vires act. An ultra vires act is
distinguished fro$ illegal act, the for$er
being voidable which $ay be enforced
by perfor$ance, ratification, or estoppel,
while the latter is void and cannot be
validated. &C however, held de +eon
negligent.
!epublic of the Philippines vs. Aco>e
+ining Co.
Aco"e 8ining reDuested the ;irector of 0osts
to open a post office in its $ining ca$p for
the benefit of its e$ployee and their
fa$ilies. 4n a resolution, Aco"e agreed to be
directly responsible for the Jdishonesty,
carelessness, or negligence of the e$ployee
it assignsK. Aco"e's e$ployee, &anchez, was
designated as the post$aster but he later
22
disappeared with !)P of post office funds.
Aco"e denied liability on the ground that the
resolution was ultra viresI:H; had no
authority to act on the $atter.
(3+; 6he co$pany is estopped fro$
denying liability on the ground that the
board resolution is ultra vires. Assu$ing
arguendo that the resolution is an ultra vires
act, the sa$e is not void for it was approved
not in contravention of law, custo$s, public
order and public policy. 6he ter$ ultra vires
should be distinguished fro$ an illegal act
for the for$er is $erely voidable which $ay
be enforced while the latter is void and
cannot be validated.
"AP4C4! v #era &'(C(*
/A0HCH> has a pier at its coal plant in
:atangas. 4t did not renew its stevedoring
contract at the plant, but instead, too% over
the services itself. >6C <udge issued
preli$inary in"unction against /A0HCH>,
saying that it was not e$powered by its
Charter to engage in stevedoring and
arrastre services.
(eld
Gnder its Charter, /A0HCH> can exercise
powers as $ay be reasonably necessary to
carry out its business of constructing,
operating and $aintaining power plants, or
which, fro$ ti$e to ti$e, $ay be declared
by the :oard to be necessary, useful,
incidental or auxiliary to acco$plish said
purpose.
4f act is lawful, and not prohibited, and for
the purpose of serving corporate ends, and
reasonably contributes to the pro$otion of
those ends in a substantial sense, it $ay be
considered within the corporation's charter
powers.
&tevedoring services are incidental and
indispensable to unload the coal ship$ents.
Pirovano v De la !ama 8teamship
&'(9.*
&toc%s are owned by ;on de la >a$a, his 2
daughters, and their 33s with no$inal
shares. Hne of the daughters was $arried to
the co$pany president, 3nrico 0irovano.
-hile the business grew, the father
distributed his stoc%s a$ong his C daughters
and his wife. /;C was also represented in
the :o; because the corp had a debt to it.
6o secure the debt, all assets were
$ortgaged to /;C. ;ebt was later converted
to stoc%, such that /;C now held 7 of E
seats in :o;. &uch conversion released the
$ortgaged assets.
3nrico 0irovano died, so the :H; passed a
resolution converting insurance proceeds on
his life to stoc%s for each of his $inor
children. Approved by &(s.
(owever, the other &(s realized that they
would actually be donating !.77 8. instead
of the 7FFP they intended (since the value of
the stoc%s increased), and that 8rs. 0irovano
would now have 2x voting power as her
sisters.
:H; later changed donation into cash, but
would be retained by the co$pany as a loan,
and the interest payable to the children, both
a$ounts to be paid to the children after debt
to /;C paid, and later, when co$pany is in
position to $eet obligations. 8rs. 0irovano
for$ally accepted the donation. :H; later
approved release of so$e funds held in trust
for 8rs. 0irovano to buy house in /=. &(s
for$ally ratified the donation.
&3C later gave opinion that donation was
void bec it was beyond the scope of the
corp's powers. &(s later voted to revo%e the
donation to the 0irovano children.
(eld
!) ;onation was re$unerativeI for services
rendered by 3nrico 0irovano.
2) ;onation was already perfected. >atified
by &(s, and agreed to by /;C, the only
creditor.
)) ;onation is within scope of the AH4. 4t is
provided that corp can invest and deal
with $oneys not i$$ediately reDuired,
in such $anner as fro$ ti$e to ti$e
$ay be deter$ined, and that corp can
aid in any other $anner any person of
which any obligation or in which any
interest is held by this corp, or in the
affairs of prosperity of which this corp
has a lawful interest.
Corp has given donations to 33s in the
past, and to political ca$paigns.
Assu$ing donation was ultra vires,
donation was ratified, $a%ing the act
valid and enforceable.
Gltra vires act outside scope of powers
granted to it by its articles of incorp. /ot
necessarily illegal, because ultra vires
acts can beco$e valid by ratification and
estoppel.
23
=eneral consequences of ultra vires acts
a) Corporation $ay be dissolved under a
Duo warranto proceeding but in $ost
cases, the court $erely en"oins the
corporation fro$ co$$ission of the ultra
vires acts
b) Certificate of >egistration $ay be
suspended or revo%ed by &3C
c) 0arties to the ultra vires contract, if
executory on both sides, neither party
can as% for specific perfor$ance. -ill be
left as they are if the contract has been
fully executed on both sides. 4f one
party has perfor$ed his part, the
contract will be enforced provided it is
not illegal
d) Contract proceeding fro$ an ultra vires
act is voidable
e) Any stoc%holder $ay bring either an
individual or derivative suit to en"oin a
threatened ultra vires act or contract. 4f
act or contract has already been
perfor$ed, a derivative suit for da$ages
$ay be filed against the directors, but
their liability will depend on whether
they acted in good faith and with
reasonable diligence in entering into
contracts. -hen based on tort, cannot
setIup the defense of ultra vires against
in"ured party who had no %nowledge
that such was ultra vires
8ay beco$e binding by the ratification of all
stoc%holders unless third parties are
pre"udiced thereby or unless the acts are
illegal
Chapter VII
CONTROL AND MANAGEMENT OF
CORPORATIONS
Allocation of power and control
) levels of control in the corporate hierarchy
!. the :oard of ;irectors or 6rustees
# responsible for corporate policies
and the general $anage$ent of the
business and affairs of the
corporation
2. the Hfficers
# in theory, execute the policies laid
down by the board
# in practice, often have wide latitude
in deter$ining the course of
business operations
). 6he stoc%holders or $e$bers
# have residual power of funda$ental
corporate changes
/H63 :H; can delegate its function to the
officers and also to co$$ittees appointed by it
5ho 6xercises Corporate Powers
A. :HA>; H1 ;4>3C6H>&
!. Authority; repository of corporate
powers
6he board of directors or trustees
are responsible for corporate
policies and general $anage$ent
of the business affairs of the
corporation
4irectors have a fiduciary duty to
the corp and to the 'Fs
=eneral *ule: once elected) 'Fs
have no right to interfere with the
9:4 /?ceptions: removal of
director (!$+)) amendments of
A:6 (!%")) fundamental changes
(!")) declaration of stock
dividends (!8#)) entering into
management contracts (!88))
fi?ing of consideration of no-par
shares (!"$)) and fi?ing of
compensation of directors (!#5)
Gnless otherwise provided in the
Corp Code, the :oard of ;irectors
control and exercise
o the corporate powers of
corporation
o all business conducted,
o all property of such
corporation (2))
6he board exercises al$ost all
corporate powers, lays down all
business policies and is
responsible for the efficiency of
$anage$ent. 6he stoc%holders
have no right to interfere with the
board's exercise of its powers and
functions except where the law
expressly gives the$ the final
say, li%e in cases of re$oval of a
director, a$end$ent of articles of
incorporation, and other $a"or
changes (0f !") 8$) 8#).
Gimitations on the 9:41s
authority or powers:
% Action by 'Fs in order to
elect a 9:4
24
$ 0ertain act of the corp that
require 2oint action of the
'Fs and 9:4
6heir resolutions on $atters
other than the exceptions are
legally not effective nor binding
and $ay be treated as $erely
advisory or $ay be totally
disregarded.
JGnless Htherwise 0rovidedK *
$ay pertain to instances where
a $anage$ent contract is
entered hence corporate powers
are exercised by the $anaging
co$pany and not the board
Authority of 9:4 can be
delegated to agents; officers;
committees (A:6) statutes) by-
laws) resolutions) (M. 0huck v
Iong Gi 3o) 8" 3hil "5+)
4elegation may be e?plicit)
implicit) or based on e?igencies
of the business (cf 9oard of
Giquidators v Ialaw)
The 9:4 may delegate its
corporate powers to either an
e?ecutive committee or officials
or contracted managers The
delegation) e?cept for the
e?ecutive committee) must be
for specific purposes The
delegation makes the officers
agents of the corporation >or
such officers to be deemed fully
clothed by the corporation to
e?ercise a power of the 9:4)
the latter must specially
authori<e them to do so (A9'-
09- 9roadcasting 0orp v 0A)
%&&&)
6he directors or trustees shall
not act individually nor
separately but as a body in a
lawful $eeting. Contracts
entered into without a for$al
board resolution does not bind
the corporation except when
$a"ority of the board has
%nowledge of the contract and
the contract benefited the
corporation.
;irectors owe their duties to
corporation as a whole rather
than to individual shareholders
of classes of shareholders
9usiness Kudgment *ule
- 'ec $# embodies the essence
of the Dbusiness 2udgment rule)E
that unless otherwise provided
in the 0ode) all corp powers and
prerogatives are vested directly in
the 9:4 0onsequently) the rule
has two consequences:
a) The resolution) contracts and
transactions of the 9:4)
cannot be overturned or set
aside by the 'Fs or members
and not even by the courts
under the principle that the
business of the corp has been
left to the hands of the 9:4;
and
b) 4irectors and duly authori<ed
officers cannot be held
personally liable for acts or
contracts done with the
e?ercise of their business
2udgment
/?ceptions:
o Chen the 0orp 0ode
e?pressly provides
otherwise;
o Chen the directors or
officers acted with fraud)
gross negligence or in bad
faith; and
o Chen directors or officers
act against the corp in
conflict-of-interest situation
2. *equirements
Oualifying share (2))I 3very
director $ust own at least one (!)
share of the capital stoc% of the
corporation of which he is a
director, which share shall stand
in his na$e on the boo%s of the
corporation. Any director who
ceases to be the owner of at least
one (!) share of the capital stoc%
of the corporation of which he is a
director shall thereby cease to be
a director.
:ee vs. CA
&u$$ons was served upon +ee and +acdao,
president and vice president of A+1A. 6he
two, however contended that they are no
longer corporate officers of the corporation
because of the voting trust agree$ent
executed to ;:0, hence, not authorized to
receive su$$ons. &u$$ons $ust be
served upon ;:0
(3+;
3xecution of a voting trust creates a
dichoto$y between eDuitable or beneficial
ownership of the corporate shares of a
stoc%holder and legal title thereto. 6he
25
change fro$ the old code to the new code
with respect to Dualifying shares of directors
is the o$ission of the phrase Jin his own
rightK pertaining to beneficial ownership of
shares. 4n the new corpo code, persons $ay
be directors if they are stoc%holders although
not Jin their own rightK hence includes
trustees. 6here is clear indication that to be
a director, what is $aterial is legal title and
not beneficial ownership. -ith the execution
of the voting trust agree$ent, +ee and
+acdao were divested of their legal title to
their shares hence can no longer be directors
and are no longer corporate officers.
:ecause of this, they are not authorized to
receive su$$ons
>eDuire$ents#;isDualifications
o >esidence (2)) I a
$a"ority of the directors or
trustees of all corporations
organized under this Code
$ust be residents of the
0hilippines
o /ationality * no
reDuire$ent for citizenship
of a director or trustee so
even an alien $ay be
elected as such excepts in
business activities totally
closed to aliens
o ;isDualification of directors,
trustees or officers (2@)
Convicted by final
"udg$ent of an offense
punishable by
i$prison$ent for a
period exceeding six (A)
years, or
?iolation of this Code
co$$itted within five
(C) years prior to the
date of his election or
appoint$ent
:yIlaws $ay provide
for additional
Dualifications#disDualific
ations as long as such
additional
Dualifications#disDualific
ations shall not $odify
reDuire$ents as
prescribed in the
corporation code or be
in conflict with such
prescribed reDuire$ents
(!8,(())
o -ote: To sit on the 9:4 is
not a vested right
:wnership of shares does not
automatically equate to a
seat in the 9:4
o 6n widely-held corporations)
'/0 mandates the presence
of at least $ or $5O of its
board si<e) whichever is
lesser) independent directors
('ecurities *egulation 0ode)
!#+ and =uidelines on the
-omination and /lection of
6ndependent 4irectors) 7emo
0irc -o %") $55$)
6er$ ;irectors shall hold office
for ! year. (owever, incu$bent
directors shall continue to be
directors#trustees as long as their
successors have not been elected
and Dualified (2))
). Fow elected (27)
8anner of election
o 6here $ust be present in
person or by representative
capital stoc% # $e$ber
o 4n any for$5 or $ust be by
ballot when reDuested by any
voting stoc% holder or
$e$ber
o ?oting $ay be in person or
by proxy
At all elections of directors or
trustees, there $ust be present
owners of a $a"ority of the
outstanding capital stoc%, or if
there be no capital stoc%, a
$a"ority of the $e$bers entitled
to vote.
3very stoc%holder entitled to vote
shall have the right to vote the
nu$ber of shares of stoc%
outstanding, at the ti$e fixed in
the byIlaws, in his own na$e on
the stoc% boo%s of the
corporation, or where the byIlaws
are silent, at the ti$e of the
election
6i$e to deter$ine voting right
o As per share standing in one's
na$e at the ti$e fixed by the
:yI+aws
o -here :yIlaws silent, at ti$e
of election
26
Cu$ulative voting * A syste$ of
voting designed to increase the
voting power of $inority
stoc%holders in the election of
corporate directors when $ore
than one director is to be
elected.
o A stoc%holder shall have as
$any votes as he has
nu$ber of shares ti$es the
nu$ber of directors up for
election
o Cu$ulative voting is
allowed for election of
$e$bers of the :oard in a
stoc% corporation. 8e$bers
of the :oard in a /onIstoc%
Corporation shall not be
voted cu$ulatively unless
specifically provided for in
the :yIlaws.
o 6he total nu$ber of votes
cast by a stoc%holder shall
not exceed the nu$ber of
shares owned by hi$ as
shown in the boo%s of the
corporation $ultiplied by
the whole nu$ber of
directors to be elected
o ,ives the $inority an
opportunity to elect a
representative to the :H;.
Cannot itself give the
$inority control of
corporate affairs but $ay
affect and li$it the extent
of $a"ority's control
o Theoretically) this allows
the minority block to
dominate the election of
9:4 Fowever) the
minority still needs the
ma2ority in order to
constitute a quorum
o :yIlaws cannot provide
against cu$ulative voting
since this right is $andated
in 27 (mandatory in a
stock corporation B
statutory right of 'Fs)
o 6n determining how many
shares are needed to vote
for the desired P of
directors (necessary when
one campaigns for pro?ies))
the following formula may
be followed: Q (outstanding
shares) ? (desired P of
directors) R % L ; Q (total P
of directors) R % L
o Gnless otherwise provided in
the AH4 or in the byIlaws,
$e$bers of corporations
which have no capital stoc%
$ay cast as $any votes as
there are trustees to be
elected but $ay not cast
$ore than one vote for one
candidate.
Candidates receiving the highest
nu$ber of votes shall be declared
elected.
Any $eeting of the stoc%holders
or $e$bers called for an election
$ay ad"ourn fro$ day to day or
fro$ ti$e to ti$e but not sine die
or indefinitely if
o 1or any reason, no election is
held, or
o 4f there are &(s not present
or represented by proxy at
the $eeting, the owners of a
capital stoc%, or if there be no
capital stoc%, a $a"ority of
the $e$ber entitled to vote.
&ince the provision reDuires
presence, $eeting of stoc%holders
is reDuired
7. Fow *emoved (2B)
Any director or trustee of a
corporation $ay be re$oved fro$
office by a vote of the
stoc%holders holding or
representing 2#) of the
outstanding capital stoc%, or if the
corporation be a /onIstoc%
Corporation, by a vote of 2#) of
the $e$bers entitled to vote
(with or without cause).
/ote &uch re$oval shall ta%e
place either at a regular $eeting
or at a special $eeting called for
the purpose of re$oval of
;irectors or 6rustees, with
previous notice of the ti$e and
place of such $eeting, as well as
the intention to propose such
re$oval. 4f the officers refuse to
call a $eeting to consider the
re$oval of the ;irector, it $ay be
called at the instance of any
stoc%holder or $e$ber, but with
due notice.
A director elected because of the
vote of $inority stoc%holders who
united in cu$ulative voting
cannot be re$oved without cause
2
6he board cannot re$ove a
director or trustee as $e$ber of
the board
!oxas v Dela !osa &'(-3*
:inalbagan 3state 4nc is engaged in the $fg
of raw sugar fro$ canes. 0ossessors of
$a"ority of shares for$ed a voting trust
co$posed of ) trustees. 6rustees now
controlled ),FFF out of C,CFF shares.
?oting trust was able to vote :H;, without
opposition fro$ $inority.
6rustees soon wanted to re$ove the
directors they had elected, even if their
ter$s had not yet expired. ?oting trust
caused &3C to issue notice for a special gen
$tg to elect a new :H;.
(eld Gnder the law, directors can only be
re$oved by vote of &(s representing at least
2#) of the subscribed capital stoc% entitled to
vote. -hen the purpose is to re$ove
directors, it $ust be stated in call for
$eeting. :ut vacancies in :H; can be filled
by $ere $a"ority vote.
6rust does not have clear 2#) $a"ority.
?oting trust should have stated in notice that
purpose was to re$ove present :H;.
8eeting called by trustees en"oined.
4n this case, re$oval was sought to be done
by replacing directors
:G6 can't re$ove thru election of new
officers bec directors have fixed ter$ of
office
-ote: !$+ need not be resorted to in all
instances 6f removal is for cause
(mismanagement or abuse of powers) the
remedy of 'Fs shall be:
a) *eceivership;
b) 6n2unction if the act has not yet
been done;
c) 4issolution if abuse amounts to a
ground for quo warranto but 'ol
=en refuses to act;
d) 4erivative suit or complaint filed
with the *T0;
e) 0riminal action

C. Aacancies (2E)
?acancies in the :oard of ;irectors
or 6rustees 8A= be filled by a vote
of at least a $a"ority of the
re$aining directors or trustees5 if
still constituting a Duoru$
4n the following cases, the
stoc%holders or $e$bers shall fill the
vacancy (*/AN)
a. -hen the
re$aining directors or trustees do
not constitute a Duoru$5
b. 4f the vacancy
is caused by the re$oval of a
director or trustee
c. 4f the vacancy
is caused by the expiration of
ter$5 and
d. 4n case of
increase in the nu$ber of
directors or trustees as a result of
an a$end$ent of the articles
authorizing such increase
A. 0ompensation ()F)
4n the absence of any provision in
the :yIlaws fixing their
co$pensation, the directors shall
not receive any co$pensation,
except for reasonable per die$s.
Any such co$pensation (other
than per die$s) $ay be granted
to the directors by the vote of the
stoc%holders representing at least
a $a"ority of the outstanding
capital stoc% at a regular or
special stoc%holder's $eeting.
+i$it 4n no case shall the total
yearly co$pensation of directors,
as such directors, exceed !FM of
the net inco$e before inco$e tax
of the corporation during the
preceding year.
5estern 2nstitute of ;echnology v 8alas
4n a $eeting of the :oard of 6rustees of
-estern 4nstitute of 6echnology, a resolution
was passed granting $onthly co$pensation
to officers respondents who are $e$bers of
the :oard. 6he resolution is valid. 6he
prohibition with respect to granting
co$pensation to corporate directors#trustees
under &ection )F of the Corporation Code is
not violated since the co$pensation is being
given to private respondents in their capacity
as officers of -46 and not as board
$e$bers.
@. Fow corporate powers e?ercised *
:oard $ust act as a body in a
$eeting
>eDuisites of board $eetings
8eeting of the :oard duly
asse$bled
28
3xistence of Duoru$
;ecision of the $a"ority of the
Duoru$ duly asse$bled
(3NC3064H/ 3lection of
directors * reDuires a vote of
$a"ority of all the $e$bers of
the board)
-(3/S (C))
>egular $eetings of directors or
trustees shall be held $onthly,
unless the byIlaws provide
otherwise.
&pecial $eetings of the board of
directors or trustees $ay be
held at any ti$e upon the call of
the president or as provided in
the byIlaws.
-(3>3S (C))
8eetings of directors or trustees of
corporations $ay be held anywhere
in or outside of the 0hilippines,
otherwise.
-(H 8A= A663/;S
6he $e$bers of the :oard
the$selves5 directors in :oard
$eetings cannot be represented or
voted by proxies.
-(H 0>3&4;3&S (C7)
6he president shall preside at all
$eetings of the directors or trustee,
otherwise
/H64C3 >3OG4>383/6& (C))
/otice of regular or special
$eetings stating the date, ti$e
and place of the $eeting $ust
be sent to every director or
trustee at least one (!) day
prior to the scheduled $eeting,
unless otherwise provided by
the byIlaws.
A director or trustee $ay
waive this reDuire$ent, either
expressly or i$pliedly
OGH>G8 >3OG4>383/6& (2C)
Gnless the articles of incorporation
or the byIlaws provide for a greater
$a"ority, a $a"ority of the nu$ber
of directors or trustees as fixed in
the articles of incorporation shall
constitute a Duoru$ for the
transaction of corporate business, and
every decision of at least a $a"ority of
the directors or trustees present at a
$eeting at which there is a Duoru$
shall be valid as a corporate act,
except for the election of officers
which shall reDuire the vote of a
$a"ority of all the $e$bers of the
board.
:. CH>0H>A63 H114C3>& A/; A,3/6&
!. 7inimum set of officers and
Nualification (2C)
4$$ediately after their election,
the directors of a corporation
$ust for$ally organize the
election of
a. A president, who shall be a
director
b. A treasurer who $ay or $ay
not be a director
c. A secretary who shall be a
resident and citizen of the
0hilippines, and
d. &uch other officers as $ay be
provided for in the :yIlaws
Any two (2) or $ore positions
$ay be held concurrently by the
sa$e person, except that no one
shall act as president and
secretary or as president and
treasurer at the sa$e ti$e.
Additional qualifications of officers
may be provided for in the by-
laws (!8,(())
4ng%ingco v. ":!C
-here the :yIlaws of the condo$iniu$
corporation specifically includes the position
of J&uperintendent#Ad$inistratorK in a roster
of corporate officers, then such position is
clearly a corporate officer position and issues
of reinstate$ent would be within the
"urisdiction of the &3C and not the /+>C.
;abaug v. ":!C
-hen the :yIlaws of the corporation provide
that one of the powers of the :oard of
6rustees is Jto appoint a 8edical ;irector,
Co$ptroller#Ad$inistration, Chief of
&ervices, and such other officers as it $ay
dee$ necessary and prescribe their powers
and dutiesK then such specifically designated
positions should be considered Jcorporate
officersK positionsV.
2. 4isqualifications (2@)
2!
/o person convicted by final
"udg$ent of an offense punishable
by i$prison$ent for a period
exceeding six (A) years, or a
violation of this Code co$$itted
within five (C) years prior to the
date of his election or appoint$ent,
shall Dualify as a director, trustee or
officer of any corporation.
# Authority of corporate officers
6he authority of corporate
officers to bind the corporation
is usually not considered
inherent in their office but is
derived fro$ law, the corporate
byIlaws or by delegation fro$
the :H; either expressly or
i$pliedly by habit, custo$, or
acDuiescence in the general
course of business
=en rule A person dealing with
a corporate officer is put on
inDuiry as to the scope of the
latter's authority but an
innocent person cannot be
pre"udiced if he had the right to
presu$e under the
circu$stances the authority of
the acting officers.
People?s Aircargo vs. CA
Corporate 0resident 0unsalan solicited a
proposal fro$ respondent &ano for the
preparation of a feasibility study. &ano
prepared feasibility study and was paid for it.
Another proposal for the preparation of
operations $anual was solicited fro$ &ano
and was accepted by 0unsalan. 8anual was
prepared and approved by Co$$issioner of
:ureau of Custo$s, se$inarIwor%shops
conducted but pay$ent was not $ade
(3+; Corporation is liable to &ano for
services rendered. ,eneral rule is that
absent the authority fro$ the :oard of
;irectors, no person, not even its officers,
can bind the corporation. (owever, acts of
person in behalf of the corporation $ay be
ratified. -hen corporation previously
allowed 1irst Contract, it gave president
apparent authority to execute in its behalf
the other contract, and is estopped fro$
denying such authority. Corporation
accepted operations $anual and the
se$inars and have already benefited fro$
the contract. 6his ratifies the act of the
president and $a%es it binding upon the
corporation. 0resident is presu$ed to have
authority to act within the do$ain of the
general ob"ectives of the corporation
!ural $an% of +ilaor vs. 4cfemia, !
'073C3, Feb C, -)))
-hen a ban%, by its acts and failure to act,
has clearly clothed its $anager with
apparent authority to sell an acDuired asset
in the nor$al course of business, it is legally
obliged to confir$ the transaction by issuing
a board resolution to enable the buyers to
register the property in their na$es. 4t has a
duty to perfor$ necessary and lawful acts to
enable the other parties to en"oy all benefits
of the contract which it had authorized.
C. :HA>; CH8846633&
6he byIlaws of a corporation $ay
create an executive co$$ittee,
co$posed of not less than three
$e$bers of the board, to be
appointed by the board. ()C)
&aid co$$ittee $ay act, by
$a"ority vote of all its $e$bers, on
such specific $atters within the
co$petence of the board, as $ay be
delegated to it in the byIlaws or on a
$a"ority vote of the board, except
with respect to
o Approval of any action for which
shareholdersR approval is also
reDuired5
o 6he filling of vacancies in the
board5
o 6he a$end$ent or repeal of byI
laws or the adoption of new byI
laws5
o 6he a$end$ent or repeal of any
resolution of the board which by
its express ter$s is not so
a$endable or repealable5 and
o A distribution of cash dividends to
the shareholders.
Cannot go as far as to render the
:H; powerless and free fro$ all
responsibilities i$posed on it by law
8ust be provided in the byIlaws
and $ust be co$posed of not less
than ) $e$bers of the board
3ssential the executive co$$ittee
acts by $a"ority vote of all the
$e$bers
;. &6HCP(H+;3>& H> 838:3>&
30
&toc%holders action is needed in $a"or
changes(!") in the corporation which
would affect their contract with the
corporation and although such action is
usually initiated by the board, it is not
sufficient to give the$ effect.
&toc%holders or $e$bers approval
expressed in a $eeting duly called and
held for the purpose is still necessary.
3xception
Corporations $ay be bound
by unani$ous agree$ent of its
stoc%holders although expressed
elsewhere than at a $eeting
!. Reqirements of stoc!holders"
or mem#ers meetin$ %notice and
qorm&
-(3/S (CF)
>egular $eetings of stoc%holders or
$e$bers shall be held annually on a
date fixed in the byIlaws, or if not
so fixed, on any date in April of
every year as deter$ined by the
board of directors or trustees
-(3>3S
&toc%holderRs or $e$berRs
$eetings, whether regular or
special, shall be held in the city
or $unicipality where the
principal office of the
corporation is located, and if
practicable in the principal office
of the corporation 0rovided,
6hat 8etro 8anila shall, for
purposes of this section, be
considered a city or
$unicipality. (C!)
8e$bers of nonIstoc%
corporations $ay provide in byI
laws that $eetings $ay be held
any place even outside the place
where the principal office is
located provided proper notice is
sent and that it is within the
0hilippines (E))
-(H 8A= A663/; A/; ?H63S
&toc%holders $ay attend and vote in
person, or by proxy.
a. 0ledgors, $ortagors, executors,
receivers and ad$inistrators
(CC)
4n case of pledged or
$ortgaged shares in stoc%
corporations, the pledgor or
$ortgagor shall have the
right to attend and vote at
$eetings of stoc%holders
G/+3&&, the pledgee or
$ortgagee is expressly given
by the pledgor or $ortgagor
such right in writing which is
recorded on the appropriate
corporate boo%s.
3xecutors, ad$inistrators,
receivers, and other legal
representatives duly
appointed by the court $ay
attend and vote in behalf of
the stoc%holders or $e$bers
without need of any written
proxy.
b. <oint owner of stoc%s (CA)
6he consent of all the coIowners
shall be necessary in order to
vote, G/+3&& there is a written
proxy, signed by all the coI
owners, authorizing one or so$e
of the$ or any other person to
vote such share or shares
0>H?4;3;, 6hat when the shares
are owned in an Qand#orQ capacity
by the holders thereof, any one of
the "oint owners can vote said
shares or appoint a proxy
therefor.
c. 6reasury shares (0f !8%) (, "+)
;efinition (E) 6hese are
shares of stoc% which have
been issued and fully paid for
but subseDuently reIacDuired
by the issuing corporation by
purchase, rede$ption,
donation or through so$e
other lawful $eans. &uch
shares $ay again be disposed
of for a reasonable price fixed
by the :H;.
6reasury shares shall have no
voting rights as long as such
shares re$ain in the
6reasury. (C@)
-(H 0>3&4;3&S
6he president shall preside at all
$eetings of of the stoc%holders or
$e$bers, unless the byIlaws
provide otherwise.
-hen there is no person
authorized to call a $eeting, the
&3C, upon petition of a
stoc%holder or $e$ber on a
showing of good cause therefor,
$ay issue an order to the
31
petitioning stoc%holder or
$e$ber directing hi$ to call a
$eeting of the corporation by
giving proper notice reDuired by
this Code or by the byIlaws.
6he petitioning stoc%holder or
$e$ber shall preside thereat
until at least a $a"ority of the
stoc%holders or $e$bers
present have been chosen one
of their nu$ber as presiding
officer. (C7)
/H64C3 >3OG4>383/6& (CF)
-ritten notice of regular
$eetings shall be sent to all
stoc%holders or $e$bers of
record at least two (2) wee%s
prior to the $eeting, unless a
different period is reDuired by
the byIlaws
-ritten notice of special
$eetings shall be sent at least
one (!) wee% prior to the
$eeting, unless otherwise
provided in the byIlaws.
/otice of any $eeting $ay
be waived, expressly or
i$pliedly, by any stoc%holder or
$e$ber
1ailure to give notice would
render a $eeting voidable.
Attendance to a $eeting
despite want of notice will be
dee$ed i$plied waiver
All proceedings had and any
business transacted at any
$eeting of the stoc%holders or
$e$bers, if within the powers
or authority of the corporation,
shall be valid even if the
$eeting be i$properly held or
called, provided all the
stoc%holders or $e$bers of the
corporation are present or duly
represented at the $eeting.
(C!)
OGH>G8 >3OG4>383/6& (C2)
Gnless otherwise provided
for in the Code or in the byI
laws, a Duoru$ shall consist of
the stoc%holders representing a
capital stoc% or a $a"ority of the
$e$bers in the case of nonI
stoc% corporations.
:yIlaws $ay provide for a
greater or lesser Duoru$
(!8,(#))
-here Duoru$ is present at
the start of a lawful $eeting,
stoc%holders present cannot
without "ustifiable cause brea%
the Duoru$ by wal%ing out fro$
said $eeting so as to defeat the
validity of any act proposed and
approved by the $a"ority
(Kohnston v Kohnston) %&"( 0A
decision)
-(= A663/; 83364/,&S
To make substantial changes
To e?ercise control
To be apprised of events
To elect 9:4
To confirm actions requiring
confirmation

2. Corporate Acts Reqirin$
Approval of ALL Stoc!holders
(including nonIvoting shares)
a. A
83/;83/6 H1 A>64C+3& H1
4/CH>0H>A64H/ * discussed in
Chapter N4?
b. 3N
63/; H> &(H>63/ CH>0H>A63
63>8 * discussed in Chapter N4?
c. 4/
C>3A&3 H> ;3C>3A&3 H1
CA046A+ &6HCP * discussed in
Chapter N4?
d. 4/
CG>>4/,, C>3A64/, H>
4/C>3A&4/, :H/;3;
4/;3:63;/3&& * discussed in
Chapter N4
e. &A
+3, +3A&3, 8H>6,A,3 H> H6(3>
;4&0H&464H/ H1 &G:&6A/64A++=
A++ CH>0H>A63 A&&36& *
discussed in Chapter N?44
f. 4/
?3&683/6 H1 1G/;& 4/
A/H6(3> CH>0H>A64H/ H>
:G&4/3&& (72)
A private corporation
$ay invest its funds in any
other corporation or business
or for any purpose other than
the pri$ary purpose for which
it was organized
32
Approval, voting
and notice reDuire$ent
!) 8a"ority of the board of
directors or trustees
and
2) >atified by the
stoc%holders
representing at least
twoIthirds (2#)) of the
outstanding capital
stoc%, or by at least two
thirds (2#)) of the
$e$bers in the case of
nonIstoc% corporations,
at a stoc%holderRs or
$e$berRs $eeting duly
called for the purpose.
)) -ritten notice of the
proposed invest$ent
and the ti$e and place
of the $eeting shall be
addressed to each
stoc%holder or $e$ber
at his place of residence
as shown on the boo%s
of the corporation and
deposited to the
addressee in the post
office with postage
prepaid, or served
personally
Appraisal right I
any dissenting stoc%holder
shall have appraisal right
-hen &( approval
not necessaryI where the
invest$ent by the
corporation is reasonably
necessary to acco$plish its
pri$ary purpose as stated
in the AH4. >ules in case a
corporation will invest its
funds in another corporation
o 4f it is the sa$e
purpose or incidental or
related to its pri$ary
purpose, the board can
invest the corporate
fund without the
consent of the
stoc%holders. -hat is
reDuired is only the
vote of the $a"ority of
the :H;. /o appraisal
right
o 4f the invest$ent is in
another corporation of
different business or
purpose, the affir$ative
vote of $a"ority of the
board consented by 2#)
H& capital stoc% is
reDuired
o Apparent conflict: !#((,)
limits corp powers to
those reasonably and
necessarily required 9ut
!8$ implies that can
invest in another
business as long as
there1s $;# vote
o Accdg to 0ampos) if
articles of incorp provide
that can invest in another
business) only $;# vote
needed :therwise)
should amend articles
first
g. A;
H064H/, A83/;83/6 A/;
>303A+ H1 :=I+A-& (7B)
?oting >eDuire$ent :H; or
:H6 by a $a"ority vote and
the owners of at least a
capital stoc%, or $a"ority of
the $e$bers of a nonIstoc%
corporation, at a regular or
special $eeting duly called
for the purpose, $ay a$end
or repeal any byIlaws or
adopt new byIlaws
;elegation of power to a$end
the :H; 6he owners of twoI
thirds (2#)) of the
outstanding capital stoc% or
$e$bers in a nonIstoc%
corporation $ay delegate to
the board of directors or
trustees the power to a$end
or repeal any byIlaws or
adopt new byIlaws
>evocation of the delegation
of power to a$end Any
power delegated to the board
of directors or trustees to
a$end or repeal any byIlaws
or adopt new byIlaws shall be
considered as revo%ed
whenever stoc%holders
owning or representing a
capital stoc% or a $a"ority of
the $e$bers in nonIstoc%
corporations, shall so vote at
a regular or special $eeting
-henever any a$end$ent or
new byIlaws are adopted,
33
such a$end$ent or new
byIlaws shall be attached to
the original byIlaws in the
office of the corporation,
and a copy thereof, duly
certified under oath by the
corporate secretary and a
$a"ority of the directors or
trustees, shall be filed with
the &3C the sa$e to be
attached to the original
articles of incorporation and
original byIlaws.
6he a$ended or new byI
laws shall only be effective
upon the issuance by the
&ecurities and 3xchange
Co$$ission of a
certification that the sa$e
are not inconsistent with
this Code.
h. 8
3>,3> A/; CH/&H+4;A64H/ *
discussed in Chapter N?44
i. ;
4&&H+G64H/ H1 6(3
CH>0H>A64H/ * discussed in
Chapter N?4
). 'ther instances reqirin$
stoc!holders" action (voting
shares only)
a.
;3C+A>A64H/ H1 &6HCP
;4?4;3/;& * discussed in
Chapter N444
b.
8A/A,383/6 CH/6>AC6& (77) *
any contract whereby a
corporation underta%es to
$anage or operate all or
substantially all of the business
of another corporation, whether
such contracts are called service
contracts, operating agree$ents
or otherwise
Approval and Aoting
*equirement:
Approval by the
board of directors, and
Approval by
stoc%holders owning at least
the $a"ority of the
outstanding capital stoc%, or
by at least a $a"ority of the
$e$bers of both the
$anaging and the $anaged
corporation
2#) vote reDuired
when
o -here a stoc%holder or
stoc%holders representing
the sa$e interest of both
the $anaging and the
$anaged corporations
own or control $ore than
oneIthird (!#)) of the
total outstanding capital
stoc% entitled to vote of
the $anaging
corporation5 or
o -here a $a"ority of the
$e$bers of the :H; of
the $anaging corporation
also constitute a $a"ority
of the $e$bers of the
:H; of the $anaged
corporation
Term of management contract:
five years
c.
14N4/, CH/&4;3>A64H/ H1 /HI0A>
&(A>3& (A2) * 6he issued price
of noIpar value shares $ay be
fixed in the AH4 or by the :H;
pursuant to authority conferred
upon it by the AH4 or the byIlaws,
or in the absence thereof, by the
capital stoc% at a $eeting duly
called for the purpose.
d.
14N4/, CH803/&A64H/ H1
;4>3C6H>& ()F) * Any such
co$pensation (other than per
die$s) $ay be granted to the
directors by the vote of the
capital stoc% at a regular or
special stoc%holder's $eeting.
7. Appraisal ri$ht
Hne of the ways to get out of the
corporation. 6he other way is to sell the
shares of stoc%.
a. ;efinition (B!)
6his is a re$edy available to a
stoc%holder who dissented and
voted against certain
extraordinary $atters to withdraw
34
or get out of the corporation by
de$anding pay$ent of the
value of his shares
b. 4nstances of appraisal right
(B!)
a) 4n case any a$end$ent to
the articles of incorporation
which has the effect of (cf
!%")
b) changing or restricting the
rights of any stoc%holder or
class of shares, or
c) authorizing preferences in
any respect superior to
those of outstanding shares
of any class, or
d) extending or shortening the
ter$ of corporate existence
(cf !#,)
e) 4n case of sale, lease,
exchange, transfer,
$ortgage, pledge or other
disposition of all or
substantially all of the
corporate property and
assets as provided in the
Code (cf !85)5 and
f) 4n case of $erger or
consolidation
g) 4n case of invest$ent of
corporate funds in another
corporation or business or
for any other purpose (72)
c. -hat are the reDuire$ents for
the successful exercise of
appraisal rightS (&ection B2 and
BA)
:y $a%ing a written
de$and on the corporation
within thirty ()F) days after
the date on which the vote
was ta%en for pay$ent of
the fair value of his shares
o 1ailure to $a%e the
de$and within such
period shall be dee$ed
a waiver of the
appraisal right.
:y surrendering the
certificate or certificates of
stoc%, the corporation shall
pay the fair value thereof as
of the day prior to the date
on which the vote was
ta%en, excluding any
appreciation or depreciation
in anticipation of such
corporate action (provided
that the proposed corp action
is implemented or affected).
4f within a period of sixty (AF)
days fro$ the date the
corporate action was
approved by the
stoc%holders, the withdrawing
stoc%holder and the
corporation cannot agree on
the fair value of the shares, it
shall be deter$ined and
appraised by three ())
disinterested persons
o Hne of who$ shall be
na$ed by the
stoc%holder, another by
the corporation, and the
third by the two thus
chosen
6he findings of the $a"ority
of the appraisers shall be final
6he award shall be paid by
the corporation within thirty
()F) days after such award is
$ade
/o pay$ent shall be $ade to
any dissenting stoc%holder
unless the corporation has
unrestricted retained earnings
in its boo%s to cover such
pay$ent (0f !8%) *atio: to
protect the creditors and the
remaining 'Fs
Gpon pay$ent by the
corporation of the agreed or
awarded price, the
stoc%holder shall forthwith
transfer his shares to the
corporation.
d. 3ffect of de$and and ter$ination
of right (B))
1ro$ the ti$e of de$and for
pay$ent of the fair value of a
stoc%holderRs shares until either
(!) the abandon$ent of the
corporate action involved or (2)
the purchase of the said shares
by the corporation, all rights
accruing to such shares, including
voting and dividend rights, shall
be suspended, 3NC306 the right of
such stoc%holder to receive
pay$ent of the fair value thereof,
0>H?4;3;, if the dissenting
stoc%holder is not paid the value
of his shares within )F days after
the award, his voting and
dividend rights shall i$$ediately
be restored.
35
e. -hen right to pay$ent ceases
(B7)
/o de$and for pay$ent
$ay be withdrawn unless
the corporation consents
thereto.
4nstances when right to
pay$ent ceases
!) 4f such de$and for
pay$ent is withdrawn
with the consent of the
corporation
2) 4f the proposed
corporate action is
abandoned or rescinded
by the corporation
)) 4f the proposed
corporate action
disapproved by the &3C
where such approval is
necessary,
7) 4f the &3C deter$ines
that such stoc%holder is
not entitled to the
appraisal right
4n such instances, his status
as a stoc%holder shall be
restored, and all dividend
distributions which would
have accrued on his shares
shall be paid to hi$.
f. -ho bears costs of appraisal
(BC)
,enerally, it shall be borne
by the corporation
3xception by the &(, when
the fair value ascertained by
the appraisers is
approxi$ately the sa$e as
the price which the
corporation $ay have
offered to pay the &(,
4n the case of an action to
recover such fair value, all
costs and expenses shall be
assessed against the
corporation, unless the
refusal of the &( to receive
pay$ent was un"ustified.
g. /otation on certificates5 rights
of transferee (BA)
-ithin ten (!F) days after
de$anding pay$ent for his
shares, a dissenting &(
shall sub$it the certificates
of stoc% representing his
shares to the corporation for
notation thereon that such
shares are dissenting shares.
(is failure to do so shall, at
the option of the corporation,
ter$inate his rights.
3ffect of transfer of
certificates bearing notation
!) 6he rights of the
transferor as a dissenting
stoc%holder shall cease5
2) 6he transferee shall have
all the rights of a regular
stoc%holder5 and
)) All dividend distributions
which would have
accrued on such shares
shall be paid to the
transferee.
-ote: right to vote: only if subscription is
not delinquent (!,%)
Devices Affecting Control
,eneral >ule 3xtent of control is proportional
to the nu$ber of shares owned by the &(
3xceptions proxy device, voting trust
agree$ents, pooling and voting agree$ents,
cu$ulative voting, classification of shares,
restriction on transfer of shares, additional
Dualifications for directors, founder's shares,
$anage$ent contracts, and unusual Duoru$
and voting reDuire$ents
!. 0>HN= (CB,
cf !$5) 'ec *egulation 0ode)
&toc%holders and $e$bers $ay vote
in person or by proxy in all $eetings
of stoc%holders or $e$bers.
>eDuire$ents of proxies
a. 4n writing (oral proxies are
not valid)
b. &igned by the stoc%holder or
$e$ber
c. 1iled before the scheduled
$eeting with the corporate
secretary
9y-laws can also impose additional
requirements (e? 7ust be notari<ed)
Gnless otherwise provided in the
proxy, it shall be valid only for the
$eeting for which it is intended. /o
proxy shall be valid and effective for a
period longer than five (C) years at
any one ti$e (continuing proxy).
*ight of pro?y can be waived only for
close corporations (!+&)
8eaning of pro?y
36
a. 0erson duly authorized by
stoc%holder or $e$ber to vote
in his behalf in a &(s' or
$e$bers' $eeting. 0roxy is an
agent for a special purpose thus
the general rules of agency
would nor$ally apply to the
relationship created by proxy
b. 1or$al authority given by
the holder of the stoc% who has
the right to vote it to another to
exercise the voting rights of the
for$er
c. 4nstru$ent or docu$ent
which evidences the authority of
the agent
1ailure to co$ply with reDuire$ents
will render proxy void and
ineffective.
To what e?tent does the pro?y
holder e?ercise his discretionH
/?tent of authority given by the 'F
0roxy is revocable even when it is
expressly provided to be irrevocable
unless it is coupled with an interest
>evocation $ay be $ade orally, in
writing or i$plied
a. Appearance of the
stoc%holder at the $eeting will
ter$inate the proxy
b. ;eath of the stoc%holder
will also ter$inate the proxy
2. ?H64/,
6>G&6(CE)
;efinition An arrange$ent
created by one or $ore stoc%holders
for the purpose of conferring upon a
trustee or trustees the right to vote
and other rights pertaining to the
shares for a period not exceeding
five (C) years at any ti$e. 6he
arrange$ent is e$bodied in a
docu$ent called a voting trust
agree$ent (?6A)
A voting trust, which is
specifically reDuired as a condition in
a loan agree$ent, $ay be for a
period exceeding five (C) years but
shall auto$atically expire upon full
pay$ent of the loan
/ssence: separation of
ownership and voting rts
>eDuire$ents of a ?6A
a. 4n writing
b. /otarized
c. &hall specify the ter$s and
conditions thereof
d. Certified copy of such agree$ent
shall be filed with the corporation
and with the &3C
o H6(3>-4&3, said agree$ent is
ineffective and unenforceable
0rocedure
a. 6he certificate or certificates
of stoc% covered by the voting
trust agree$ent shall be
cancelled and new ones shall be
issued in the na$e of the trustee
or trustees stating that they are
issued pursuant to said
agree$ent.
b. 4n the boo%s of the
corporation, it shall be noted that
the transfer in the na$e of the
trustee or trustees is $ade
pursuant to said voting trust
agree$ent.
c. 6he trustee or trustees shall
execute and deliver to the
transferors voting trust
certificates, which shall be
transferable in the sa$e $anner
and with the sa$e effect as
certificates of stoc%.
>ight to inspect ?6A 6he voting
trust agree$ent filed with the
corporation shall be sub"ect to
exa$ination by any stoc%holder in the
sa$e $anner as any other corporate
boo% or record. 6he transferor and the
trustee or trustees $ay exercise the
right of inspection of all corporate
boo%s and records in accordance with
the provisions of this Code.
Any other stoc%holder $ay
transfer his shares to the sa$e
trustee or trustees upon the ter$s
and conditions stated in the voting
trust agree$ent, and thereupon shall
be bound by all the provisions of said
agree$ent.
>estriction /o ?6A shall be
entered into for the purpose of
circu$venting the law against
$onopolies and illegal co$binations in
restraint of trade or used for purposes
of fraud.
Auto$atic expiration of rights
under the ?6A Gnless expressly
renewed, all rights granted in a voting
trust agree$ent shall auto$atically
expire at the end of the agreed
period. 6he voting trust certificates as
well as the certificates of stoc% in the
na$e of the trustee or trustees shall
thereby be dee$ed cancelled and new
3
certificates of stoc% shall be reissued
in the na$e of the transferors.
6he voting trustee or trustees
$ay vote by proxy unless the
agree$ent provides otherwise.
0urpose * to $a%e possible a
unified control of the affairs of the
corporation and consistent policy5 to
$a%e possible for a $a"ority group
of shareholders to dispose of a
beneficial interest in a large
proportion of their shares and still
retain control of the corporation
through the voting trustee
-o principal-agent relationship
The trustee has unlimited
authority The only limitation is that
he should act for the benefit of the
'F (fiduciary obligation)
Aoting trust certificates B issued
by the trustees (not the corp)
These certificates confirm (%) that a
trustee has been constituted) ($)
the e?tent of shares) and (#) the
participation of the 'F in the ATA
The trustee can1t dispose of the
block of shares; receive dividends
0an only vote
The 'F can revoke the ATA on
the ground of breach of fiduciary
obligations
&tatus of transferee and
transferor
a. ?oting trustee is only a
share owner vested with
apparent legal title for the sole
purpose of voting upon stoc%s
that he does not own
b. 6ransferring stoc%holder
retains the right of inspection of
corporate boo%s which he can
exercise concurrently with the
voting trustee
0owers and rights of voting
trustees
a. >ight to vote and other rights
pertaining to the shares in their
na$es sub"ect to ter$s and
conditions of and for the period
specified in the agree$ent
b. ?ote in person or by proxy
unless agree$ent provides
otherwise
c. >ights of inspection of corporate
boo%s and records
d. +egal title holder * Dualified to
be a director
+i$itations on voting trust
agree$ents
a. should not exceed C years
except if a condition in a loan
agree$ent, shall auto$atically
expire upon full pay$ent of the
loan
b. $ust not be for purposes of
circu$venting the law against
$onopolies and illegal
co$binations in restraint of trade
c. $ust not be used for
purposes of fraud
d. $ust be in writing, notarized,
specify the ter$s and conditions
thereof
e. certified copy $ust be filed
with corporation and &3C
otherwise unenforceable
f. agree$ent is sub"ect to
exa$ination by stoc%holder
g. shall auto$atically expire at
the end of the agreed period
h. vote in person or by proxy
unless agree$ent provides
otherwise
i. rights of inspection of
corporate boo%s and records
4istinction between pro?y and voting trust
Proxy #;A
:egal title
/o legal title AcDuires legal title
!evocability
>evocable unless
coupled with
interest
4rrevocable if
validly executed
:G6 &( can
revo%e if there's a
breach of fiduciary
obli
6xtent of
power
Can only act at a
specified
stoc%holder's or
$e$ber's
$eeting
/ot li$ited to any
particular $eeting
5hen to
vote
Absence of the
owner
3ven when owner
is present
Capacity to
#e a
director
0an1t be voted as
a director) unless
he is also a 'F of
record (owns
other shares)
0an be voted as a
director
0onsidered as the
'F of record in
the books of the
corp
S#(ect
)atter
Aoting rights 'hares R voting
rights
Duration
Gsually shorter
but can't exceed C
years
Gsually longer but
can't exceed C
years except in
loan agree$ents
38
"atl 2nvestment A Dev?t Corp v ADuino
&'(CC*
:at"a%, a 1ilIA$ corp, owed $oney to 0/:.
4ts oil $ills were also $ortgaged to other
ban%s. 6hey further borrowed $oney fro$
/4;C, a wholly owned subsidiary of 0/:, to
pay off the $ortgages. 4n return, /4;C got
preferred shares, convertible into co$$on
shares. :at"a% executed a !
st
$ortgage on all
its properties to 0/: in exchange for a credit
facility etc.
/ext, a ?oting 6rust Agree$ent was
executed in favor of /4;C by &(s
representing AFM of :at"a%. 0eriod of C
years, irrevocable. ;uring this ti$e, all
dividends to be paid to &(s. -hen :at"a%
beca$e insolvent, 0/: foreclosed the
$ortgaged properties. -hen :at"a% failed to
redee$, it transferred ownership to /4;C.
:at"a% later sued /4;C, as%ing for the turnI
over of all the assets and in the alternative,
as%ed for receivership.
(eld
T>eceiver is appointed if applicant has
interest in property. :ut title of properties is
now with /4;C. T:at"a% did not i$pugn
validity of the foreclosure sales. Also, no
evidence that prop is in danger of loss,
re$oval or $aterial in"ury if receiver not
appointed.
-hat was assigned to /4;C was only power
to vote shares of stoc% of :at"a%. &uch
power includes authority to execute any
agree$ent or doc necessary to express
consent or assent to any $atter by &(s.
?oting trust did not provide for transfer of
assets. -hat was stipulated to be returned
were only certifs of stoc%. ?oting trust
transfers only voting or other rights
pertaining to shares or control over the
stoc%.
). 0HH+4/,
A/; ?H64/, A,>33383/6&
Agree$ent between 2 or $ore
stoc%holders to vote their shares in
the sa$e way
There must be a valuable
consideration for each party
Gsually relate to election of directors
0arties often provide for arbitration
in case of disagree$ent. -ote:
arbitrator is not like a trustee The
former has no voting rights
?alid as long as they do not li$it the
discretion of the :H; in the
$anage$ent of corporate affairs or
wor% any fraud against stoc%holders
not party to the contract. Thus) it is
void if it provides that directors) once
elected) should vote for certain
persons as officers /@0/3T6:-: 0lose
corps may provide that a ATA can
interfere with discretion of the 9:4
;oes not involve a transfer of stoc%s
but is $erely a private agree$ent
-o transfer of ownership and voting
rights
Agree$ents by stoc%holders (!FF)
o Agree$ents by and a$ong
stoc%holders executed before the
for$ation and organization of a
close corporation, signed by all
stoc%holders, shall survive the
incorporation of such corporation
and shall continue to be valid and
binding between and a$ong such
stoc%holders, if such be their
intent, to the extent that such
agree$ents are not inconsistent
with the articles of incorporation,
irrespective of where the
provisions of such agree$ents are
contained, except those reDuired
by this 6itle to be e$bodied in
said articles of incorporation.
o An agree$ent between two
or $ore stoc%holders, if in writing
and signed by the parties thereto,
$ay provide that in exercising
any voting rights, the shares held
by the$ shall be voted as therein
provided, or as they $ay agree,
or as deter$ined in accordance
with a procedure agreed upon by
the$.
o /o provision in any written
agree$ent signed by the
stoc%holders, relating to any
phase of the corporate affairs,
shall be invalidated as between
the parties on the ground that its
effect is to $a%e the$ partners
a$ong the$selves.
o A written agree$ent a$ong
so$e or all of the stoc%holders in
a close corporation shall not be
invalidated on the ground that it
so relates to the conduct of the
corporation as to restrict or
interfere with the discretion or
powers of the board of directors
0rovided, 6hat such agree$ent
shall i$pose on the stoc%holders
who are parties thereto the
liabilities for $anagerial acts
3!
i$posed by this Code on
directors.
o 6o the extent that the
stoc%holders are actively
engaged in the $anage$ent or
operation of the business and
affairs of a close corporation,
the stoc%holders shall be held to
strict fiduciary duties to each
other and a$ong the$selves.
&aid stoc%holders shall be
personally liable for corporate
torts unless the corporation has
obtained reasonably adeDuate
liability insurance.
P!4EF ;!B8;66 P44:2"
A"D #4;2"
A!66+6";8
0rincipal *
agent
6rusteeI
beneficiary
Consensual
0roxy can't
exceed
delegated
authority
6he only
li$it to his
authority
$ust be for
benefit of
trustee
(fiduciary
obligation)
8erely an
agree$ent to
vote in the
sa$e way
8ust be in
writing
8ust be in
writing and
notarized
/o for$alities
reDuired
Copy $ust
be filed
with corp
sec
Copy $ust
be filed with
&3C
8erely a
contract
between &(s
6ransfer of
legal title to
trustee
>egular
voting
rights
Another
person
exercises
voting
rights only
for a
specific
$tg
(unless
otherwise
provided)
Absolute
voting
rights,
sub" only
to
fiduciary
duty
Another
person
exercises
voting
rights
continuous
ly
Hwner still
exercises
voting rights
0roxy
cannot be
6rustee can
be director
director
>evocable
at will, in
any
$anner
3NC if
coupled
with an
interest
4rrevocable,
as long as no
$isconduct
or fraud
>evocable by
consent or
$utual
ter$ination. 4f
unilateral
ter$ination,
liable for
da$ages
8ax of C
yrs at a
ti$e
8ax of C yrs
at a ti$e
(unless
coter$inus
with loan)
&3C can pass on validity
Chapter VIII
DUTIES OF DIRECTORS AND
CONTROLLING STOCKHOLDERS
Duties and :iabilities of Directors
!. ;uties 4n ,eneral
;uty ?iolation under )!
Hbedience I -illfully and
%nowingly vote for or
assent to patently
unlawful acts of the
corporation
;iligence I ,uilty of gross
negligence or bad faith
in directing the affairs
of the corporation
+oyalty I AcDuire any personal
or pecuniary interest in
conflict with their duty
as such directors or
trustees
3xtent of liability ;irectors or
trustees shall be liable solidarily for all
da$ages resulting therefro$ suffered
by the corporation, its stoc%holders,
or $e$bers and other persons
4irectors act as a body in formulating
corp policies and e?ercise all powers
of management Fence) they are
fiduciaries of the corp 6t does not
40
matter who elected them :nce
elected) they must represent the
interests of all 'Fs and of the corp
as a whole
4irectors must act only within the
corp powers 6f not) they will be
liable for damages) unless they
acted in => and with due diligence
2. ;uty of diligence
-hat are reDuired and expected
of directors
o 6o possess at least ordinary
%nowledge and s%ill to enable
the$ to $a%e sound business
decision
o 6o attend directors $eetings
with reasonable regularity
o 6o exercise reasonable care in
the $anage$ent of the
corporation
o 6o %eep the$selves sufficiently
infor$ed about the general
condition of the business
6he degree of care and diligence
reDuired is usually that which $en
pro$pted by selfIinterest, generally
exercise in their own affairs. 4n
deter$ining whether reasonable
diligence has been exercised, the
particular circu$stances of each
case $ust be considered. 6he
nature of the business is an
i$portant factor.
9usiness 2udgment rule
,3/ >G+3 ;irectors cannot be held
liable for $ista%es or errors in the
exercise of their business "udg$ent if
they acted in good faith, with due care U
prudence. Contracts intra vires entered
into by the board of directors are binding
upon the corp. U courts will not
interfere.
3NC3064H/ 4f the contracts are so
unconscionable U oppressive as to
a$ount to a wanton destruction of the
rights of the $inority.
:oard of ;irectors has authority to
$odify the proposed ter$s of the
contracts of the corporation for the
purpose of $a%ing the ter$s $ore
acceptable to the other contracting
partiesV6he test to be applied is
whether the act in Duestion is the direct
and i$$ediate furtherance of the
corporation's business, fairly incidental
to the express powers and reasonably
necessary to their exercise. 4f so, the
corporation has the power to do it5
otherwise not. .8ontelibano v. :acolod
8urcia 8illing Co.2
8teinberg vs. #elasco
&teinberg is the receiver of &ibugay 6rading.
?elasco (0res) and other directors, approved
and authorized unlawful purchases of
co$pany's stoc% fro$ ,anzon et al. Accdg to
&teinbeg, this diverted funds supposed to be
paid to creditors.
,anzon et al resigned as directors before the
:o; approved the purchase of stoc%s fro$
the$, worth ),)FF. At that ti$e, corp owed
!)P. 6he corp also declared dividends in favor
of &(s, to be paid in install$ents so as Jnot to
affect financial condition of the corp.K A#>'s
which appeared on boo%s were worthless,
because receiver could not collect the$.
(3+; 4f directors dispose of corp prop or pay
away its $oney without authority, they will be
reDuired to $a%e good the loss out of their
private estates.
;irectors are not liable for loss to corp fro$
want of %nowledge, or for $ista%es of
"udg$ent, provided they were honest and
fairly within the scope of the powers and
discretion confided to $gt.
:ut acceptance of office of director i$plies a
co$petent %nowledge of the duties assu$ed,
and directors cannot excuse i$prudence bec of
their ignorance or inexperience. 4f they
co$$it error of "udg$ent through $ere
rec%lessness or want of ordinary prudence or
s%ill, they $ay be held liable for
conseDuences.
Creditors of corp have right to assu$e that so
long as there are outstanding debts and
liabilities, :o; will not use assets of corp to
purchase its own stoc%, and that it will not
declare dividends to &(s when corp is
insolvent.
;irectors held liable.
&toc% purchases and dividends
were funded out of re$aining
assets. :ut assets W liabilities.
,anzon et al were favored bec
they were able to get $oney
ahead of creditors
>ecipients of dividends can be
held liable by receiver. >atio &(s
are accessories. >e$e$ber, they
41
were the ones who chose
directors.
). ;uty of loyalty
6he deter$ination as to whether, in a
given case, the duty of loyalty has been
violated has ulti$ately to be decided by
the court on the case's own $erits. 6he
ff. are $ore co$$on situations involving
such conflict of interests
a. 'elf-dealing director ()2)
A contract of the corporation
with one or $ore of its directors
or trustees is voidable, at the
option of such corporation,
unless all the following
conditions are present
o 6hat the presence of such
director or trustee in the
board $eeting in which the
contract was approved was
not necessary to constitute
a Duoru$ for such $eeting5
o 6hat the vote of such
director or trustee was nor
necessary for the approval
of the contract5
o 6hat the contract is fair and
reasonable under the
circu$stances5 and
o 6hat in case of an officer,
the contract has been
previously authorized by the
board of directors.
-here any of the first two
conditions set forth in the
preceding paragraph is absent,
in the case of a contract with a
director or trustee, such
contract $ay be ratified by the
vote of the stoc%holders
representing at least twoIthirds
(2#)) of the outstanding capital
stoc% or of at least twoIthirds
(2#)) of the $e$bers in a
$eeting called for the purpose
1ull disclosure of the adverse
interest of the directors or
trustees involved $ust be $ade
at such $eeting
6he contract is voidable whether
the corporation suffered
da$ages or not
6he burden of proving fairness
is on the director
b. >i?ing compensation of directors and
officers ()F)
=eneral rule: 4irectors are only
entitled to per diems
/?ception: Chen A:6) by-laws) or
an advance contract provides for
compensation
Assuming compensation is
intended) only 'Fs can fi? the
amount 6n fact) the 'Fs should
approve the granting of
compensation because this entails
a reduction of the amount that
could be distributed to them as
dividends
'F1s resolution to grant
compensation can only refer to
future services
$arreto v :a Previsora Filipina
:arreto, et al. are directors of +a 0revisora
1ilipina, a $utual building and loan assoc.
:yIlaws provide co$pensation of !M of
profits to each director. Co$pensation to
apply retroactively.
(eld :yIlaws do not create a legal obl to
pay life gratuity or pension out of its net
profits XL beyond powers of $utual bldg
and loan assoc.
Corp +aw authorizes co$pensation only for
future services, and cannot authorize
continuous co$pensation to particular
directors after their e$ploy$ent has
ter$inated for past services rendered
gratuitously by the$ to the corp.
:uilding and loan associations are founded
on strict $utuality and eDuality of benefits
and obligations. Any contract or byIlaw in
contravention of a statute is ultra vires and
void. 6here is an i$plied contract with
$e$bers that it shall not divert funds or
powers to purposes other than for which it
was created. All $e$bers $ust participate
eDually in profits and bear losses. Any
diversion of funds to unauthorized purposes
violates principle of $utuality between
$e$bers.
Also, there was no valid consideration bec
the past services were rendered
gratuitously.
c. 6nterlocking directors ()))
A contract between two or $ore
corporations having interloc%ing
directors shall not be invalidated
42
on that ground alone, except
cases of fraud.
6he contract is fair and
circu$stances.
4f the interest of the interloc%ing
director in one corporation is
substantial and his interest in
the other corporation or
corporations is $erely no$inal,
he shall be sub"ect to the
provisions of the preceding
section ()2) insofar as the
latter corporation or
corporations are concerned.
&toc%holdings exceeding twenty
(2FM) percent of the
outstanding capital stoc% shall
be considered substantial for
purposes of interloc%ing
directors.
>eDuisites of a valid contract
between the corporation and
one or $ore of its directors,
trustees or officers
!) ;hat the presence of
such director or trustee
in the $oard meeting in
which the contract was
approved was not
necessary to constitute a
Duorum for such meeting
2) 6hat the vote of such
director or trustee was not
necessary for the approval
of the contract
)) 6hat the contract is fair and
circu$stances
7) 6hat in case of an officer,
the contract with the officer
has been previously
authorized by the :oard of
;irectors
d 'ei<ing corporate opportunity;
4isloyalty
-here a director, by virtue of
his office, acDuires for hi$self a
business opportunity which
should belong to the
corporation, thereby obtaining
profits to the pre"udice of such
corporation, he $ust account to
the latter for all such profits by
refunding the sa$e ()7)
o G/+3&& his act has been
ratified by a vote of the
stoc%holders owning or
representing at least twoI
thirds (2#)) of the
outstanding capital stoc%.
o Fence) a ma2ority 'F can
actually compete with the
corporation if he owns $;# of
the :0'
o 6his provision shall be
applicable, notwithstanding
the fact that the director
ris%ed his own funds in the
venture.
o *equires pre2udice 6f there1s
no pre2udice to the
corporation) the director or
officer can still be held liable
under !#%
o !#8 covers only directors
Fowever) according to
0ampos) officers can be held
liable under !#%
-hen a director, trustee or officer
atte$pts to acDuire or acDuires,
in violation of his duty, any
interest adverse to the
corporation in respect of any
$atter which has been reposed in
hi$ in confidence, as to which
eDuity i$poses a liability upon
hi$ to deal in his own behalf, he
shall be liable as a trustee for the
corporation and $ust account for
the profits which otherwise would
have accrued to the corporation.
()!)
6he last paragraph of &ection )!
and &ection )7 contain the
doctrine of corporate opportunity.
4n case of such conflict of
interests, and the director acts
against the good of the
corporation, he shall be
accountable for the profits he
obtained, even if he had ris%ed
his own funds.
0orporate right ) opportunity or
e?pectancy arises only when: (a)
directors were negotiating on
behalf of the corporation; (b) the
corporation was in need of the
particular business opportunity to
the knowledge of the directors) or
(c) the business opportunity was
sei<ed and developed at the
e?pense and with the facilities of
the corporation (Gitwin v Allen)
e .sing inside information (0f !#+)
$#$) $,) "%) ,%$) 'ecurities
*egulation 0ode)
43
6he fiduciary position of
insiders
)
, directors, and officers
prohibits the$ fro$ using
confidential infor$ation relating
to the business of the
corporation to benefit
the$selves or any co$petitor
corporation in which they $ay
have a $ere substantial
interest.
6he liability of a director or
officer guilty of using inside
infor$ation is to the corporation
and not to any individual
stoc%holder
&ince loss and pre"udice to the
corporation is not a reDuire$ent
for liability, the corporation has
a cause of action as long as
there is unfair use of inside
infor$ation
4t is inside infor$ation if it is not
generally available to others and
is acDuired because of the close
relationship of the director or
officer of the corporation
,eneral rule (8a"ority view)
;irectors owe no fiduciary duty
to stoc%holders but they $ay
deal with the$ at ar$'s length.
/o duty to disclose facts %nown
to the director or officer
&pecial facts doctrine ('trong v
*epide) * Conceding the
absence of a fiduciary
relationship in the ordinary
case, courts nevertheless hold
that where special
circu$stances or facts are
present which $a%e it
ineDuitable for the director to
withhold infor$ation fro$ the
stoc%holder, the duty to disclose
arises and conceal$ent is fraud.
Duties and :iabilities of 4fficers G the
provisions on seizing corporate opportunity
3
+,nsider- %eans. (a" the issuer/ ()" a director or o00icer
(or 1erson 1er0or%ing si%ilar 0unctions" o0, or a 1erson
controlling the issuer/ (c" a 1erson (hose relationshi1 or
0or%er relationshi1 to the issuer gi2es or ga2e hi% access
to %aterial in0or%ation a)out the issuer or the securit& that
is not generall& a2aila)le to the 1u)lic/ (d" a go2ern%ent
e%1lo&ee, or director, or o00icer o0 an e3change, clearing
agenc& and4or sel0#regulator& organi5ation (ho has
access to %aterial in0or%ation a)out an issuer or a
securit& that is not generall& a2aila)le to the 1u)lic/ or (e"
a 1erson (ho learns such in0or%ation )& a co%%unication
0ro% an& o0 the 0oregoing insiders (63.8, Sec Regulations
Code"
and disloyalty ()!Y! and )7) shall also
apply to corporate officers
-ote: 7embers of the 9:4 who are also
officers are held to a more stringent liability
because they are in-charge of day-to-day
activities
Duty of controlling interest
A $a"ority stoc%holder is sub"ect
to the duty of good faith when he acts by
voting at a stoc%holders' $eeting with
respect to a $atter in which he has a
personal interest
Controlling stoc%holders $ay
dispose of their shares at any ti$e and at
such price as they choose provided they
do not pervert these prerogatives by
transferring office to persons who are
%nown as intending to raid the corporate
treasury or otherwise i$properly benefit
the$selves.
4t is fraudulent for a stoc%holder
to buy fro$ another stoc%holder without
disclosing his identity
0rincipal stoc%holders are li%ewise
prohibited fro$ using inside infor$ation in
the purchase and sale of eDuity security
!emedies in case of mismanagement
>eceivership
4n"unction if the act has not been
done
;issolution if the abuse a$ounts
to a ground for Duo warranto but the
&olicitor ,eneral refuses to act
;erivative suit a co$plaint filed
with the >6C
Bichico, et al. vs. ":!C
6he petitioners, who are officers and
directors of Crispa, 4nc., assailed the
decision of the /+>C holding the$ solidarily
liable with Crispa for the pay$ent of
separation pay and bac%wages to the private
respondents. 4t was the contention of the
petitioners that the award of separation pay
and bac%wages is a corporate obligation and
$ust therefore be assu$ed by Crispa alone.
(3+; -hile the general rule is that
obligations incurred by a corporation, acting
through its directors, officers and e$ployees,
are its sole liabilities, there are ti$es when
solidary liabilities $ay be incurred such as in
this case where it is undisputed that
44
petitioners had a direct hand in the illegal
dis$issal of respondent e$ployees. 6hey
were the ones, who as highIran%ing officers
and directors of Crispa, signed he :oard
resolution retrenching the private
respondents on the feigned ground of serious
business losses that had no basis apart fro$
an unsigned and unaudited profit and loss
state$ent which had no evidentiary value
whatsoever. 6his is indicative of bad faith on
the part of petitioners for which they can be
held "ointly and severally liable with Crispa
for all the $oney clai$s of the illegally
ter$inated respondent e$ployees.
;ramat +ercantile, 2nc. vs. CA
0ersonal liability of a corporate director,
trustee or officer along (although not
necessarily) with the corporation $ay so
validly attach, as a rule, only when
o (e assents (a) to a patently unlawful
act of the corporation, or (b) for bad
faith or gross negligence in directing
its affairs, or (c) for conflict of
interest, resulting in da$ages to the
corporation, its stoc%holders or other
persons5
o (e consents to the issuance of
watered stoc%s or who, having
%nowledge thereof, does not
forthwith file with the corporate
secretary his written ob"ection
thereto5
o (e agrees to hold hi$self personally
and soidarily liable with the
corporation5 or
(e is $ade, by a specific provision of law, to
personally answer for his corporate action.
Chapter IX
THE RIGHT OF INSPECTION
$asis of right
>eason of the law for granting stoc%holders
the right to inspect the records of the
corporation As the beneficial owners of the
business, the stoc%holders have the right to
%now
!. 6he financial condition of the
corporation5 and
2. (ow the corporate affairs are being
$anaged by their elected directors.
&o that if they find the conditions
unsatisfactory, they $ay be able to ta%e
necessary $easures to protect their
invest$ent.
6he right of inspection is
1. 3reventive * to a li$ited extent $ay
serve as a deterrent to an illI
intentioned $anage$ent to %now that
its acts $ay be scrutinized
2. *emedial * a dissatisfied stoc%holder
$ay resort to the right of inspection as
a preli$inary step to see%ing $ore
direct re$edies against abuses
co$$itted by $anage$ent (removal of
directors or a derivative suit).
The right of inspection goes hand-in-hand with
the right to vote Through the former) the 'F
can gather information on how to vote
5hat records coveredH records reDuired
to be %ept by corporation (@7)
:oo%s that record all business transactions
of the corporation which shall include
contract, $e$oranda, "ournals, ledgers,
etc5
8inute boo% for $eetings of the
&(s#$e$bers5
8inute boo% for $eetings of the board5
&toc% and transfer boo%.
7inutes of meetings without the signature of
the corporate secretary have no probative
value (-AT. v 'ec of Gabor) %&+%)
Chat is a stock transfer agentH
o A stoc% transfer agent is one
engaged principally in the business of
registering transfers of stoc%s in
behalf of a stoc% corporation. /o
stoc% transfer agent shall be allowed
to operate in the 0hilippines unless he
secures a license fro$ the &3C and
pays a fee as $ay be fixed by the
Co$$ission, which shall be renewable
annually
o A stoc% corporation is not
precluded fro$ perfor$ing or $a%ing
transfer of its own stoc%s, in which
case all the rules and regulations
i$posed on stoc% transfer agents,
except the pay$ent of a license fee
herein provided, shall be applicable.
1inancial state$ents (@C)
45
o -ithin ten (!F) days fro$ receipt of
a written reDuest of any stoc%holder
or $e$ber, the corporation shall
furnish to hi$ its $ost recent
financial state$ent, which shall
include a balance sheet as of the
end of the last taxable year and a
profit or loss state$ent for said
taxable year, showing in reasonable
detail its assets and liabilities and
the result of its operations
o At the regular $eeting of
stoc%holders or $e$bers, the :H;
or :H6 shall present to such
stoc%holders or $e$bers a financial
report of the operations of the
corporation for the preceding year,
which shall include financial
state$ents, duly signed and
certified by an independent certified
public accountant. (owever, if the
paidIup capital of the corporation is
less than 0CF,FFF.FF, the financial
state$ents $ay be certified under
oath by the treasurer or any
responsible officer of the
corporation.
;orres et al v CA
4t is the corporate secretaryRs duty and
obligation to register valid transfers of stoc%s
and if said corporate officer refuses to
co$ply, the transferorIstoc%holder $ay
rightfully bring suit to co$pel perfor$ance.
6xtent of and limitations on right
!. Gimitations as to time and place
a. Hnly at reasonable hours on
business days
:yIlaws cannot li$it inspection
to $erely a few days during the
year chosen by the directors
.0ardo vs. (ercules +u$ber2
:yIlaws cannot provide that the
inspection shall only be upon
authority of the 0resident of the
corporation previously obtained
in each case
(owever, inspection should be
$ade in such a $anner as not
to i$pede the efficient
operations of the corporation
9y-laws can adopt policies with
respect to right to inspect
(!8,(%5))
b. 4nspection shall be done in the place
where the corporation %eep all its
records, which, as en"oined by law, is
in the principal office
&toc%holder cannot de$and that
he be allowed to ta%e the
corporate boo%s outs of the
corporation's principal office for
the purpose of inspecting the$.
2. Gimitation as to purpose
4s the stoc%holder's purpose $aterialS *
=3&. 6here is however a presu$ption that
his purpose is a proper one and the
corporation cannot refuse to grant hi$ the
right on its $ere belief that his $otive is
i$proper.
Htherwise, such refusal $ay open
its guilty officers or directors to
liability for da$ages, G/+3&& they
can successfully prove in their
defense that the stoc%holder was
not acting in good faith nor for a
legiti$ate purpose in $a%ing his
de$and.
:urden of proving that the purpose
is i$proper or illegal is on
corporation and its officers.
=ood purposes: to investigate acts
of management; to investigate
financial conditions; fi? value of
shares; mailing list for pro?ies;
information for litigation
-ot good and honest purposes:
obtain corporate secrets (eg)
formula); nuisance suit; to
embarrass the company
(ow does one deter$ine whether the
purpose as proved by the corporation or
as ad$itted by the stoc%holder is a
legiti$ate one or notS * A legiti$ate
purpose is one which is ger$ane to the
interests of the stoc%holder as such and
not contrary to the interests of the
corporation.
5ho may exercise right
;irector, trustee, stoc%holder, $e$ber,
personally or through an agent
o The right to inspect corporate books
may be done with the assistance of
technical men (eg) lawyers and
accountants) and it may be
46
delegated The right includes the
right to copy or to take notes
(C= 3hilpotts v 3hililppine 7fg
0o) %&%&)
6he transferor of shares and the voting
trustee, in accordance with &ection CE
&toc%holders of a parent corporation
with respect to subsidiary
o 4f two are legally separate
and independent entity, no right of
inspection. Fowever) the 'F of the
parent corp can look at the books of
the latter with respect to its
investments to the subsidiary
o 4f they are practically one
and the sa$e in so far as
$anage$ent and control and
inspection is de$anded because of
gross $anage$ent of subsidiary by
the parent's directors who are also
directors of subsidiary, there can be
inspection
!emedies available if inspection refused
8anda$us
4n"unction
Action for da$ages * any officer
or agent of the corporation who shall
refuse to allow any director, trustees,
stoc%holder or $e$ber of the
corporation to exa$ine and copy
excerpts fro$ its records or $inutes, in
accordance with the provisions of this
Code, shall be liable to such director,
trustee, stoc%holder or $e$ber for
da$ages
1ile an action to i$pose a penal
offense by fine and#or i$prison$ent
o Any officer or agent of the
corporation who shall refuse to allow
any director, trustees, stoc%holder
or $e$ber of the corporation to
exa$ine and copy excerpts fro$ its
records or $inutes, in accordance
with the provisions of this Code x x
x and in addition, shall be guilty of
an offense which shall be punishable
under &ection !77 of the
Corporation Code
o 4f such refusal is $ade
pursuant to a resolution or order of
the board of directors or trustees,
the liability under this section for
such action shall be i$posed upon
the directors or trustees who voted
for such refusal
o 4t shall be a defense to any
action that the person de$anding to
exa$ine and copy has i$properly
used any infor$ation secured through
any prior exa$ination of the records,
or is not acting in good faith or for a
legiti$ate purpose in $a%ing his
de$and
o :ther valid grounds for
denying access to books or records:
immediately prior to the annual 'Fs1
meeting; holder of books is
unavailable; the books are being
audited; on-going inventory count;
computeri<ation; moving out or
change of business address
Chapter X
DERIVATIVE SUITS
Definition
4erivative suit * suits of stoc%holders based
on wrongful or fraudulent acts of directors or
other persons
"ature and basis=distinguish from other
suits
4/;4?4;GA+ suit if wrong
done is personal to &(
C+A&& suit if wrong done
is to a group of &(
;3>4?A64?3 suit if wrong
done is to the corporation itself
o 4n a derivative suit,
the cause of action belongs to the
corporation and not the stoc%holders
but since the directors who are
charged with $is$anage$ent are the
ones who will be sued or $ay not be
willing to sue, then the corporation is
left without redress, hence, &( is
given the right to sue on behalf of the
corporation
!eDuirements relating to derivative suit
1. 6he stoc%holder or $e$ber bringing the
suit $ust have exhausted his re$edies
within the corporation (e? Fe has made a
demand on the directors or trustees and
they have failed or refused to act on such
4
demand -ote: demand is not
necessary if it will be futile)
2. 6he stoc%holder or $e$ber $ust have
been one at the ti$e the transaction or
act co$plained of too% place, or in the
case of a stoc%holder, the shares $ust
have devolved upon hi$ since by
operation of law, unless such transaction
or act continues and is in"urious to the
stoc%holder
The number of shares owned by the 'F
is immaterial
Feirs of a 'F can bring a derivative suit
provided that the transaction took place
during the lifetime of the 'F
3. Any benefit recovered by the stoc%holder
or $e$ber as a result of bringing the
suit, whether by final "udg$ent, by
"udicial co$pro$ise or by extraI"udicial
settle$ent, $ust be accounted for to the
corporation, who is the real party in
interest
4. 4f the suit is successful, the plaintiff is
entitled to rei$burse$ent fro$ the
corporation for the reasonable expenses
of litigation, including attorney's fees
$itong v CA
4n the absence of a special authority fro$
the board of directors to institute a
derivative suit for and in its behalf, the
$anaging officer is disDualified by law to sue
in her own na$e. 6he power to sue and be
sued in any court by a corporation even as a
stoc%holder is lodged in the :H; that
exercises its corporate powers and not in the
president or officer thereof. :ut where
corporate directors are guilty of a breach of
trust, not of $ere error of "udg$ent or
abuse of discretion, and intraIcorporate
re$edy is futile or useless, a &( $ay
institute a derivative suit in behalf of hi$self
and other &(s and for the benefit of the
corporation, to bring about a redress of the
wrong inflicted directly upon the corporation
and indirectly upon the stoc%holders.
:im vs. :im<Fu, ! '0C0.0, Feb '(,
-))'
6he suit of respondent cannot be
characterized as derivative, because she
was co$plaining only of the violation of her
pree$ptive right under &ection )E of the
Corporation Code. &he was $erely praying
that she be allowed to subscribe to the
additional issuances of stoc%s in proportion
to her shareholdings to enable her to
preserve her percentage of ownership in the
corporation. &he was therefore not acting
for the benefit of the corporation. Ouite the
contrary, she was suing on her own behalf,
out of a desire to protect and preserve her
pree$ptive rights
Reqirements nder the Interim Rles of
Procedre for Intra*Corporate
Controversies %Rle +&
% Fe was a stockholder or member at the
time the acts or transactions sub2ect of
the action occurred and the time the
action was filed;
$ Fe e?erted all reasonable efforts) and
alleges the same with particularity in the
complaint) to e?haust all remedies
available under the A:6) by-laws) laws or
rules governing the corporation or
partnership to obtain the relief he desires
# -o appraisal rights are available for the
act(s) complained of; and
8 The suit is not a nuisance or harassment
suit
4erivative suits are within the 2urisdiction of
the *T0 (!($) 'ecurities *egulation 0ode)
Chapter XI
FINANCING THE CORPORATION
CAPITAL STRUCTURE
8ources of Financing
) $ain sources
!. Contributions by stoc%holders
(3Duity)
2. +oans or advances fro$
creditors (:orrrowing)
). 0rofits that the business $ay
earn
Classification of 8hares (A)
&hares of stoc% of stoc%
corporations $ay be divided into classes
or series of shares or both
3ach class or series of shares $ay
have rights, privileges, restrictions, stated
in the AH4
/o share $ay be deprived of
voting rights, except
o 0referred or
o >edee$able shares,
48
unless otherwise provided by the Code
6here shall always be a
class#series of shares which have a
CH80+363 ?H64/, >4,(6&
3AC( &(A>3 &(A++ :3 3OGA+
4/ A++ >3&03C6& 6H 3?3>= H6(3>
&(A>3, except as otherwise provided in
the AH4
1. Co$$on
A stoc%holder, owner of at least
one co$$on share, has the
following rights
o right to vote at $eetings
o right to dividends
o right to exa$ine corporate
boo%s
8ost co$$only issued
3ntitles owner to eDual proIrata
division of profits after preference
2. 0referred
&toc%s which are given preference
by the issuing corporation in the
distribution of assets of the
corporation in case of liDuidation
and in the distribution of dividends,
or such other preferences as $ay be
stated in the AH4 which are not
violative of the Corporation Code.
(A)
+i$itations on preferred shares
o 0referred shares can only
be issued with par value
o 0referred shares $ust be
a. &tated in the Articles of
4ncorporation or
b. 8ay be fixed by the :H;
where authorized by the
AH4, provided such ter$s
and conditions shall be
effective upon filing of a
certificate thereof with the
&3C.
3ntitles holder to so$e
preferences in dividends,
distribution of assets upon
liDuidation or both
o preference as to
dividends * dividends are
payable only when profits are
earned and as a general rule,
even if there are existing
profits, :H; has discretion to
declare dividends or not
a. 0articipating * after
getting their fixed dividend
preference ahead of C&,
they share with the C& the
rest of the dividends
G/+3&& expressly provided,
they are nonIparticipating
b. Cu$ulative *
dividends in arrears accrue,
$ust be paid first before
co$$on stoc% dividends are
paid.
c. /on cu$ulative *
contract $a%es dividends
depend upon existence of
profits for the year
o as to
voting rights * usually does not
have voting rights5 but unless
clearly withheld, 0& would have
right to vote
-ote: even if deprived of voting
rights) 3' holders are entitled to
vote on the matters enumerated
under !"
o preference upon liDuidation * in
the absence of provision,
participate pro rata with co$$on
stoc%
o not a creditor5 there's no
assurance that you will get bac%
invest$ents but if the corporation
profits, you participate in the
profits
3. 0ar value
6hese are shares with a
stated value set out in the AH4. 6his
re$ains the sa$e regardless of the
profitability of the corporation. 6his
gives rise to financial stability and is
the reason why ban%s, trust
corporations, insurance co$panies
and building and loan associations
$ust always be organized with par
value shares.
Hne in the certificate of stoc%
of which appears an a$ount in pesos
as the no$inal value of the shares
Can't be issued at less than
par value. :therwise) it would
become a watered stock (!"()
discussed in 0hapter @66)
0ar value is $ini$u$ issue
price of such share in the AH4 which
$ust be stated in the certificate
4. /oIpar value
6hese are shares without a stated
value. 6he Corporation upon their
issuance will set their value, which
shall not be less than 0C.
&hall be dee$ed fully paid and
nonIassessable and the holders of
such shares shall not be liable to the
4!
corporation or to its creditors in
respect thereto (A)
3ntire consideration received by
the corporation for its noIpar value
shares shall be treated as capital
and shall not be available for
distribution as dividends (4bid)
Cannot be issued as 0referred
&hares (4bid)
AH4 $ust state the fact that
corp issues noIpar shares and the
nu$ber of shares
6hree ways of deter$ining value
of no par value shares (A2)
o :y $a"ority vote of the
outstanding shares (issued
shares) in a $eeting called for
the purpose
o :y :H; pursuant to authority
conferred upon it by the AH4
o :y a$end$ent of the AH4
Corporations which cannot issue
noIpar value shares
o :an%s
o 4nsurance Co$panies
o 6rust Co$panies
o :uilding and +oan Associations
o 0ublic utilities
5. 1ounderZs
6hose shares,
classified as such in the AH4, which
are given certain rights and
privileges not en"oyed by the owners
of other stoc%s. (@)
-here exclusive
right to vote and be voted for in the
election of directors is granted, such
right $ust be for a li$ited period
not to exceed C years sub"ect to
approval by &3C. C year period shall
co$$ence fro$ date of approval by
&3C. (4bid)
6. >edee$able
6hose shares, expressly so provided
in the AH4, which $ay be purchased
or ta%en up by the corporation upon
the expiration of a fixed period
regardless of the existence of
unrestricted retained earnings in the
boo%s of the corporation and upon
such ter$s and conditions stated in
the AH4 and in the certificate of
stoc% (B)
*edemption is repurchase) a
reacquisition of stock by a
corporation which issued the stock
in e?change for property) whether
or not the acquired stock is cancelled)
retired or held in the treasury
/ssentially) the corporation gets back
some of its stock) distributes cash or
property to the shareholder in
payment for the stock) and continues
in business as before The
redemption of stock dividends
previously issued is used as a veil for
the constructive distribution of cash
dividends (06* v 0A) %&&&)
Chile redeemable shares may be
redeemed regardless of the e?istence
of unrestricted retained earnings) this
is sub2ect to the condition that the
corporation has) after such
redemption) assets in its books to
cover debts and liabilities inclusive of
capital stock *edemption) therefore)
may not be made where the
corporation is insolvent or if such
redemption will cause insolvency or
inability of the corporation to meet its
debts as they mature (*epublic
3lanters 9ank v Agana) %&&,)
. 6reasury
6hese are shares of stoc% which
have been issued and fully paid for,
but subseDuently reIacDuired by the
issuing corporation by purchase,
rede$ption, donation or through
so$e other lawful $eans. &uch
shares $ay again be disposed of for a
reasonable price fixed by the :H;.
(E)
-ote: delinquent stocks) which
are stocks that have not been fully
paid) may become treasury stocks
upon bid of the corporation in
absence of other bidders (!"+)
8ay be sold at less than par,
regarded as corporate property
4n this $anner, stoc%s can be
retired gradually, even those which
aren't redee$able
/o li$it as to how $any shares
can be retired
8. Convertible * A type of
preferred stoc% that the holder can
exchange for a predeter$ined nu$ber of
the corporation's co$$on shares at a
specified ti$e
!. /onIvoting shares (A)
&hares which have, generally, no
voting rights5 except in the following
circu$stances
50
o A$end$ent of the AH4
o Adoption and a$end$ent of byI
laws
o &ale, lease, exchange, other
disposition of all or substantially
all of the corporate property
o 4ncurring, creating or increasing
bonded indebtedness
o 4ncrease or decrease of capital
stoc%
o 8erger and consolidation
o 4nvest$ent of corporate funds
in another corporation or
business
o ;issolution of the corporation
C+A&&3& H1 &(A>3&
A. Co$$on

/oIpar 0ar

8ultiple par value &ingle par value
:. 0referred
+iDuidation ;ividends
Cu$ulative#nonIcu$ulative 0articipating#nonI
participating
C. >edee$able
-ith floating coupon rate -ith guaranteed
coupon rate
;. Convertibles
3. Co$bo of :[C[;
1. 1ounder's shares
,. 6reasury &hares
"ature of 8ubscription Contract
!. 'ubscription 0ontract
Any contract for the acDuisition
of unissued stoc% in an existing or a
corporation still to be for$ed shall
be dee$ed a subscription contract,
notwithstanding the fact that the
parties $ay refer to it as a purchase
or so$e other contract. (AF)
6ransfer for consideration of
treasury shares is a sale by the
corporation (not subscription). A
transfer of fully paid shares by a
stoc%holder to a third person is a sale.
:ut it see$s that assign$ent by a
subscriber of his unpaid subscription
would reDuire that the reDuisites for
valid release fro$ subscription $ust
be co$plied with
&hareholders are not creditors of
the corporation with respect to their
shareholdings thereto and the
principle of co$pensation or setIoff
has no application
/ot necessarily reDuired to be in
writing
:nce subscription contract is
perfected) 'F becomes the debtor of
the corporation Fe is liable to pay
any unpaid portion of the
subscription Fe can also be made
personally liable to the creditors of
the corporation to the e?tent of his
unpaid subscription
=eneral *ule: 'F is not liable to
pay interest on his unpaid
subscription /?ception: if required
by the by-laws (!"")
2. 3re-incorporation subscription
(A!)
0reIincorporation subscription is a
subscription for shares of stoc% of a
corporation still to be for$ed.
4t shall be irrevocable for a period of
at least six (A) $onths fro$ the date
of subscription.
4t can only be revo%ed, when
o when all of the other subscribers
consent to the revocation, or
o when the incorporation of the
corporation fails to $aterialize
within six (A) $onths or within a
longer period as $y be stipulated
in the contract of subscription.
After the sub$ission of the AH4 to the
&3C, no preIincorporation subscription
$ay be revo%ed.
Pre<emptive !ight to 8hares (0f !#&) %5$)
!. ;efinition of pre-emptive rights *
option privilege of an existing stoc%holder
to subscribe to a proportionate part of
shares subseDuently issued by the corp
before the sa$e can be disposed of in
51
favor of the others5 includes all issues
and disposition of shares of any class
All stoc%holders of a stoc%
corporation shall en"oy preIe$ptive
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 AH4 or an a$end$ent
thereto
6his is to prevent dilution in
shareholding
4ncludes not only new shares in
pursuance of an increase of capital
stoc% but would cover the issue of
previously unissued shares which
for$ part of the existing capital
stoc% as well as treasury shares
-here the shares are issued in
exchange for property needed for
corporate purposes or for debt
previously granted, &( cannot
de$and his preIe$ptive right for
right $ay pre"udice corporate
interest ()E)
2. +i$itation to exercise of preI
e$ptive right ()E)
a. &uch preI
e$ptive right shall not extend to
shares to be issued in co$pliance
with laws reDuiring stoc% offerings
or $ini$u$ stoc% ownership by the
public5
b. /ot extend to
shares to be issued in good faith
with the approval of the
stoc%holders representing twoIthirds
stoc%, in exchange for property
needed for corporate purposes or in
pay$ent of a previously contracted
debt
c. &hall not ta%e
effect if denied in the AH4 or an
a$end$ent thereto.
). >e$edies in case of
unwarranted denial
a. 4n"unction
b. 8anda$us
in any case, the suit should be
individual and not derivative
because the wrong done is to the
stoc%holders individually
c. &3C can cancel shares if the third
party is not innocent
CA046A+ CH/6>4:G64H/&
(8oney [ 0roprietary rights)
[
+HA/ ACCH88H;A64H/&
CH>0H>A64H/
0>H03>6=#A&&36&
+4A:4+46=
Hbligation to pay
0rincipal [ 4nterest
&ecurity 4nterest over 0roperty and
Assets
0references visI\Ivis &(
3OG46= 4/63>3&6
(&hares of &toc%, 4nchoate >ights)
>eturn of 3Duity 4nterest
;ividends
0roceeds realized fro$ sale of shares
+iDuidity dividends
CH/6>H+ 3CH/ :3/3146& C+A&&414CA64H/ H1
&(A>3&
Chapter XII
CONSIDERATION FOR ISSUANCE OF
SHARES
Form of consideration (A2)
&toc%s shall not be issued for a
consideration less than the par or issued
price thereof.
Consideration for the issuance of
stoc% $ay be any or a co$bination of any
two or $ore of the following
a) Actual cash paid to the
corporation5
b) 0roperty, tangible or
intangible, actually received by the
corporation and necessary or
convenient for its use and lawful
purposes at a fair valuation eDual to
52
A
a
A
a
the par or issued value of the stoc%
issued
o ?aluation of consideration
other than actual cash, or
consists of intangible property
such as patents of copyrights *
initially be deter$ined by the
incorporators or the board of
directors, sub"ect to approval by
the &3C.
o -ote: 3roperty should not
be encumbered :therwise) it
would impair the consideration
c) +abor perfor$ed for or
services actually rendered to the
corporation (must be capable of
being valuated)5
d) 0reviously incurred
indebtedness of the corporation5
e) A$ounts transferred fro$
unrestricted retained earnings to
stated capital (issuance of stock
dividends)5 and
f) Hutstanding shares
exchanged for stoc%s in the event of
reclassification or conversion.
0rohibited consideration &hares of
stoc% shall not be issued in exchange for
pro$issory notes or future service
(because reali<ation is uncertain)
>uture service may be used as
consideration provided that certificates
of stock will be issued only after the
performance of such services
&a$e consideration applies for the
issuance of bonds by the corporation.
1ixing of issued price of noIpar value
shares 6he issued price of noIpar value
shares $ay be fixed
a) in the AH4 or
b) by the :H; pursuant to authority
conferred upon it by the AH4 or the
byIlaws, or
c) in the absence thereof, by the &(s
representing at least a $a"ority of
the outstanding capital stoc% at a
$eeting duly called for the purpose.
6he value of the
consideration received $ust be eDual to
the issue price of the shares of stoc%s
which in no case shall be less than par
:iability on watered stoc%s
Catered stock * shares issued as fully paidI
up when in fact the consideration agreed to
and accepted by the directors of the
corporation was so$ething %nown to be
$uch less than the par value or issued value
of the shares.
-ater in stoc% refers to the difference
between the fair $ar%et value at the ti$e of
the issuance and the par or issued value of
said stoc%. &ubseDuent increase in the value
of the property used in paying the stoc% does
not do away with the water in the stoc%. 6he
existence of such water is deter$ined at the
ti$e of issuance of the stoc%.
/vils: deprives corp of needed capital;
dilutes proportionate interest of e?isting
and future 'F; in2ures present and future
creditors because it reduces value of corp
assets
Any director or officer of a
corporation consenting to the issuance of
stoc%s or who, having %nowledge thereof,
does not forthwith express his ob"ection in
writing and file the sa$e with the
corporate secretary
o for a consideration less than its par or
issued value or
o for a consideration in any for$ other
than cash, valued in excess of its fair
value,
shall be solidarily liable with the
stoc%holder concerned to the corporation
and its creditors for the difference
between the fair value received at the
ti$e of issuance of the stoc% and the par
or issued value of the sa$e.
Iow Payment of 8hares 6nforced
2. ;elinDuency sale
a.
Fow do shares become delinquent (A@)
0ay$ent of any
unpaid subscription or any
percentage thereof, together with
the interest accrued, if any, shall
be $ade on the date specified in
the contract of subscription or on
the date stated in the call $ade
by the board.
1ailure to pay on
such date shall render the entire
balance due and payable and
shall $a%e the stoc%holder liable
for interest at the legal rate on
such balance, unless a different
rate of interest is provided in the
53
byIlaws, co$puted fro$ such
date until full pay$ent.
4f within thirty ()F)
days fro$ the said date no
pay$ent is $ade, all stoc%s
covered by said subscription
shall thereupon beco$e
delinDuent and shall be sub"ect
to sale as hereinafter provided,
unless the :H; orders
otherwise.
;espite the fact
that the subscription is partially
paid, the entire subscription
beco$es delinDuent
'ubscriber is not
barred from paying the balance
plus the e?penses incurred by
the corp before the date of the
delinquency sale
b. 3rocedure for delinquency sale (AB)
6he :H; $ust $a%e a call
by resolution de$anding the
pay$ent of the balance of the
subscription (Qnotice of callQ).
6he notice of call shall be
served on each stoc%holder
either personally or by
registered $ail. At this point,
there is no need for publication.
4f the stoc%holder does not
pay the a$ount on the date
designated in the notice, the
:oard shall issue, by resolution,
a Qnotice of delinDuency.Q
/otice of delinDuency shall
be served on the nonIpaying
subscriber either personally or
by registered $ail, 0+G&
publication in a newspaper of
general circulation in the
province or city where the
corporation is located, once a
wee% for two (2) consecutive
wee%s. 6he notice shall state
the a$ount due on each
subscription plus accrued
interest, and the date, ti$e and
place of the sale which shall not
be less than )F days nor $ore
than AF days fro$ the date the
stoc%s beco$e delinDuent.
6he a$ount due in the
notice $ust include all
expenses publication, legal,
etc.
o /ote the notices are
"urisdictional.
4n the public auction, the
highest bidder is one who is
willing to pay the balance of the
subscription for the least nu$ber
of shares. 6he corporation will
give the highest bidder the
certificate of stoc% in the nu$ber
of his bid5 the re$aining nu$ber
will be issued a certificate of stoc%
in favor of the subscriber as fully
paid. 4f there are no bidders, the
corporation $ust bid for the
whole nu$ber of shares
regardless of how $uch the &(
has paid. &uch stoc%s will pertain
to the corporation as fully paid
treasury stoc%s.
c. Chen sale may
be questioned
/o action to recover
delinDuent stoc% sold can be
sustained upon the ground of
irregularity or defect in the notice
of sale, or in the sale itself of the
delinDuent stoc%, unless the party
see%ing to $aintain such action
first pays or tenders to the party
holding the stoc% the su$ for
which the sa$e was sold, with
interest fro$ the date of sale at
the legal rate5 and
/o such action shall
be $aintained unless it is
co$$enced by the filing of a
co$plaint within six (A) $onths
fro$ the date of sale.
4ssuance of Certificate * Hnce full
pay$ent for the stoc%s have been
tendered to the corporation in any of
the valid for$s of consideration for
the issuance of stoc%s, the purchaser
or the subscribers entitled to be
issued the corresponding certificate of
stoc% which evidences their ownership
of shares in a particular corporation
54
Apocada v ":!C
Apocada was e$ployed in 4ntans 0hil
wherein he subscribed to !CFF shares. (e
subseDuently resigned and instituted a
co$plaint with /+>C against corporation for
pay$ent of unpaid wages, CH+A, balance of
gasoline and representation expenses,
bonus. Corporation applied what is due to
Apocada the balance of his unpaid
subscription.
(3+; &etIoff is not proper. Gnpaid
subscriptions are not yet due and payable.
6hey beco$e due and payable when a call is
$ade by the corporation. 6here is no such
call yet. &etIoff against wages is not valid
under labor code.

2. Co
urt Action (@F)
,en. >ule A valid call is a prereDuisite to
liability where court action is the re$edy
chosen.
3xceptions
!. the subscription contract specifies a
date of pay$ent
2. the corp. has beco$e insolvent all
unpaid subscriptions are
i$$ediately recoverable in a court
action by the assignee in insolvency
.?elasco vs. 0oizat2
As a defense to a court action, the &(
$ay contend that the subscription was
induced by fraudulent
$isrepresentation, provided he is not
barred by ratification, or guilty of laches.
6ffect of DelinDuency
a) Any cash dividends due on
delinDuent stoc% shall first be applied to
the unpaid balance on the subscription
plus costs and expenses, while stoc%
dividends shall be withheld fro$ the
delinDuent stoc%holder until his unpaid
subscription is fully paid. (7))
b) /o delinDuent stoc% shall
be
o voted for or
o be entitled to vote or to
o representation at any
stoc%holderRs $eeting, nor shall the
holder thereof be entitled
o to any of the rights of a
stoc%holder (@!)
3xcept the right to dividends in
accordance with the provisions of
this Code, until and unless he
pays the a$ount due on his
subscription with accrued interest,
and the costs and expenses of
advertise$ent, if any.
/ote that the provision on
dividends pertain to delinDuent
stoc% hence a call $ust have
been $ade
&toc% dividends on delinDuent
shares are not applied but are
included in delinDuency sale
wherein it is liDuidated
!ights and 4bligations of Iolders of
Bnpaid $ut "on<DelinDuent 8toc%
(olders of subscribed shares not fully paid
which are not delinDuent shall have A++
the rights of a stoc%holder. (@2)
&ubscribers for stoc% shall pay to the
corporation 4/63>3&6 on all unpaid
subscriptions fro$ the date of
subscription, if so reDuired by, and at the
rate of interest fixed in the byIlaws. 4f no
rate of interest is fixed in the byIlaws,
such rate shall be dee$ed to be the legal
rate. (AA) =eneral rule: unpaid
subscriptions can not be charged with
interest /?ception: when required by the
by-laws
/o certificate of stoc% shall be issued to a
subscriber until the full a$ount of his
subscription, together with the interest
and expenses (in case of delinDuent
shares) if any is due, has been paid. (A7)
/o shares of stoc% against which the
corporation holds any unpaid clai$ shall
be transferable in the boo%s of the
corporation (A)).
Attributes of a subscription contract:
unconditional (obligation to pay must not
be sub2ect to any contingencies) and
indivisible (as to the amount and
transferability)
2ssuance of Certificate
A certificate of stoc% is the best evidence of
the rights and status of a &( (although not a
condition precedent to the acDuisition of such
rights), and is convenient for the purposes of
transfer.
Contents of a certificate
55
- certifies that the person na$ed is a
holder or owner of a stated nu$ber
of shares
- %ind of shares issued
- date of issuance
- par value, if par value shares
- signed by the proper officer of the
corp. (usually the pres., and the
sec.)
- bears the corporate seal
HverIissue of shares occurs when certificates
are issued for $ore than the nu$ber of
shares authorized by the articles. Any share
certificate w#c represents an overIissue
would be void. /o rights or liabilities can
arise therefro$ in favor or against the
holders and bona fide purchasers would have
the right to da$ages for $isrepresentation
against the corp. but can't acDuire the rights
of stoc%holders.
=eneral rule: entire subscription must be
paid first before the certificates of stock can
be issued 3artial payments are to be
applied pro rata to each share of stock
subscribed (-ava v 3eers 7ktg 0orp and
>ua 0un v 'ummers)
/?ception: in the 9alta<ar v Gingayen =ulf
/lectric 3ower 0o case) it was the practice
of the corp to issue certificates of stock to
its individual 'Fs for unpaid shares of stock
and to give full voting power to shares fully
paid
:ost or Destroyed Certificate (@))
3rocedure for re-issuance in case of loss)
stolen or destroyed certificates:
!. 6he registered owner of certificates of
stoc% or his legal representative shall file
with the corporation an affidavit setting
forth
a) the circu$stances as to how the
certificates were lost, stolen or
destroyed5
b) the nu$ber of shares represented
by each certificate, the serial
nu$bers of the certificates5
c) the na$e of the corp which issued
the sa$e5
d) such other infor$ation and evidence
which he $ay dee$ necessary.
2. 6he corp shall publish a notice in a
newspaper of general circulation published in
the place where the corp has its principal
office, once a wee% for ) consecutive wee%s at
the expense of the owner.
). After the expiration of one (!) year fro$
the date of the last publication and if no
contest has been presented, the corp shall
cancel in its boo%s the certificate of stoc% and
issue in lieu thereof new certificates of stoc%.
6he right to $a%e such contest shall be barred
after the expiration of the oneIyear period.
7. 3ven before the one year period expires,
the new certificates $ay be issued if the
registered owner files a bond or other
security, running for a period of one (!) year
for a su$ and in such for$ and with such
sureties as $ay be satisfactory to the :H;.
0rovided, that if there is a pending contest
regarding the ownership of said certificates,
the issuance of new certificates shall be
suspended until the final decision of the court.
o /ote 3xcept in cases of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no action
$ay be brought against the corp
which shall have issued certificates of
stoc% in lieu of those lost, stolen or
destroyed pursuant to the above
procedure.
Chapter XIII
DIVIDENDS AND PURCHASE OF
CORPORATION OF ITS OWN
SHARES
Form of Dividends (7))
!. CA&
( * $ost co$$on for$.
2. &6H
CP * a distribution to the stoc%holders of
the co$pany's own stoc%. 6he corporate
profits are transferred to capital stoc% and
56
shares of stoc% representing the
increase in capitalization are distributed.
These do not represent income on the
part of the 'F 6nvestment and
proportional interest in the corp remain
the same
+i$itation on the issue of
stoc% dividends
o there $ust be unissued
shares of the corporation. 6f
there are none) there must be
an increase in capital stock first)
which requires an amendment
of the A:6
o there $ust be
unrestricted retained earnings
o cannot be issued to
nonIstoc%holders even for
services rendered
). 0>
H03>6= * Although the corp. $ay have
a big a$ount of earnings available for
dividends, they $ay not all be in cash.
8ource of Dividends (7))
JGnrestricted retained earningsK (G>3)
(definition by the &3C) the undistributed
earnings of the corp. w#c have not been
allocated for any $anagerial, contractual or
legal purposes and which are free for
distribution to the &(s as dividends.
6he only fund out of w#c dividends can be
legally paid.
&hould there be any capital deficit,
subseDuent profits, if any, during succeeding
periods $ust !
st
be applied to cover the
deficit, and only the profits re$aining after
eli$inating the deficit, can be considered as
G>3.
4ividends can not be declared out of
increase in valuation of e?isting assets This
is sub2ect to fluctuation and is not yet
reali<ed
Iow Dividends are declared
Approval U voting reDuire$ent
a) Approval of :H;
b) 4n case of stoc% dividend $ust be
approved by &(s representing not less
than twoIthirds (2#)) of the outstanding
capital stoc% at a regular or special
Dividend Declaration Discretionary with
the $oard
,en. >ule -H/ there should be a distribution
of dividends to the &(s in any given year U
the for$ of such dividends are $atters
addressed to the business "udg$ent of the
:H;
3xceptions
!. -hen the decision is tainted w# bad faith,
fraud or gross negligence
2. 4f the court finds, upon co$plaint of a &(,
that a surplus was unreasonably
accu$ulated (profits accu$ulated in
excess of !FFM of the corp's paidIin
capital stoc%), it $ay order the corp. to
distribute dividends
/?ceptions:
a. when "ustified
by definite corporate expansion
pro"ects or progra$s approved by the
board of directors5 or
b. when the
corporation is prohibited under any
loan agree$ent with any financial
institution or creditor, whether local or
foreign, fro$ declaring dividends
without its#his consent, and such
consent has not yet been secured5 or
c. when it can be
clearly shown that such retention is
necessary under special
circu$stances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (7))
5hen !ight to Dividends #ests
=eneral rule as soon as the
sa$e have been lawfully declared by the
:H;, beco$es a debt owing to the &(.
/o revocation can be $ade
/?ceptions
o not yet announced or
co$$unicated to the public,
revocable before announce$ent to
&(s
o when stoc% dividends are
declared since these are not
distributions but $erely represent
changes in the capital structure, $ay
be revo%ed prior to actual issuance
>ights of transferee to
dividends * >ight to dividends vests upon
declaration so whoever owns the stoc% at
ti$e or stoc%holders of record also owns
the dividend. &ubseDuent transfer of
5
stoc% would not carry with it right to
dividends .-G/'' agreed upon by the
parties
:iability for 2llegal Dividends
;irectors not liable if unintentionally
declare illegal dividends, such as when the
directors, in declaring dividends
- rely on financial state$ents
prepared by a dishonest 33 who$
they had no reason to suspect
- rely on advice of legal counsel
;irectors liable under )! if found
negligent or in bad faith to the (!) corp5 or
(2) its creditors, if insolvent
Purchase by the Corporation of its 4wn
8hares (7!)
A stoc% corporation shall have the power
to purchase or acDuire its own shares for
a legiti$ate corporate purpose or
purposes (treasury shares) provided,
that the corporation has unrestricted
retained earnings in its boo%s to cover
the shares to be purchased or acDuired
Treasury shares are shares of stocks
which have been issued and fully paid
for) but subsequently reacquired y the
issuing corporation by purchase)
redemption) donation or through some
other lawful means (E)
Treasury shares have no voting rights
(C@)
7ay be issued as property dividends
provided that the retained earnings has
not been subsequently impaired by
losses
Trust >und doctrine * the reDuire$ent of
unrestricted retained earnings is
because subscription to the capital of a
corporation constitute a fund to which
creditors have a right to loo% for the
satisfaction of their clai$s
+egiti$ate purpose includes
a) 6o eli$inate fractional shares arising
out of stoc% dividends5
b) 6o collect or co$pro$ise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinDuency sale, and to purchase
delinDuent shares sold during said
sale5 and
c) 6o pay dissenting or withdrawing
stoc%holders entitled to pay$ent for
their shares under the provisions of
this Code (appraisal right, Cf B!).
6mproper purpose includes: raising of
price of stock by making it appear that it
is being actively traded (prohibited under
'ec $8 of the 'ecurities *egulations
0ode) and preferring some 'Fs to the
pre2udice of other 'Fs and creditors (may
be viewed as early liquidation of the
investment of some of the 'Fs)
*emedies in case of improper purchase:
a) Creditors pre"udiced by the
repurchase can go after the selling
&(s to recover what was paid to the$
b) ;irectors who were negligent or in :1
for approving the repurchase can also
be held personally responsible
c) 0re"udiced &( can also go after :H;
who approved purchase (when their
dividends are reduced, re$aining
assets can't cover debts, etc)
A corporation $ust have
unrestricted retained earnings in acDuiring
own shares except
a) shares are acDuired in the rede$ption
of redee$able shares (B)
b) shares are reIacDuired to effect a
decrease in capital stoc% approved by
the &3C ()B)
shares are reacDuired by a close corporation
pursuant to the order of the &3C acting to
arbitrate a deadloc% (!F7)
Chapter XIV
AMENDMENTS OF CHARTER
Procedure for amendment of
articles of incorporation (!A)
a) 6he a$end$ent $ust be for a legiti$ate
purpose5 and $ust be approved by a
$a"ority vote of the :oard5 and vote (in a
$eeting) or $ere written assent (no
$eeting) of 2#) of the outstanding stoc%,
or in case of a nonIstoc% corporation, by
the $e$bers of the corporation.
Hnce the a$end$ent is
approved, dissenting stoc%holders
$ay exercise their rights of appraisal
if it involved di$inishing of substantial
rights previously granted or creating a
new set of shares with priority rights.
b) 6he original and a$ended articles
together shall contain all provisions
reDuired by law to be set out in the
58
articles of incorporation. &uch articles,
as a$ended shall be indicated by
underscoring the change or changes
$ade
c) A copy thereof duly certified under oath
by the corporate secretary and a
$a"ority of the directors or trustees
stating the fact that said a$end$ent or
a$end$ents have been duly approved
by the reDuired vote of the stoc%holders
or $e$bers, shall be sub$itted to the
&ecurities and 3xchange Co$$ission.
d) 6he a$end$ent of the Articles of
4ncorporation will be effective only upon
approval of the &3C5 but should no
action be ta%en by the &3C within A
$onths fro$ the date of filing, then
auto$atically, the a$end$ent is
dee$ed effective, provided that delay is
not attributable to the corporation.
rounds for disapproving
amendment (!@)
6he &3C $ay disapprove any
a$end$ent thereto if the sa$e is not in
co$pliance with the reDuire$ents of this
Code
6he &3C shall give the incorporators a
reasonable ti$e within which to correct
or $odify the ob"ectionable portions of
the articles or a$end$ent.
6he following are grounds for such
disapproval
a) A$end$ent is not
substantially with the for$
prescribed
b) 0urpose is patently
unconstitutional, illegal, i$$oral,
contrary to govern$ent rules and
regulations
c) 6reasurer's Affidavit is false
d) 0ercentage reDuire$ent of
ownership as reDuired by the
Constitution not co$plied with
8pecial Amendments
!. 4ncrease or decrease of capital stoc%
()B)
Approval and Aoting *equirement
a) Approved by a $a"ority vote
of the board of directors
b) 6woIthirds (2#)) of the
outstanding capital stoc% shall favor
the increase or di$inution of the
capital stoc%
0ertificate of >iling
A certificate in duplicate $ust
be signed by a $a"ority of the
directors of the corporation and
countersigned by the chair$an and
the secretary of the stoc%holdersR
$eeting, setting forth
a) 6hat the reDuire$ents of
voting and notice have been
co$plied with5
b) 6he a$ount of the increase or
di$inution of the capital stoc%5
c) 4f an increase of the capital
stoc%, the a$ount of capital stoc%
or nu$ber of shares of noIpar
stoc% thereof actually subscribed,
the na$es, nationalities and
residences of the persons
subscribing, the a$ount of capital
stoc% or nu$ber of noIpar stoc%
subscribed by each, and the
a$ount paid by each on his
subscription in cash or property,
or the a$ount of capital stoc% or
nu$ber of shares of noIpar stoc%
allotted to each stoc%Iholder if
such increase is for the purpose
of $a%ing effective stoc% dividend
therefor authorized5
d) 6he a$ount of stoc%
represented at the $eeting5 and
e) 6he vote authorizing the
increase or di$inution of the
capital stoc%
Hne of the duplicate
certificates shall be %ept on file in the
office of the corporation and the other
shall be filed with the &ecurities and
3xchange Co$$ission and attached
to the original articles of
incorporation.
Approval of '/0
Any
increase or decrease in the capital
shall reDuire prior approval of the
&ecurities and 3xchange Co$$ission.
;ecr
ease of capital stoc% /o decrease of
the capital stoc% shall be approved by
the Co$$ission if its effect shall
pre"udice the rights of corporate
creditors
/ffectivity
1ro$ and after approval by the &ecurities
and 3xchange Co$$ission and the
issuance by the Co$$ission of its
5!
certificate of filing, the capital stoc% shall
stand increased or decreased
Treasurer1s Affidavit:
6he &ecurities and 3xchange
Co$$ission shall not accept for filing
any certificate of increase of capital
stoc% unless acco$panied by the sworn
state$ent of the treasurer of the
corporation lawfully holding office at the
ti$e of the filing of the certificate,
showing that at least twentyIfive (2CM)
percent of such increased capital stoc%
has been subscribed and that at least
twentyIfive (2CM) percent of the
a$ount 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 eDual to twentyIfive (2CM)
percent of the subscription
Appraisal right (B!Y!)
Appraisal right $ay be exercised where
the increase in capital stoc% results in
the creation of shares with preferences
superior to those of existing ones.
-ote: 3roposing amendments is a way
of easing out the minority stockholders
because it compels them to e?ercise
their appraisal rights
2. Change in corporate ter$ ()@)
Approval and Aoting *equirement
a) Approved by a $a"ority vote of the
board of directors or trustees and
b) >atified at a $eeting by the
twoIthirds (2#)) of the outstanding
capital stoc% or by at least twoI
thirds (2#)) of the $e$bers in case
of nonIstoc% corporations.
Appraisal right
=3& for extension of corporate ter$
()@)
=3& for shortening and extension
(B!)
Chapter XV
TRANSFER OF SHARES
1. 8anner and 3ffectivity of
6ransfer
6ndorsement and delivery
&hares of stoc%
$ay be transferred as follows (A))
a) delivery of the certificate or
certificates and
b) indorsed by the owner or his
attorneyIinIfact or other person
legally authorized to $a%e the
transfer
!ural $an% of 8alinas v CA
Cle$ente, 0resident of >ural :an% of &alinas
and owner of shares in said corporation
executed a &pecial 0ower of Attorney to his
wife 8elania giving her full power to sell or
otherwise dispose of shares of stoc% of the
:an%. :efore death of Cle$ente, 8elania,
pursuant to said &0A, executed deed of
Assign$ent of for$er's shares. After death
of Cle$ente, 8elania presented to ban% deed
of assign$ent for registration which the
ban% refused. 8anda$us filed by 8elania to
co$pel ban% to register the transfer.
(3+; 6ransfer before death valid, stoc% not
yet part of estate. &hares of stoc% are
personal property and $ay be transferred by
delivery. >egistration in corporate boo%s is
not necessary. 6he transfer effected in this
case is valid. 6he corporation $ay not
i$pose any restriction on such transfer. 6he
right of transferee#assignee to have stoc%s
transferred to his na$e is inherent right,
duty of the corporation to register the
transfer is $inisterial.
!azon v 2AC
Chudian was issued !,CFF shares at 3 >azon
4nc with the corresponding stoc% certificate
no ). &aid stoc% certificates were delivered
to 3nriDue >azon allegedly because it was
the latter who paid for all the subscription on
the shares of stoc% in defendant corporation
with the understanding that has was the
owner of said shares of stoc% and was to
have possession until such ti$e as he was
paid by other no$inal
incorporators#stoc%holders. +ater on, parties
delivered it for deposit with ban% under the
"oint custody of the parties. Ad$inistrator of
the estate of Chudian filed a co$plaint
against 3nriDue >azon et al praying that the
said stoc% certificates be delivered to estate
of Chudian along with all cash and stoc%
dividends and preIe$ptive rights accruing
thereto.
60
(3+; Chudian is still owner
a) &hares of stoc% is transferred by
delivery and endorse$ent of the
stoc% certificate
b) &uch $ode of transfer is not
co$plied with in this case
c) 4n the boo%s of the corporation,
Chudian is still the owner of the
stoc%s. (e was even elected
$e$ber of the board which proves
that he is a stoc%holder
d) Hne who clai$s ownership should
show that the sa$e was transferred
to hi$ in accord with the valid $ode
of transfer. 6his petitioner failed to
show
3ndorse$ent is a $andatory reDuire$ent of
law for an effective transfer
;an v 86C
Alfonso 6an is owner of 7FF shares in
?isayan 3ducational &upply Corp evidenced
by certificate /o. 2. Alfonso transferred CF
shares to Angel. Certificate /o. 2 was
cancelled and Certificate /o. A was issued to
Angel and Certificate /o. B was issued to
Alfonso. (owever, Alfonso did not $a%e the
proper endorse$ent and did not $a%e
delivery of certificate no. 2. +ater on,
Alfonso 6an elected to withdraw fro$ the
corporation. 4n exchange for his shares, he
received stoc%s in trade. Certificate /o. B
was later on cancelled due to above. After
several years, Alfonso 6an filed a case with
Cebu &3C Duestioning the cancellation of his
stoc% certificates despite nonIendorse$ent
and lac% of delivery
(3+; ;elivery and endorse$ent under
&ection A) of the corporation code is not
$andatory because of the use of the word
$ay. ;elivery is not essential where it
appears that the persons sought to be held
as stoc%holders are officers of the
corporation and have custody of the stoc%
boo% as in this case. 6o hold that
cancellation of certificate of stoc% of Alfonso
is null and void because of lac% of delivery
and endorse$ent of $other certificate of
stoc% no. 2 which was deliberately withheld
is to prescribe restrictions on the transfer of
stoc% in violation of corporation law
*egistration
0urpose of registration
a" enable the
transferee to exercise all the
rights of a stoc%holder
)" to infor$
the corporation of any change in
share ownership so that it can
ascertain the persons (a) entitled
to the rights (b) sub"ect to the
liabilities of a &(
c" until
registration is acco$plished, the
transfer, though valid between
the parties, cannot be effective
against the corporation
3ffect of lac% of registration
a) transferee cannot vote
b) transferee cannot be voted
for
c) an outsider
d) cannot prevail over rights of a
subseDuent attaching creditor
e) not entitled to dividends
f) stoc%holder on record has the
right to participate in $eetings.
-o registration of transfer of unpaid
shares
4f there is any
unpaid balance on the stoc%holder's
subscription there can be no stoc%
certificate on which indorse$ent can
be $ade. 6he shares are thus not
transferable on the corporate boo%s.
(A))
(owever, the
stoc%holder can still transfer his
interest in the corporation by way of a
deed of assign$ent.
8unset #iew Condominium Corp v
Campos
&unset ?iew Condo$iniu$ corporation filed
suit against AguilarI:ernares >ealty and +i$
&iu +eng for collection of assess$ents levied
on their respective condo$iniu$ units which
they bought on install$ents and had not yet
fully paid
(3+; >espondents not shareholders of
condo$iniu$ corporation because they are
not yet fully paid
a) &ec C Condo$iniu$ Act * shareholding
in a condo$iniu$ corporation will be
conveyed only in a proper case
b) &ec 7 of Condo$iniu$ Act leaves to
8aster ;eed the deter$ination of when
shareholding will be transferred to
purchaser of a unit
c) 8aster ;eed provides that only owner of
unit is a shareholder and that ownership
of unit is acDuired by purchaser sub"ect
to conditions and ter$s of the
instru$ent conveying the unit to such
purchaser.
61
d) ;eed of Conveyance provide that
ownership is conveyed only upon full
pay$ent of purchase price
e) &ec !F Condo$iniu$ Act * 8e$bership
in Condo$iniu$ corporation shall not be
transferable separately fro$
condo$iniu$ unit of which it is an
appurtenance
*emedy if registration refused *
6ransferee $ay petition the court for a
writ of $anda$us to co$pel the
corporation to do so
!ivera v Florendo &'(C3*
>ivera is the registered owner of 7BEE
shares of stoc% of 1u"iya$a (otel U
>estaurant 4nc. 4t is alleged that one
A%asa%o is the real owner of the 7BEE shares
under >ivera's na$e, and as such owner he
sold 2CCF shares to 8ilagros. >ivera refused
to indorse the certificates to 8ilagros despite
the assurance he gave to 8ilagros before the
sale was consu$$ated. 6he other
incorporators also sold their shares to
8ilagros and one <ureidini. As regards these
transfers, the certificates were properly
indorsed by their respective owners.
8ilagros and <ureidini atte$pted to have all
the certificates registered in their na$es but
the corporation refused to do so.
(3+; 8anda$us will not lie where the
shares of stoc% are not even indorsed by the
registered owner >ivera who is specifically
resisting the registration thereof in the boo%s
of the corp. 3ven the shares of stoc% sold by
the other incorporators cannot be also the
sub"ect of $anda$us on the strength of the
$ere indorse$ent of the supposed owners of
said shares in the absence of express
instructions fro$ the$. 6he right of the
parties will have to be threshed out in an
ordinary action.
2. >estrictions on 6ransfer5
Close Corporations
=eneral *ule: >ree transferability of
shares
&hares are personal property * &hares
of stoc% so issued are personal property
and $ay be transferred (A))
/?ception: 6n close corporations
Considering the special circu$stances
attending a close corporation (e.g. for$ed
by persons who %now each other well,
thus they would want to choose the
persons who will be allowed in their
group), it is "ustifiable and even
i$perative for its stoc%holders to protect
the$selves fro$ future conflicts by
placing restrictions on the right of each
one of the$ to transfer his shares to an
outsider.
Aalidity of restrictions on transfer of
shares (EB)
>estrictions on the right to
transfer shares $ust appear in the
articles of incorporation and in the byI
laws as well as in the certificate of
stoc%5 otherwise, the sa$e shall not
be binding on any purchaser thereof
in good faith.
>estrictions shall not be
$ore onerous than granting the
existing stoc%holders or the
corporation the option to purchase the
shares of the transferring stoc%holder
with such reasonable ter$s,
conditions or period stated therein. 4f
upon the expiration of said period, the
corporation fails to exercise the option
to purchase, the transferring
stoc%holder $ay sell his shares to any
third person.
0resu$ptions
a. 4f the stoc% certificate
CH/&04CGHG&+= shows the
restriction, the purchaser or
transferee is conclusively
presu$ed to have notice of the
restriction, provided this appears
in the AH4. (e cannot prove that
he acted in good faith.
-here a conclusive presu$ption
of notice arises, the corporation
$ay, at its option, refuse to
register the transfer, unless
(!) all the stoc%holders have
consented to the transfer, or
(2) the AH4 have been properly
a$ended to re$ove the
restriction.
b. 4f it appears in the certificate, but
/H6 CH/&04CGHG&+=, then
although he $ay be presu$ed to
62
have notice of the restriction, he
can prove the contrary.
3. Gnauthorized transfers
a. certificates
indorsed in blan% * where the
stoc%holder indorses his certificate
in blan% in such a $anner as to
clothe whoever $ay be in
possession of it with apparent
authority to deal with the shares as
the latter's own, he will be estopped
fro$ clai$ing the shares as against
a bonafide purchaser. 6his is called
the theory of DuasiInegotiability
b. forged
transfers * if the corporation should
issue a new certificate pursuant to a
forged transfer, it incurs no liability
to the person in whose favor it
issued it and $ay de$and its return
for cancellation. 4t is the duty of the
purchaser to deter$ine that the
indorse$ent was genuine. :ut with
respect to a subseDuent purchaser
in good faith and for value, the
corporation is estopped fro$
denying the validity of the newly
issued certificate because by issuing
such, it has represented that the
person na$ed therein is a
stoc%holder of the corporation.
3xcept where recognition of the
original and new subscriber will
result to an overissue of shares.
6he new &( would now have right to
da$ages against the corporation
and the latter against those who
$ade false representations.
4. Collateral 6ransfers
&ub"ect to collateral transfers
&hares of stoc% being personal
property, $ay be the sub"ect $atter
of
a. pledge or
b. chattel $ortgage.
>egistration in corporate boo%s
not necessary &uch collateral
transfers are not covered by &ec. A)
of the Code since such provision
applies only to absolute transfer.
6hus, the registration in the
corporate boo%s of pledges and
chattel $ortgages of shares
CA//H6 have any legal effect.
:im ;ay v CA
&y ,uio% and &y +i$ pledged their shares in
,o 1ay and Co to +i$ 6ay. 6hey endorsed
their respective share in blan% and delivered
the sa$e to +i$ 6ay. &y ,uio% and &y +i$
failed to pay hence +i$ 6ay went to the
corporate secretary to as% the registration of
the shares in his na$e. Corporate secretary
refused. +i$ 6ay instituted an action for
$anda$us at &3C to co$pel corporate
secretary to register.
(3+; Corporate's secretary cannot be
co$pelled to record transfer. 6he duty of a
corporate secretary to record transfers of
stoc%s is $inisterial. (owever, he cannot be
co$pelled to do so when the transferees title
to said shares has no pri$a facie validity or
is uncertain. 8anda$us will not issue to
establish a right but only to enforce one
already established. +i$ 6ay failed to
establish a legal right to have the shares
registered in his na$e. +i$ 6ay failed to
establish a legal right. (e is not owner of
the shares without foreclosure and purchase
at auction. (e is $erely a pledgee.
Attach$ent of shares
arcia vs. Jomouad, ! '00(3(, Jan -3,
-)))
1AC6& ;ico lost a collection case and the
0roprietary Hwnership Certificate (0HC) in the
Cebu Country Club in his na$e was levied on
and scheduled for public auction. ,arcia
clai$ed ownership over the certificate and
filed the action for in"unction to en"oin the
auction. ;ico had executed a ;eed of
6ransfer in favor of petitioner which was
furnished to 6he Club but the transfer was not
recorded in the boo%s of the Club because
petitioner failed to present proof of pay$ent
of the reDuisite capital gains tax.
(3+; 6he transfer of the sub"ect certificate
$ade by ;ico to petitioner was not valid as to
the "udg$ent creditors, as the sa$e still stood
in the na$e of ;ico, the "udg$ent debtor, at
the ti$e of the levy on execution. 4n addition,
as correctly ruled by the CA, the entry in the
$inutes of the $eeting of the ClubRs board of
directors noting the resignation of ;ico as
proprietary $e$ber thereof does not
constitute co$pliance with &ection A) of the
Corporation Code. &aid provision of law strictly
reDuires the recording of the transfer in the
boo%s of the corporation, and not elsewhere,
to be valid as against third parties.
63
Chapter XVI
DISSOLUTION
!. Causes of
dissolution
a. 3xpiration of
original, extended or shortened ter$
6h
e ter$ within which the
corporation is to exist (which
cannot be $ore than CF years)
$ust be stated in its AH4. Hnce
such period expires, the
corporation is auto$atically
dissolved without any other
proceeding and it cannot
thereafter be considered a de
facto corporation.
A
voluntary dissolution $ay be
effected by a$ending the
articles of incorporation to
shorten the corporate ter$
pursuant to the provisions of the
Code. Gpon approval of the
a$ended articles of
incorporation or the expiration
of the shortened ter$, as the
case $ay be, the corporation
shall be dee$ed dissolved
without any further proceedings
(!2F)
b. ?oluntary
dissolution when no creditors are
affected (!!B)
;is
solution $ay be effected by
$a"ority vote of the board of
directors or trustees, and by a
resolution duly adopted by the
affir$ative vote of the
stoc%holders owning at least
outstanding capital stoc% or of
at least twoIthirds (2#)) of the
$e$bers.
8e
eting to be held upon call of the
directors or trustees after
publication of the notice of ti$e,
place and ob"ect of the $eeting
for three ()) consecutive wee%s
in a newspaper published in the
place where the principal office
of said corporation is located5 and
if no newspaper is published in
such place, then in a newspaper
of general circulation in the
0hilippines, after sending such
notice to each stoc%holder or
$e$ber either by registered $ail
or by personal delivery at least
thirty ()F) days prior to said
$eeting.
A
copy of the resolution authorizing
the dissolution shall be certified
by a $a"ority of the board of
directors or trustees and
countersigned by the secretary of
the corporation. 6he &ecurities
and 3xchange Co$$ission shall
thereupon issue the certificate of
dissolution.
c. ?oluntary
dissolution when creditors are
affected (!!E)
0etiti
on for dissolution shall be filed
with the &ecurities and 3xchange
Co$$ission.
6he
petition shall be signed by a
$a"ority of its board of directors
or trustees or other officers
having the $anage$ent of its
affairs, verified by its president or
secretary or one of its directors or
trustees, and shall set forth all
clai$s and de$ands against it,
and that its dissolution was
resolved upon by the affir$ative
vote of the stoc%holders
stoc% or by at least twoIthirds
(2#)) of the $e$bers at a
$eeting of its stoc%holders or
$e$bers called for that purpose.
4f
the petition is sufficient in for$
and substance, the Co$$ission
shall, by an order reciting the
purpose of the petition, fix a date
on or before which ob"ections
thereto $ay be filed by any
person, which date shall not be
less than thirty ()F) days nor
$ore than sixty (AF) days after
the entry of the order. :efore
such date, a copy of the order
shall be published at least once a
wee% for three ()) consecutive
64
wee%s in a newspaper of
general circulation published in
the $unicipality or city where
the principal office of the
corporation is situated, or if
there be no such newspaper,
then in a newspaper of general
circulation in the 0hilippines,
and a si$ilar copy shall be
posted for three ()) consecutive
wee%s in three ()) public places
in such $unicipality or city.
Gp
on five (C) dayRs notice, given
after the date on which the right
to file ob"ections as fixed in the
order has expired, the
Co$$ission shall proceed to
hear the petition and try any
issue $ade by the ob"ections
filed5 and if no such ob"ection is
sufficient, and the $aterial
allegations of the petition are
true, it shall render "udg$ent
dissolving the corporation and
directing such disposition of its
assets as "ustice reDuires, and
$ay appoint a receiver to collect
such assets and pay the debts
of the corporation
d. ;issolution by
$inority in close corporations
?oluntary dissolution when creditors
are affected (!FC)
Any stoc%holder of a close
corporation $ay, by written petition
to the &ecurities and 3xchange
Co$$issions, co$pel the dissolution
of such corporation whenever any of
the acts of the directors, officers or
those in control of the corporation is
illegal, or fraudulent, or dishonest,
or oppressive or unfairly pre"udicial
to the corporation or any
stoc%holder or whenever corporate
assets are being $isapplied or
wasted.
e. 1ailure to
organize and co$$ence business5
cessation of business for C years
(22)
1ailure to for$ally organize
and co$$ence the transaction
of its business or construction of
its wor%s within two years its
corporate powers shall cease
and the corporation is dee$ed
dissolved
o 6ransacting
business * i$plies a
continuity of acts or dealings
in the acco$plish$ent of the
purpose for which the
corporation was for$ed
o 1or$ally
organize includes not only the
adoption of the byIlaws but
also the establish$ent of the
body which will ad$inister
the affairs of the corporation
and exercise its powers
Co$
$enced transaction of its
business but subseDuently
beco$es continuously inoperative
for a period of at least five
years ground for suspension or
revocation of its corporate
franchise
f. 4nvoluntary
dissolution
*evocation of certificate of
registration by the '/0 (!2!)
A corporation $ay be
dissolved by the &ecurities and
3xchange Co$$ission upon filing
of a verified co$plaint and after
proper notice and hearing on
grounds provided by existing
laws, rules and regulations
,rounds for revocation
(&ec. 2 0; EF2IA)
o 1raud in procuring its
certificate of registration
o &erious $isrepresentation as
to what the corporation can
or is doing to the great
pre"udice of or da$age to the
general public
o >efusal to co$ply or defiance
of any lawful order of the
Co$$ission restraining
co$$ission of acts which
would a$ount to a grave
violation of its franchise
o Continuous inoperation for a
period of at least five years
o 1ailure to file byIlaws within
the reDuired period
o 1ailure to file reDuired reports
in appropriate for$s as
deter$ined by the
Co$$ission within the
prescribed period
Hther grounds
65
o &ec. !77 :0 AB *
?iolation by the corporation
of any provision of the
Corporation Code
o &ec. !F7 :0 AB * 4n
case of a deadloc% in a close
corporation, and the &3C
dee$s it proper to order the
dissolution of the
corporation as the only
practical solution to the
dispute
Nuo Carranto 3roceedings (&ec. 2,
>ule AA >HC)
-hen it has
offended against a provision of
an Act for its creation and
renewal
-hen it has
forfeited its privileges and
franchises by nonuser
-hen it has
co$$itted or o$itted an act
which a$ounts to a surrender of
its corporate rights, privileges or
franchise
-hen it has
$isused a right, privilege, or
franchise conferred upon it by
law or when it has exercised a
right, privilege or franchise in
contravention of law
2. 3ffects of
dissolution5 -indingIGp and +iDuidation
a. +oss of "uridical personality
corporation loses its
"uridical personality and can no
longer lawfully continue its
business except for the purpose
of winding up
cannot even be a
de facto corporation, hence
sub"ect to collateral attac%
cannot enter into
new contracts which would have
the effect of continuing the
business
). 3xecutory contracts
/o right or re$edy
in favor of or against any
corporation, its stoc%holders,
$e$bers, directors, trustees, or
officers, nor any liability
incurred by any such
corporation, stoc%holders,
$e$bers, directors, trustees, or
officers, shall be re$oved or
i$paired either by the subseDuent
dissolution of said corporation or
by any subseDuent a$end$ent or
repeal of this Code or of any part
thereof. (!7C)
6he prevailing view is
that executory contracts are not
extinguished. (owever, so$e
authorities $a%e an exception of
contracts for personal services
such as e$ploy$ent contracts of
officers and e$ployees where the
dissolution is involuntary or the
result of $erger or consolidation
in which case the contracts are
dee$ed ter$inated.
c. -indingIGp and +iDuidation
;efinition 6he winding up and
turning assets of corporation into
cash for distribution
A liDuidation proceeding is a
proceeding in re$ so that all
other interested persons whether
%nown to the parties or not $ay
be bound by such proceedings
1or how long $ay the liDuidation
of a corporation be underta%enS
o 3very corporation whose
charter expires by its own
li$itation or is annulled by
forfeiture or otherwise, or
whose corporate existence for
other purposes is ter$inated
in any other $anner, shall
nevertheless be continued as
a body corporate for three ())
years after the ti$e when it
would have been so dissolved
o (owever, in case the
corporate assets are
conveyed to a trustee or a
receiver appointed by the
&3C, the three year li$itation
will not apply
o Although the three year
period $ay have expired, it
does not necessarily follow
that a creditor who was
unable to collect his clai$
before three years would lose
is rights. 4t is still possible
for hi$ to sue the trustee, if
there be one, or if the
circu$stances so warrant, to
follow the assets in the hands
66
of the stoc%holders who nay
have received the sa$e as
liDuidating dividends
-hat could and should be done
during the period of liDuidationS
o 1or the purpose of
prosecuting and defending
suits by or against it and
enabling it to settle and
close its affairs, to dispose
of and convey its property
and to distribute its assets,
but not for the purpose of
continuing the business for
which it was established.
o 3xcept by decrease of
capital stoc% and as
otherwise allowed by this
Code, no corporation shall
distribute any of its assets
or property except upon
lawful dissolution and after
pay$ent of all its debts and
liabilities.
-hat happens if an asset cannot
be distributed to the person
entitled to itS
o Gpon the winding up of the
corporate affairs, any asset
distributable to any creditor
or stoc%holder or $e$ber
who is un%nown or cannot
be found shall be escheated
to the city or $unicipality
where such assets are
located.
-ho $ay underta%e the
liDuidation of a corporate
(8ethods of +iDuidation)S
o :y the corporation itself
through the board of
directors * the board of
directors serve as trustees
o Conveyance of all corporate
assets to trustees who will
ta%e charge of the
liDuidation. 1ro$ and after
any such conveyance by the
corporation of its property
in trust for the benefit of its
stoc%holders, $e$bers,
creditors and others in
interest, all interest which
the corporation had in the
property ter$inates, the
legal interest vests in the
trustees, and the beneficial
interest in the stoc%holders,
$e$bers, creditors or other
persons in interest.
o +iDuidation by a receiver who
$ay have been appointed by
the &3C upon its decreeing
the dissolution of the
corporation. )Iyear period
does not apply because the
corporation is substituted by
the receiver. (owever, the
$ere appoint$ent of a
receiver, without anything
$ore does not result in the
dissolution of the corporation
nor bar it fro$ the existence
of its corporate rights
A corporation cannot
distribute any of its assets or
property except upon lawful
dissolution and only after
pay$ent of all its debts and
liabilities, after which the
re$aining assets $ust be
distributed to the stoc%holders in
proportion to their interest in the
corporation.
3xceptions
decrease in c#s resulting
in a surplus which can then
be distributed to stoc%holders
provided no creditors are
pre"udiced
as otherwise allowed by
the code
Appraisal right
;eadloc% in a close
corporation
&( of a close corporation
$ay co$pel corporation to
buy his shares at fair value
Corporation repurchases
shares for any legiti$ate
corporate purpose
Corporation validly
distributes dividend
C:6+6";6, 6;. A:. v. CA1
6he ter$ination of the life of a "uridical
entity does not by itself cause the extinction
or di$inution of the rights and liabilities of
such entity, nor those of its owners and
creditors. 4f the threeIyear extended life has
expired without a trustee or receiver having
been expressly designated by the
corporation within that period, the board of
directors (or trustees) itself, $ay be
per$itted to so continue as QtrusteesQ by
legal i$plication to co$plete the corporate
liDuidation. &till in the absence of a board of
directors or trustees, those having any
6
pecuniary interest in the assets, including
not only the shareholders but li%ewise the
creditors of the corporation, acting for and in
its behalf, $ight $a%e proper representation
with the &ecurities and 3xchange
Co$$ission, which has pri$ary and
sufficiently broad "urisdiction in $atters of
this nature, for wor%ing out a final
settle$ent of the corporate concerns.
;issolved corporation's capacity to sue
!eburiano vs. CA, ! ')-(39, Jan -',
'(((
Corporation a$ended its Ao4 to shorten
its corporate existence while the case was
pending in court. &3C approved the
a$end$ent but the trial court was not
notified. After the trial court rendered
"udg$ent against corporation, it filed $otion
to Duash writ of execution because the
corporation lac%ed "uridical personality to
sue or be sued.
&C held that it was erroneous to contend
that a dissolved and nonIexisting corporation
could no longer be represented by a lawyer
and conco$itantly a lawyer could not appear
as counsel for a nonIexisting "udicial person.
A corporation that has a pending action and
which cannot be ter$inated within the threeI
year period after its dissolution is authorized
under &ec. @B .now !222 of the Corporation
+aw to convey all its property to trustees to
enable it to prosecute and defend suits by or
against the corporation beyond the threeI
year period. Although private respondent
did not appoint any trustee, yet the counsel
who prosecuted and defended the interest of
the corporation in the instant case and who
in fact appeared in behalf of the corporation
$ay be considered a trustee of the
corporation at least with respect to the
$atter in litigation only.
Chapter XVII
CORPORATE COM!INATIONS
!. +erger
and Consolidation
a. Chat is a merger ;
consolidationH
+erger
o Hne of the constituent
corporations re$ains as an
existing "uridical person,
whereas the other corporation
shall cease to exist. 8erger
is the disappearance of one of
the corporations with the
other corporation acDuiring all
the assets, rights of action,
and assu$ing all the liabilities
of the disappearing
corporation.
o Hf course, there is an
arrange$ent as to the shares
of stoc%s that will be issued
to the for$er stoc%holders of
the two (2) corporations
which were $erged. &aid
stoc%holders are now
stoc%holders of the
corporation which survives.
6he proportion between the
two (2) corporations will be
the basis of the shares of
stoc%s that will be issued to
the stoc%holders under the
surviving corporation.
Consolidation
o 4f there is consolidation, there
will be disappearance of both
the constituent corporations
with the e$ergence of a new
corporate entity which shall
obtain all the assets of the
disappearing corporations,
and li%ewise shall assu$e all
their liabilities.
o Also, the nu$ber of shares
that will be issued to each of
the stoc%holders under the
new corporation is
deter$ined by the ration
between the assets of the two
(2) corporations.
). Chat is a
Dconstituent corporationEH A
Dconsolidated corporationEH
6wo or $ore corporations $ay $erge
into a single corporation which shall
be one of the constituent corporations
or $ay consolidate into a new single
corporation which shall be the
consolidated corporation.
c. Chat corporate
approvals are requiredH (@@)
68
!. Approval by $a"ority vote of
each of the board of directors or
trustees of the constituent
corporations of the plan of
$erger or consolidation.
2. Approval by the stoc%holders or
$e$bers of each of such
corporations. 6he affir$ative
vote of stoc%holders
stoc% of each corporation in the
case of stoc% corporations or at
least twoIthirds (2#)) of the
$e$bers in the case of nonI
stoc% corporations shall be
necessary for the approval of
such plan
). /otice of such $eetings shall be
given to all stoc%holders or
$e$bers of the respective
corporations, at least two (2)
wee%s prior to the date of the
$eeting, either personally or by
registered $ail. &aid notice shall
state the purpose of the
$eeting and shall include a copy
or a su$$ary of the plan of
$erger or consolidation.
7. Any dissenting stoc%holder in
stoc% corporations $ay exercise
his appraisal right in accordance
with the Code. 0rovided, that if
after the approval by the
stoc%holders of such plan, the
board of directors decides to
abandon the plan, the appraisal
right shall be extinguished.
C. A$end$ent to the plan of
$erger or consolidation $ay be
$ade by approved of the
$a"ority vote of the respective
boards of directors or trustees
of all the constituent
corporations and ratified by the
affir$ative vote of stoc%holders
stoc% or of twoIthirds (2#)) of
the $e$bers of each of the
constituent corporations. &uch
plan, together with any
a$end$ent, shall be considered
as the agree$ent of $erger or
consolidation.
d. Chat is a plan of
merger or consolidationH (@A)
6he board of directors or trustees of
each corporation, party to the
$erger or consolidation, shall approve
a plan of $erger or consolidation
setting forth the following
6he na$es of the corporations
proposing to $erge or
consolidate, hereinafter referred
to as the constituent
corporations5
6he ter$s of the $erger or
consolidation and the $ode of
carrying the sa$e into effect5
A state$ent of the changes, if
any, in the articles of
incorporation of the surviving
corporation in case of $erger5
and, with respect to the
consolidated corporation in case
of consolidation, all the
state$ents reDuired to be set
forth in the articles of
incorporation for corporations
organized under this Code5 and
&uch other provisions with
respect to the proposed $erger or
consolidation as are dee$ed
necessary or desirable.
e. Chat are articles
of merger or consolidationH (@B)
After the approval by the
stoc%holders or $e$bers, articles
of $erger or articles of
consolidation shall be executed by
each of the constituent
corporations
!) to be signed by the president
or viceIpresident and
2) certified by the secretary or
assistant secretary of each
corporation
6he articles of $erger or
consolidation shall set forth
!) 6he plan of the $erger or the
plan of consolidation5
2) As to stoc% corporations, the
nu$ber of shares
outstanding, or in the case of
nonIstoc% corporations, the
nu$ber of $e$bers5 and
)) As to each corporation, the
nu$ber of shares or
$e$bers voting for and
against such plan,
respectively.
0. Chen is the
effectivity of merger or consolidationH
3ffectivity Gpon issuance by the
&3C of the certificate of $erger
and consolidation
6!
6he articles of $erger or of
consolidation shall be sub$itted
to the &ecurities and 3xchange
Co$$ission in Duadruplicate for
its approval.
4n the case of $erger or
consolidation of ban%s or
ban%ing institutions, building
and loan associations, trust
co$panies, insurance
co$panies, public utilities,
educational institutions and
other special corporations
governed by special laws, the
favorable reco$$endation of
the appropriate govern$ent
agency shall first be obtained.
4f the Co$$ission is satisfied
that the $erger or consolidation
of the corporations concerned is
not inconsistent with the
provisions of this Code and
existing laws, it shall issue a
certificate of $erger or of
consolidation, at which ti$e the
$erger or consolidation shall be
effective.
4f, upon investigation, the
Co$$ission has reason to
believe that the proposed
$erger or consolidation is
contrary to or inconsistent with
the provisions of this Code or
existing laws, it shall set a
hearing to give the corporations
concerned the opportunity to be
heard. -ritten notice of the
date, ti$e and place of hearing
shall be given to each
constituent corporation at least
two (2) wee%s before said
hearing. 6he Co$$ission shall
thereafter proceed as provided
in this Code.
g. Chat are the
effects of a merger or consolidationH
(BF)
!) 6he constituent corporations
shall beco$e a single
corporation which
4n case of $erger, shall be
the surviving corporation
designated in the plan of
$erger5 and
4n case of consolidation,
shall be the consolidated
corporation designated in the
plan of consolidation5
2) 6he separate existence of the
constituent corporations shall
cease, except that of the
surviving or the consolidated
corporation5
)) 6he surviving or the consolidated
corporation shall possess all the
rights, privileges, i$$unities and
powers and shall be sub"ect to all
the duties and liabilities of a
corporation organized under this
Code5
7) 6he surviving or the consolidated
corporation shall thereupon and
thereafter possess
all the rights, privileges,
i$$unities and franchises of
each of the constituent
corporations5 and
all property, real or personal,
and all receivables due on
whatever account, including
subscriptions to shares and
other choses in action, and all
and every other interest of,
or belonging to, or due to
each constituent corporation
these shall be dee$ed
transferred to and vested in
such surviving or consolidated
corporation without further
act or deed5 and
C) 6he surviving or consolidated
corporation shall
be responsible and liable for
all the liabilities and
obligations of each of the
constituent corporations in
the sa$e $anner as if such
surviving or consolidated
corporation had itself incurred
such liabilities or obligations5
and
any pending clai$, action or
proceeding brought by or
against any of such
constituent corporations $ay
be prosecuted by or against
the surviving or consolidated
corporation.
6he rights of creditors or liens
upon the property of any of
such constituent corporations
shall not be i$paired by such
$erger or consolidation
0
A884C2A;6D $A"K v. CA
Hrdinarily, in the $erger of two or $ore
existing corporations, one of the co$bining
corporations survives and continues the
co$bined business, while the rest are
dissolved and all their rights, properties and
liabilities are acDuired by the surviving
corporation. Although there is dissolution of
the absorbed corporations, there is no
winding up of their affairs or liDuidation of
their assets, because the surviving
corporation auto$atically acDuires all their
rights, privileges and powers, as well as their
liabilities.
h. 3rocedure for
7erger or 0onsolidation
!) :oard of each corporation shall
draw up a plan of $erger or
consolidation, setting forth
na$es of corporations
involved (constituent
corporations)
ter$s and $ode of carrying
it out
state$ent of changes, if
any, in the present articles
of surviving corporation5 or
the articles of the new
corporation to be for$ed in
case of consolidation.
2) 0lan for $erger or consolidation
shall be approved by $a"ority
vote of each board of the
concerned corporations at
separate $eetings.
)) 6he sa$e shall be sub$itted for
approval by the stoc%holders or
$e$bers of each such
corporation at separate
corporate $eetings duly called
for the purpose. /otice should
be given to all stoc%holders or
$e$bers at least two (2) wee%s
prior to date of $eeting, either
personally or by registered $ail.
7) Affir$ative vote of 2#) of the
outstanding capital stoc% in case
of stoc% corporations, or 2#) of
the $e$bers of a nonIstoc%
corporation shall be reDuired.
C) ;issenting stoc%holders $ay
exercise the right of appraisal.
:ut if :oard abandons the plan
to $erge or consolidate, such
right is extinguished.
A) Any a$end$ent to the plan
$ust be approved by the sa$e
votes of the board $e$bers of
trustees and stoc%holders or
$e$bers reDuired for the original
plan.
@) After such approval, Articles of
8erger or Articles of Consolidation
shall be executed by each of the
constituent corporations, signed
by president or ?0 and certified
by secretary or assistant
secretary, setting forth
plan of $erger or
consolidation
in stoc% corporation, the
nu$ber of shares
outstanding5 in nonIstoc%,
the nu$ber of $e$bers
as to each corporation,
nu$ber of shares or
$e$bers voting for and
against such plan,
respectively
B) 1our copies of the Articles of
8erger or Consolidation shall be
sub$itted to the &3C for
approval. &pecial corporations
li%e ban%s, insurance co$panies,
building and loan associations,
etc., need the prior approval of
the respective govern$ent
agency concerned.
E) 4f &3C is satisfied that the $erger
or consolidation is legal, it shall
issue the Certificate of 8erger or
the Certificate of 4ncorporation,
as the case $ay be.
!F) 4f the &3C is not satisfied, it shall
set a hearing, giving due notice to
all the corporations concerned.
(@AI@E)
i. Gimitation on the
right to merge ; consolidate
!) &hould not create $onopolies
2) &hould not eli$inate free and
healhty co$petition
)) Act )C!B &ec 2F inhibits illegal
co$binations
7. Appraisal right *
any dissenting stoc%holder $ay
exercise his appraisal right under the
conditions provided in the Code
2. 8ale of
substantially all assets (7F)
1
a. *estrictions: &ub"ect to the
provisions of existing laws on illegal
co$binations and $onopolies
b. 'cope of power: 6o sell, lease,
exchange, $ortgage, pledge or
otherwise dispose of all or
substantially all of its property and
assets, including its goodwill, upon
such ter$s and conditions and for
such consideration, which $ay be
$oney, stoc%s, bonds or other
instru$ents for the pay$ent of
$oney or other property or
consideration, as its board of
directors or trustees $ay dee$
expedient
8eaning of disposition of
substantially all of the corporate
property and assetsI if thereby
the corporation would be
rendered incapable of continuing
the business or acco$plishing
the purpose for which it was
incorporated.
c. Approval) voting and notice
requirement:
8a"ority vote of its board of
directors or trustees,
Authorized by the vote of the
stoc%holders representing at
least twoIthirds (2#)) of the
outstanding capital stoc%, or in
case of nonIstoc% corporation,
by the vote of at least to twoI
thirds (2#)) of the $e$bers, in
a stoc%holderRs or $e$berRs
$eeting duly called for the
purpose.
-ritten notice of the proposed
action and of the ti$e and place
of the $eeting shall be
addressed to each stoc%holder
or $e$ber at his place of
residence as shown on the
boo%s of the corporation and
deposited to the addressee in
the post office with postage
prepaid, or served personally
o -hen &( approval not
necessary I 4f disposition 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 re$aining
business.
o 4n nonIstoc% corporations
where there are no $e$bers
with voting rights I the vote
of at least a $a"ority of the
trustees in office will be
sufficient authorization for the
corporation to enter into any
transaction authorized by this
section.
d. Appraisal right: any dissenting
stoc%holder $ay exercise his appraisal
right under the conditions provided in
the Code
e. Abandonment of the sale) leaseS
I After such authorization or approval
by the stoc%holders or $e$bers, the
board of directors or trustees $ay,
nevertheless, in its discretion,
abandon such sale, lease, exchange,
$ortgage, pledge or other disposition
of property and assets, sub"ect to the
rights of third parties under any
contract relating thereto, without
further action or approval by the
stoc%holders or $e$bers.
f. 0ompared to merger and
consolidation
Advantage of $erger and
consolidation over sale
# furnish a short cut to the
acco$plish$ent of various
transactions
# $ay avoid the difficulty, delay
and expense which usually
acco$pany dissolution, winding
up and distribution of assets to its
&( by a selling corp
# auto$atic assu$ption of liabilities
of the absorbed corp (in sale,
there $ust be sufficient funds
reserved by the absorbed corp to
pay its liabilities, otherwise the
sale $ay be attac%ed by the
creditors as a fraudulent
conveyance)
# transfer or exchange of shares is
exe$pt fro$ registration under
&ecurities Act (in sale,
registration with &3C reDuired)
Advantage of sale of substantially all
assets -here the absorbing corp
foresees proble$s in securing
stoc%holders' approval and in granting
2
the appraisal right of dissenters, it
$ay decide that its purchase of the
assets of the absorbed corp would
be $ore convenient and practical
than $erger
Chapter XVIII
FOREIGN CORPORATIONS
!. ;efinition
(!2))
Foreign corporation is one formed,
organized or existing under any
laws other than those of the
Philippines and whose laws allow
Filipino citizens and corporations to
do business in its own country or
state.
2. /ecessity
of obtaining a license to do business
6he reason for the license is to sub"ect
the foreign corporation doing business in
the 0hilippines to the "urisdiction of the
courts, otherwise a foreign corporation
illegally doing business here $ay
successfully though unfairly plead such
neglect or illegal act so as to avoid
service and thereby i$pugn the
"urisdiction of the local courts.
). J;oing
businessK (&ec. )(d) >A @F72)
&oliciting orders
&ervice contracts
Hpening offices, whether called
liason offices or branches
Appointing representatives or
distributors do$iciled in the
0hilippines or who in any calendar
year stay in the country for a period
or periods totaling !BF days or $ore
0articipating in the
$anage$ent, supervision or control
of any do$estic business, fir$,
entity or corporation in the
0hilippines
Any other act or acts that i$ply
a continuity of co$$ercial dealings
or arrange$ents, and conte$plate
to that extent, perfor$ance
nor$ally incident to , and in
progressive prosecution of,
co$$ercial gain or of the purpose
and ob"ect of the business
organization
4t shall not include
o 8ere invest$ent as a
shareholder by a foreign entity in
do$estic corporations duly
registered to do business and#or
the exercise of such rights as
such investor
o (aving a no$inee director or
officer to represent its interests in
such corporations
o Appointing a representative
or distributor do$iciled in the
0hilippines which transacts
business in its own na$e and for
its own account
7. >eDuire$ent
s for the issuance of a license
a. ;ocu$entary reDuire$ents (!2C)
A foreign corporation applying for
a license to transact business in
the 0hilippines shall sub$it to the
&3C
o Copy of its articles of
incorporation and byIlaws,
certified in accordance with
law
o 6heir translation to an official
language of the 0hilippines, if
necessary.
6he application shall be under
oath and, unless already stated in
its articles of incorporation, shall
specifically set forth the following
o 6he date and ter$ of
incorporation5
o 6he address, including the
street nu$ber, of the
corporation in the country or
state of incorporation5
o 6he na$e and address of its
resident agent authorized to
accept su$$ons and process
in all legal proceedings and,
pending the establish$ent of
a local office, all notices
affecting the corporation5
o 6he place in the 0hilippines
where the corporation intends
to operate5
o 6he specific purpose or
purposes which the
corporation intends to pursue
in the transaction of its
3
business in the 0hilippines
0rovided, 6hat said purpose
or purposes are those
specifically stated in the
certificate of authority
issued by the appropriate
govern$ent agency5
o 6he na$es and addresses
of the present directors and
officers of the corporation5
o A state$ent of its
authorized capital stoc% and
the aggregate nu$ber of
shares which the
corporation has authority to
issue, ite$ized by classes,
par value of shares, shares
without par value, and
series, if any5
o A state$ent of its
outstanding capital stoc%
and the aggregate nu$ber
of shares which the
corporation has issued,
ite$ized by classes, par
value of shares, shares
without par value, and
series, if any5
o A state$ent of the a$ount
actually paid in5 and
o &uch additional infor$ation
as $ay be necessary or
appropriate in order to
enable the &ecurities and
3xchange Co$$ission to
deter$ine whether such
corporation is entitled to a
license to transact business
in the 0hilippines, and to
deter$ine and assess the
fees payable.
Attached to the application for
license shall be a duly executed
certificate under oath by the
authorized official or officials of
the "urisdiction of its
incorporation, attesting to the
fact that
o 6he laws of the country or
state of the applicant allow
1ilipino citizens and
corporations to do business
therein
o 6he applicant is an existing
corporation in good
standing.
4f such certificate is in a foreign
language, a translation thereof
in 3nglish under oath of the
translator shall be attached
thereto.
6he application shall li%ewise be
acco$panied by a state$ent
under oath of the president or
any other person authorized by
the corporation, showing to the
satisfaction of the &3C and other
govern$ental agency in the
proper cases that the
o Applicant is solvent and in
sound financial condition, and
o &etting forth the assets and
liabilities of the corporation as
of the date not exceeding one
(!) year i$$ediately prior to
the filing of the application.
1oreign ban%ing, financial and
insurance corporations shall, in
addition to the above
reDuire$ents, co$ply with the
provisions of existing laws
applicable to the$.
4n the case of all other foreign
corporations, no application for
license to transact business in the
0hilippines shall be accepted by
the &3C without previous
authority fro$ the appropriate
govern$ent agency, whenever
reDuired by law.
b. ;eposit reDuire$ents (!2A)
Gpon issuance of the license, such
foreign corporation $ay
co$$ence to transact business in
the 0hilippines and continue to do
so for as long as it retains its
authority to act as a corporation
under the laws of the country or
state of its incorporation, unless
such license is sooner
surrendered, revo%ed, suspended
or annulled in accordance with
this Code or other special laws.
-ithin sixty (AF) days after the
issuance of the license to transact
business in the 0hilippines, the
license, except foreign ban%ing or
insurance corporation, shall
deposit with the &3C for the
benefit of present and future
creditors of the licensee in the
0hilippines, securities satisfactory
to the &3C, consisting of
o :onds or other evidence of
indebtedness of the
,overn$ent of the
0hilippines, its political
subdivisions and
4
instru$entalities, or of
govern$entIowned or
controlled corporations and
entities,
o &hares of stoc% in
Qregistered enterprisesQ as
this ter$ is defined in
>epublic Act /o. C!BA,
o &hares of stoc% in do$estic
corporations registered in
the stoc% exchange, or
o &hares of stoc% in do$estic
insurance co$panies and
ban%s, or
o Any co$bination of these
%inds of securities,
-ith an actual $ar%et value of
at least one hundred thousand
(0!FF,FFF.) pesos5
0rovided, however, 6hat within
six (A) $onths after each fiscal
year of the licensee, the &3C
shall reDuire the licensee to
deposit additional securities
eDuivalent in actual $ar%et
value to two (2M) percent of
the a$ount by which the
licenseeRs gross inco$e for that
fiscal year exceeds five $illion
(0C,FFF,FFF.FF) pesos.
6he &3C shall also reDuire
deposit of additional securities if
the actual $ar%et value of the
securities on deposit has
decreased by at least ten (!FM)
percent of their actual $ar%et
value at the ti$e they were
deposited.
6he &3C $ay at its discretion
release part of the additional
securities deposited with it if the
gross inco$e of the licensee has
decreased, or if the actual
$ar%et value of the total
securities on deposit has
increased, by $ore than ten
(!FM) percent of the actual
$ar%et value of the securities at
the ti$e they were deposited.
6he &3C $ay, fro$ ti$e to
ti$e, allow the licensee to
substitute other securities for
those already on deposit as long
as the licensee is solvent. &uch
licensee shall be entitled to
collect the interest or dividends
on the securities deposited.
4n the event the licensee ceases
to do business in the
0hilippines, the securities
deposited as aforesaid shall be
returned, upon the licenseeRs
application therefor and upon
proof to the satisfaction of the
&3C that the licensee has no
liability to 0hilippine residents,
including the ,overn$ent of the
>epublic of the 0hilippines.
c. Appoint$ent of resident agent (!2B)
A resident agent $ay be either
an
o 4ndividual residing in the
0hilippines of good $oral
character and of sound
financial standing
o ;o$estic corporation lawfully
transacting business in the
0hilippines
6he &3C shall reDuire as a
condition precedent to the
issuance of the license to transact
business in the 0hilippines by any
foreign corporation that such
corporation file with the &3C a
written power of attorney
o ;esignating so$e person who
$ust be a resident of the
0hilippines, on who$ any
su$$ons and other legal
processes $ay be served in
all actions or other legal
proceedings against such
corporation, and
o Consenting that service upon
such resident agent shall be
ad$itted and held as valid as
if served upon the duly
authorized officers of the
foreign corporation at its
ho$e office.
Any such foreign corporation shall
li%ewise execute and file with the
&3C an agree$ent or stipulation,
executed by the proper
authorities of said corporation, in
for$ and substance as follows
o Q6he (na$e of foreign
corporation) does hereby
stipulate and agree, in
consideration of its being
granted by the &ecurities and
3xchange Co$$ission a
license to transact business in
the 0hilippines, that if at any
ti$e said corporation shall
cease to transact business in
the 0hilippines, or shall be
without any resident agent in
the 0hilippines on who$ any
5
su$$ons or other legal
processes $ay be served,
then in any action or
proceeding arising out of
any business or transaction
which occurred in the
0hilippines, service of any
su$$ons or other legal
process $ay be $ade upon
the &3C and that such
service shall have the sa$e
force and effect as if $ade
upon the dulyIauthorized
officers of the corporation at
its ho$e office.Q
-henever such service of
su$$ons or other process shall
be $ade upon the &3C, the
Co$$ission shall, within ten
(!F) days thereafter, trans$it
by $ail a copy of such su$$ons
or other legal process to the
corporation at its ho$e or
principal office.
6he sending of such copy by the
Co$$ission shall be necessary
part of and shall co$plete such
service. All expenses incurred
by the Co$$ission for such
service shall be paid in advance
by the party at whose instance
the service is $ade.
4n case of a change of address
of the resident agent, it shall be
his or its duty to i$$ediately
notify in writing the &3C of the
new address.
d. &u$$ary >eDuisites for the
4ssuance of +icense
6he &3C will issue a license to
the foreign corporation to do
business in the 0hilippines,
provided the following
conditions are $et
o Appoint$ent of a >esident
Agent
3ither a 1ilipino or
do$estic corporation5
and
0ower of Attorney to
&3C to receive process
o 8ust prove that the foreign
corporationRs country grants
reciprocal rights to 1ilipinos
and 0hilippine corporation.
o 3stablish an office in the
0hilippines
o :ring in its assets
o Gnderta%ing that 1ilipino
creditors will be preferred in
the event of insolvency
o /otice of six (A) $onths
should there be desire to
ter$inate operations
o 1ranchise and patents $ust
re$ain in the 0hilippine, if
this is possible
o 8ust file a bond of 0!FF,FFF
which $ay be in the following
for$
surety bond
govern$ent securities
securities of political
subdivisions
shares of stoc% of
registered enterprises
with the &3C
shares of stoc% of any
corporation being sold at
the stoc% exchange
o 0rovided, that within six (A)
$onths after each fiscal year,
the &3C shall reDuire the
deposit of additional
securities eDuivalent to 2M of
the a$ount in excess of
0CFF,FFF of the gross
inco$e. .&ec. !2C, !2A,
Corporation Code2
C. -hat laws
are applicable to foreign corporations
licensed to transact business in the
0hilippinesS (!2E)
Any foreign corporation lawfully
doing business in the 0hilippines shall
be bound by all laws, rules and
regulations applicable to do$estic
corporations of the sa$e class, 3NC306
such only as provide for the
o Creation, for$ation,
organization or dissolution of
corporations
o 6hose which fix the relations,
liabilities, responsibilities, or
duties of stoc%holders, $e$bers,
or officers of corporations to each
other or to the corporation.
A. -hat are the
conseDuence of doing business in the
0hilippines without a licenseS (!)))
/o foreign corporation transacting
business in the 0hilippines without a
license, or its successors or assigns,
shall be per$itted to $aintain or
6
intervene in any action, suit or
proceeding in any court or
ad$inistrative agency of the
0hilippines5
&uch corporation $ay be sued
or proceeded against before
0hilippine courts or ad$inistrative
tribunals on any valid cause of
action recognized under 0hilippine
laws.
&hall not be per$itted to
$aintain or intervene in any action,
suit or proceeding in any court or
ad$inistrative agency in the
0hilippines5 but such corporation
$ay be sued or proceeded against
before 0hilippine courts or
ad$inistrative tribunals.
4n addition, &ec. !)7 $a%es it a
ground for revocation of license
when a foreign corporation transacts
business in the 0hilippines as agent
of or acting for and in behalf of any
foreign corporation or entity not
duly licensed to do business in the
0hilippines.
&tatus of Contracts entered into
without the reDuisite license
o 6he failure to obtain a
license by a foreign corporation
doing business in the 0hilippines
does not affect the validity of
contracts entered into by such
foreign corporation, but $erely
re$oves its legal standing to
sue in local tribunals. (owever,
the defect $ay be cured by
subseDuent registration by the
foreign corporation to obtain the
necessary license to do business
in the 0hilippines. .(o$e
4nsurance Co. v. 3astern
&hipping +ines, !2) &C>A 727
(!EB))2
o Although the law does not
declare as void or invalid the
contracts entered into by a
foreign corporation with a local
corporation without the for$er
first securing a license or
certificate to do business in the
0hilippines, the parties in this
case cannot obtain relief on the
contracts entered into because
they are charged with the
%nowledge of the existing law at
the ti$e they entered into such
contract and at the ti$e it is to
be operative. .6opI-eld 8fg. v.
3C3;, &.A., !)B &C>A !!B
(!EBC)2
o (owever, in the case of
8errill +ynch 1utures, 4nc. v. CA,
2!! &C>A B27 (!EE2), the &C
held that although the foreign
corporation has engaged in
business in the 0hilippines without
a license, the dis$issal of the suit
would not be proper on the
ground that if the local investors
%new that the foreign corporation
had no license to do business,
then they are estopped fro$
using the lac% of license to avoid
their obligations.
+egal standing of foreign
corporations to sue on their corporate
na$es, trade na$es, and trade$ar%s
o A foreign corporation
although not doing business in
the 0hilippines has a personality
to sue to oppose the registration
of a trade$ar% when it is shown
that its products using such
trade$ar% are being i$ported
and sold in the 0hilippines,
pursuant to the ter$s of >A !AA.
.,eneral ,ar$ents v. ;irector of
0atents, 7! &C>A CF (!E@!)2
o A foreign corporation has a
right to $aintain an action in
0hilippine courts even if it is not
licensed to do business and is not
actually doing business on its own
therein to protect its corporate
and trade na$es, since it is a
property right in re$, which it
$ay assert to protect against all
the world, in any of the courts of
the worldIIeven in "urisdiction
where it does not transact
businessII"ust the sa$e as it $ay
protect its tangible property,
against trespass or conversion.
o 6his is consonance with the
Convention of the Gnion of 0aris
for the 0rotection of 4ndustrial
0roperty to which the 0hils. is a
party. Article B thereof provides,
QA trade na$e shall be protected
in all the countries of the Gnion
without the obligation of filing or
registration, whether or not it
for$s part of the trade$ar%.Q 6he
$andate is contained in >A !AA,
or the 6rade$ar% +aw. .Converse
>ubber Corp. v. Gniversal >ubber
0roducts, !7@ &C>A !C7 (!EB@)2
@. Application
to existing foreign corporations (!2E)
3very foreign corporation which on
the date of the effectivity of the
Code is authorized to do business in
the 0hilippines under a license
issued to it, shall continue to have
such authority under the ter$s and
condition of its license, sub"ect to
the provisions of this Code and other
special laws.
B. A$end$en
ts to articles of incorporation or byIlaws
of foreign corporations (!)F)
-ithin sixty (AF) days after the
a$end$ent beco$es effective, file
with the &3C, and in the proper
cases with the appropriate
govern$ent agency, a duly
authenticated copy of the articles of
incorporation or byIlaws, as
a$ended, indicating clearly in
capital letters or by underscoring the
change or changes $ade, duly
certified by the authorized official or
officials of the country or state of
incorporation.
6he filing thereof shall not of itself
enlarge or alter the purpose or
purposes for which such corporation
is authorized to transact business in
the 0hilippines.
E. A$ended
license (!)!)
A foreign corporation authorized
to transact business in the
0hilippines shall obtain an a$ended
license in the event it
o Changes its corporate na$e, or
o ;esires to pursue in the
0hilippines other or additional
purposes
:y sub$itting an application
therefor to the &3C, favorably
endorsed by the appropriate
govern$ent agency in the proper
cases.
!F. 8erger or
consolidation involving a foreign
corporation licensed in the 0hilippines
(!)2)
Hne or $ore foreign
corporations authorized to transact
business in the 0hilippines $ay $erge
or consolidate with any do$estic
corporation or corporations if
o &uch is per$itted under
0hilippine laws and by the law of
its incorporation
o 6he reDuire$ents on $erger
or consolidation as provided in
this Code are followed
-henever a foreign corporation
authorized to transact business in the
0hilippines shall be a party to a
$erger or consolidation in its ho$e
country or state as per$itted by the
law of its incorporation, such foreign
corporation shall, within sixty (AF)
days after such $erger or
consolidation beco$es effective, file
with the &3C, and in proper cases
with the appropriate govern$ent
agency, a copy of the articles of
$erger or consolidation duly
authenticated by the proper official or
officials of the country or state under
the laws of which $erger or
consolidation was effected
0rovided, however, that if the
absorbed corporation is the foreign
corporation doing business in the
0hilippines, the latter shall at the
sa$e ti$e file a petition for
withdrawal of its license.
!!. >evocation
of license (!)7)
-ithout pre"udice to other
grounds provided by special laws, the
license of a foreign corporation to
transact business in the 0hilippines
$ay be revo%ed or suspended by the
&3C upon any of the following
grounds
o 1ailure to file its annual
report or pay any fees as reDuired
by this Code5
o 1ailure to appoint and
$aintain a resident agent in the
0hilippines as reDuired by this
6itle5
o 1ailure, after change of its
resident agent or of his address,
to sub$it to the &ecurities and
3xchange Co$$ission a
state$ent of such change as
reDuired by this 6itle5
o 1ailure to sub$it to the
Co$$ission an authenticated
copy of any a$end$ent to its
8
articles of incorporation or byI
laws or of any articles of $erger
or consolidation within the ti$e
prescribed by this 6itle5
o A $isrepresentation of any
$aterial $atter in any
application, report, affidavit or
other docu$ent sub$itted by
such corporation pursuant to
this 6itle5
o 1ailure to pay any and all
taxes, i$posts, assess$ents or
penalties, if any, lawfully due to
the 0hilippine ,overn$ent or
any of its agencies or political
subdivisions5
o 6ransacting business in the
0hilippines outside of the
purpose or purposes for which
such corporation is authorized
under its license5
o 6ransacting business in the
0hilippines as agent of or acting
for and in behalf of any foreign
corporation or entity not duly
licensed to do business in the
0hilippines5 or
o Any other ground as would
render it unfit to transact
business in the 0hilippines. (n)
!2. 4ssuance of
certificate of revocation (!)C)
Gpon the revocation of any such
license to transact business in the
0hilippines, the &ecurities and
3xchange Co$$ission shall issue a
corresponding certificate of
revocation, furnishing a copy thereof
to the appropriate govern$ent
agency in the proper cases.
6he &ecurities and 3xchange
Co$$ission shall also $ail to the
corporation at its registered office in
the 0hilippines a notice of such
revocation acco$panied by a copy
of the certificate of revocation.
!). -ithdrawal
by a foreign corporation (&ection !)A)
4f a foreign corporation duly
licensed to do business desires to
withdraw, it $ust file a petition for
withdrawal, and $ust $eet the
following reDuire$ents
o All clai$s accrued in the
0hilippines $ust be settled
o All taxes $ust be paid
0etition $ust be published once a
wee% for three ()) consecutive wee%s.
(!)A)
;oing business in the 0hilippines without a
license
Communications +aterials vs. CA, !
')---0, Aug --, '((3
4n deter$ining whether a corporation does
business in the 0hilippines or not, aside fro$
their activities within the foru$, reference
$ay be $ade to the contractual agree$ents
entered into by it with other entities in the
country. A scrutiny of the different contracts
and agree$ents entered into with various
business contacts in the country indicate
convincingly a purpose to convey to custo$ers
and the general public that they are dealing
directly with the foreign corporation, and that
foreign corporation is actively engaging in
business in the country. 6hese agree$ents
also contain provisions which are highly
restrictive in nature, reducing the local
signatory to be a $ere extension or
instru$ent of the foreign corporation. (ence,
the foreign corporation is dee$ed to be doing
business in the 0hilippines without a license.
/onetheless, petitioner is estopped fro$
raising this fact to bar the foreign corporation
fro$ suing. Hne who has dealt with a
corporation of foreign origin as a corporate
entity is estopped to deny its corporate
existence and capacity. And the doctrine of
estoppel to deny corporate existence applies
to a foreign as well as to do$estic
corporations. 6he principle will be applied to
prevent a person contracting with a foreign
corporation fro$ later ta%ing advantage of its
nonco$pliance with the statutes chiefly in
cases where such person has received the
benefits of the contract.
+! Ioldings, :td vs. $a>ar, ! ')-(39,
Jan -', -))-
6he Duestion whether or not a foreign
corporation is doing business is dependent
principally upon the facts and circu$stances of
each particular case, considered in the light of
the purposes and language of the pertinent
statute or statutes involved and of the general
principles governing the "urisdictional
authority of the state over such corporations
CA:, the CA categorized as Jdoing businessK
petitioner's participation under the
JAssign$ent Agree$entK and the J;eed of
Assign$ent.K 6his is si$ply untenable. 6he
expression Jdoing businessK should not be
given such a strict and literal construction as
!
to $a%e it apply to any corporate dealing. At
this early stage and with petitioner's acts or
transactions li$ited to the assign$ent
contracts, it cannot be said that it had
perfor$ed acts intended to continue the
business for which it was organized. 4t $ay
not be a$iss to point out that the purpose
or business for which petitioner was
organized is not discernible in the records.
/o effort was exerted by the CA to establish
the nexus between petitioner's business and
the acts supposed to constitute Jdoing
business.K 6hus, whether the assign$ent
contracts were incidental to petitioner's
business or were continuation thereof is
beyond deter$ination.
Chapter XIX
SPECIAL
CORPORATIONS
!. Close
Corporations

a. -hat is a close corporationS
(EA)
A close corporation is one whose
articles of incorporation provide
that
o All the corporationRs issued
stoc% of all classes,
exclusive of treasury
shares, shall be held of
record by not $ore than a
specified nu$ber of
persons, not exceeding
twenty (2F)5
o All the issued stoc% of all
classes shall be sub"ect to
one or $ore specified
restrictions on transfer
per$itted by this 6itle5 and
o 6he corporation shall not list
in any stoc% exchange or
$a%e any public offering of
any of its stoc% of any class.
A corporation shall not be
dee$ed a close corporation
when at least twoIthirds (2#))
of its voting stoc% or voting
rights is owned or controlled by
another corporation which is not
a close corporation.
b. -hat entities $ay not be
organized as closed corporationsS
Any corporation $ay be
incorporated as a close
corporation, except
o 8ining
o Hil co$panies
o &toc% exchanges
o :an%s
o 4nsurance co$panies
o 0ublic utilities
o 3ducational institutions
o Corporations declared to be
vested with public interest in
accordance with the
provisions of this Code.
c. ?alidity of restrictions on
transfer of shares (EB)
>estrictions on the right to
transfer shares $ust appear in
the
o Articles of incorporation
o :yIlaws
o Certificate of stoc%
H6(3>-4&3, the sa$e shall not be
binding on any purchaser in good
faith.
&aid restrictions shall not be $ore
onerous than granting the
corporation the option to
purchase the shares of the
transferring stoc%holder with such
reasonable ter$s, conditions or
period stated therein.
4f upon the expiration of said
period, the existing stoc%holders
or the corporation fails to exercise
the option to purchase, the
transferring stoc%holder $ay sell
his shares to any third person.
d. 3ffects of issuance or transfer
of stoc% in breach of Dualifying
conditions (EE)
A person is conclusively presu$ed
to have notice of the fact of
ineligibility to be a stoc%holder
o 4f stoc% of a close corporation
is issued or transferred to any
person who is not entitled
under any provision of the
articles of incorporation to be
a holder of record of its stoc%,
and
o 4f the certificate for such
stoc% conspicuously shows
the Dualifications of the
80
persons entitled to be
holders of record thereof
A person to whom stoc% is
issued or transferred is
conclusively presumed to
have notice of these facts1
o 4f the articles of
incorporation of a close
corporation states the
nu$ber of persons, not
exceeding twenty (2F), who
are entitled to be holders of
record of its stoc%, and
o 4f the certificate for such
stoc% conspicuously states
such nu$ber, and
o 4f the issuance or transfer of
stoc% to any person would
cause the stoc% to be held
by $ore than such nu$ber
of persons.
2f a stoc% certificate of any
close corporation
conspicuously shows a
restriction on transfer of
stoc% of the corporation, the
transferee of the stoc% is
conclusively presumed to
have notice of the fact that
he has acDuired stoc% in
violation of the restriction, if
such acDuisition violates the
restriction.
-henever any person to who$
stoc% of a close corporation has
been issued or transferred has,
or is conclusively presu$ed
under this section to have,
notice either
o 6hat he is a person not
eligible to be a holder of
stoc% of the corporation, or
o 6hat transfer of stoc% to
hi$ would cause the stoc%
of the corporation to be
held by $ore than the
nu$ber of persons
per$itted by its articles of
incorporation to hold stoc%
of the corporation, or
o 6hat the transfer of stoc% is
in violation of a restriction
on transfer of stoc%, the
corporation $ay, at its
option, refuse to register
the transfer of stoc% in the
na$e of the transferee.
6he provisions of subsection (7)
shall not be applicable if the
transfer of stoc%, though
contrary to subsections (!), (2) or
()), has been consented to by all
the stoc%holders of the close
corporation, or if the close
corporation has a$ended its
articles of incorporation in
accordance with this 6itle.
6he ter$ QtransferQ, as used in
this section, is not li$ited to a
transfer for value.
6he provisions of this section shall
not i$pair any right which the
transferee $ay have to rescind
the transfer or to recover under
any applicable warranty, express
or i$plied.
e. Agree$ents by stoc%holders
(&ection !FF)
!. Agree$ents by and a$ong
stoc%holders
3xecuted before the
for$ation and organization of
a close corporation,
&igned by all stoc%holders
&hall survive the
incorporation of such
corporation and shall continue
to be valid and binding
between and a$ong such
stoc%holders, if such be their
intent,
6o the extent that such
agree$ents are not
inconsistent with the articles
of incorporation, irrespective
of where the provisions of
such agree$ents are
contained, except those
reDuired by this 6itle to be
e$bodied in said articles of
incorporation.
2. An agree$ent between two or
$ore stoc%holders, if in writing
and signed by the parties thereto,
$ay provide that in exercising
any voting rights, the shares held
by the$ shall be voted as therein
provided, or as they $ay agree,
or as deter$ined in accordance
with a procedure agreed upon by
the$.
). /o provision in any written
agree$ent signed by the
stoc%holders, relating to any
phase of the corporate affairs,
shall be invalidated as between
the parties on the ground that its
effect is to $a%e the$ partners
a$ong the$selves.
81
7. A written agree$ent a$ong
so$e or all of the stoc%holders
in a close corporation shall not
be invalidated on the ground
that it so relates to the conduct
of the business and affairs of
the corporation as to restrict or
interfere with the discretion or
powers of the board of
directors
0rovided, 6hat such
agree$ent shall i$pose on
the stoc%holders who are
parties thereto the liabilities
for $anagerial acts i$posed
by this Code on directors.
C. 6o the extent that the
stoc%holders are actively
engaged in the $anage$ent or
operation of the business and
affairs of a close corporation,
the stoc%holders shall be held to
strict fiduciary duties to each
other and a$ong the$selves.
&aid stoc%holders shall be
personally liable for corporate
torts unless the corporation has
obtained reasonably adeDuate
liability insurance.
f. A$end$ent of articles of
incorporation (!F))
Any a$end$ent to the articles of
incorporation which see%s to delete
or re$ove any provision reDuired by
this 6itle to be contained in the
articles of incorporation or to reduce
a Duoru$ or voting reDuire$ent
stated in said articles of
incorporation shall not be valid or
effective unless approved by the
affir$ative vote of at least twoI
thirds (2#)) of the outstanding
capital stoc%, whether with or
without voting rights, or of such
greater proportion of shares as $ay
be specifically provided in the
articles of incorporation for
a$ending, deleting or re$oving any
of the aforesaid provisions, at a
g. ;eadloc%s
'. ,eadloc!s, Defined1
6he directors or
stoc%holders are so divided
respecting the $anage$ent
of the corporationRs
business and affairs
6he votes reDuired for any
corporate action cannot be
obtained
6he conseDuence is that the
corporation can no longer be
conducted to the advantage
of the stoc%holders generally
2. >esolution of deadloc%s
6he &3C, upon written
petition by any stoc%holder,
shall have the power to
arbitrate the dispute.
4n the exercise of such
power, the Co$$ission shall
have authority to $a%e such
order as it dee$s
appropriate, including an
order
o Cancelling or altering any
provision contained in the
articles of incorporation,
byIlaws, or any
stoc%holderRs agree$ent5
o Cancelling, altering or
en"oining any resolution
or act of the corporation
or its board of directors,
stoc%holders, or officers5
o ;irecting or prohibiting
any act of the corporation
or its board of directors,
stoc%holders, officers, or
other persons part to the
action5
o >eDuiring the purchase at
their fair value of shares
of any stoc%holder, either
by the corporation
regardless of the
availability of unrestricted
retained earnings in its
boo%s, or by the other
stoc%holders5
o Appointing a provisional
director5
o ;issolving the
corporation5 or
o ,ranting such other relief
as the circu$stances $ay
warrant.
). 0rovisional ;irector
An i$partial person who is
neither a stoc%holder nor a
creditor of the corporation or
of any subsidiary or affiliate
of the corporation, and whose
further Dualifications, if any,
82
$ay be deter$ined by the
Co$$ission.
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 $eetings
of directors, until such ti$e
as he shall be re$oved by
order of the Co$$ission or
by all the stoc%holders.
(is co$pensation shall be
deter$ined by agree$ent
between hi$ and the
corporation sub"ect to
approval of the
Co$$ission, which $ay fix
his co$pensation in the
absence of agree$ent or in
the event of disagree$ent
between the provisional
director and the
corporation.
8an Juan 8tructural
and 8teel Fabricatiors
vs. CA
8otorich entered into agree$ent with &an
<uan for the transfer of a parcel of +and to
latter. &an <uan already paid downpay$ent.
-hen &an <uan was ready to pay the
balance, 8otorich refused to sell. 8otorich
contend that /enita ,ruenberg's, treasurer
of 8otorich, signature is not sufficient to bind
8otorich, and that the signature of >eynaldo
,ruenberg, president of 8otorich is reDuired.
/enita ,ruenberg is the spouse of >eynaldo
,ruenberg and both owns EE.BAAM of the
shares of stoc% of the corporation.
(3+; 8otorich is not a close corporation.
6he $ere ownership by a single stoc%holder
or by another corporation of all or nearly all
of the capital stoc% of a corporation is not of
itself sufficient ground for disregarding their
separate personalities. A narrow distribution
of ownership does not of itself $a%e a close
corporation. 6here are exceptional cases
where an action by a director who is singly is
the controlling stoc%holder $ay be
considered as a binding corporate act and a
board action is a $ere for$ality. (owever,
/enita is not the sole controlling stoc%holder.
C:486 C4!P4!A;24"8 !6B:A! C4!P4!A;24"8
!. +anagement = $oard Authority
6here can be classification of directors into
one or $ore classes, each of who$ $ay be
voted for and elected solely by a particular
class of stoc%5 and
6he articles of incorporation of a close
corporation $ay provide that the business of
the corporation shall be $anaged by the
stoc%holders of the corporation rather than by
a board of directors. &o long as this provision
6here are no classification of board of directors
Corporate 0owers devolved upon board of
directors whose powers are executed by officers.
Cannot provide that it be $anaged by
stoc%holders
83
C:486 C4!P4!A;24"8 !6B:A! C4!P4!A;24"8
continues in effect
!. /o $eeting of stoc%holders need be called
to elect directors
2. Gnless the context clearly reDuires
otherwise, the stoc%holders of the
corporation shall be dee$ed to be
directors for the purpose of applying the
provisions of this Code
). 6he stoc%holders of the corporation shall
be sub"ect to all liabilities of directors.
6he articles of incorporation $ay li%ewise
provide that all officers or e$ployees or that
specified officers or e$ployees shall be
elected or appointed by the stoc%holders,
instead of by the board of directors.
:oard of directors $ust be elected in a
stoc%holders $eeting
&toc%holders of a corporation are separate and
distinct fro$ directors
Hfficers $ust be elected by the :oard of
;irectors
2. +eetings
Gnless the byIlaws provide otherwise, any
action by the directors of a close corporation
without a $eeting shall nevertheless be
dee$ed valid if
!. :efore or after such action is ta%en,
written consent thereto is signed by all
the directors5 or
2. All the stoc%holders have actual or i$plied
%nowledge of the action and $a%e no
pro$pt ob"ection thereto in writing5 or
). 6he directors are accusto$ed to ta%e
infor$al action with the express or
i$plied acDuiescence of all the
stoc%holders5 or
7. All the directors have express or i$plied
%nowledge of the action in Duestion and
none of the$ $a%es pro$pt ob"ection
thereto in writing.
4f a directorRs $eeting is held without proper
call or notice, an action ta%en therein within
the corporate powers is dee$ed ratified by a
director who failed to attend, unless he
pro$ptly files his written ob"ection with the
secretary of the corporation after having
%nowledge thereof.
6he directors or trustees shall not act individually
nor separately but as a body in a lawful $eeting.
6hey will act only after discussion and
deliberation of $atters before the$. Contracts
entered into without a for$al board resolution
does not bind the corporation except when
ratified or when $a"ority of the board has
%nowledge of the contract and the contract
benefited the corporation.
Absence of a pro$pt ob"ection in writing does not
ratify acts done by directors without a valid
$eeting. 6here $ust be express or i$plied
ratification.
3xpress ratification $ay consist of a :oard
>esolution to that effect
4$plied ratification $ay consist of acceptance of
benefits fro$ said unauthorized act while having
%nowledge of said act
1ailure to give notice would render a $eeting
voidable.
Attendance to a $eeting despite want of notice
will be dee$ed i$plied waiver
All proceedings had and any business transacted
at any $eeting of the stoc%holders or $e$bers,
if within the powers or authority of the
corporation, shall be valid even if the $eeting be
i$properly held or called, provided all the
stoc%holders or $e$bers of the corporation are
present or duly represented at the $eeting.
(C!)
). #oting = Luorum /o share $ay be deprived of voting rights,
except 0referred or >edee$able shares, unless
84
C:486 C4!P4!A;24"8 !6B:A! C4!P4!A;24"8
6he AH4 $ay provide for a classification of
directors into one or $ore classes, each of
which $ay be voted for and elected solely by
a particular class of stoc%.
6he AH4 $ay provide for a greater Duoru$ or
voting reDuire$ents in $eetings of
stoc%holders or directors than those provided
in this Code.
otherwise provided by the Code
6here shall always be a class#series of shares
which have a CH80+363 ?H64/, >4,(6&
3AC( &(A>3 &(A++ :3 3OGA+ 4/ A++ >3&03C6&
6H 3?3>= H6(3> &(A>3, except as otherwise
provided in the AH4
1or :oard of directors, the byIlaws or AH4 can
provide for a greater $a"ority in Duoru$
1or stoc%holders, the AH4 can provide for a
different percentage in Duoru$
7. Pre<emptive !ight
6he preIe$ptive right of stoc%holders in close
corporations shall extend to all stoc% to be
issued, including reissuance of treasury
shares, whether for $oney, property or
personal services, or in pay$ent of corporate
debts, unless the articles of incorporation
provide otherwise.
+i$itations on the exercise of preIe$ptive right
a. &uch preIe$ptive right shall not extend to
shares to be issued in co$pliance with laws
reDuiring stoc% offerings or $ini$u$ stoc%
ownership by the public5
b. /ot extend to shares to be issued in good faith
with the approval of the stoc%holders
representing twoIthirds (2#)) of the outstanding
capital stoc%, in exchange for property needed
for corporate purposes or in pay$ent of a
previously contracted debt
c. &hall not ta%e effect if denied in the Articles of
4ncorporation or an a$end$ent thereto.
C. ;ransferability
>estrictions on the right to transfer shares
$ust appear in the A4 and in the byIlaws as
well as in the certificate of stoc% otherwise the
sa$e shall not be binding on any purchaser
thereof in good faith
>estrictions on the right to transfer not allowed
A. 5ithdrawal !ight
Any stoc%holder of a close corporation $ay,
for any reason, co$pel 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 boo%s to cover its debts and
liabilities exclusive of capital stoc%
Any stoc%holder of a close corporation $ay,
by written petition to the &3C, co$pel 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 pre"udicial to the
&toc%holders $ay reDuire the corporation to buyI
bac% their shares at fair value when the
Corporation has unrestricted >etained 3arnings
a. 4n case any a$end$ent to the articles of
incorporation which has the effect of
changing or restricting the rights of
any stoc%holder or class of shares, or
authorizing preferences in any respect
superior to those of outstanding shares
of any class, or
extending or shortening the ter$ of
corporate existence
b. 4n case of sale, lease, exchange, transfer,
$ortgage, pledge or other disposition of all
85
C:486 C4!P4!A;24"8 !6B:A! C4!P4!A;24"8
corporation or any stoc%holder, or
2. Corporate assets are being $isapplied or
wasted.
or substantially all of the corporate property
and assets as provided in the Code5 and
c. 4n case of $erger or consolidation
d. 3xtension or shortening of the ter$ of the
corporation ()@)
e. ;iversion of funds of corporation fro$
pri$ary purpose to secondary purpose
(7!)
6he corporation $ay buyIbac% shares of
stoc%holders sub"ect to the following li$itations
(6reasury shares)
a. 6here $ust be unrestricted retained
earnings
b. 8ust be for a legiti$ate purpose
86

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CORPORATION LAW

a property right, a right in re$.

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