MIDTERMS o Where one corporation is so organized and controlled and its affairs are

conducted so that it is in fact a mere instrumentality or adjunct of the

THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Blg. 68) other
Alter Ego a SH of a group or a group of SH of a stock corporation controls
Q: What is a corporation? another corporation
Sec. 2. Corporation defined. - A corporation is an artificial being created by o Where the corporation is a mere alter ego/farce/conduit of individual
operation of law, having the right of succession and the powers, attributes and SH; Where a subsidiary corporation is created by a parent company
properties expressly authorized by law or incident to its existence. merely as an agency especially if SH/officers are the same
Factors:
Q: What are the 4 attributes of a corporation? 1. Parent owns all/most of capital stock
(SOAP) 2. They have common directors/officers
1. It has the Right of Succession 3. Parent finances subsidiary
2. It is created by operation of law 4. Parent subscribes to all the capital stock
3. It is an artificial being with separate and distinct personality 5. Subsidiary has inadequate capital
4. It has the powers, attributes, and properties expressly authorized by law or 6. Subsidiary is only a department
incident to its existence 7. Parent uses property as its own

Q: What is the doctrine of corporate entity? Q: What are the 3 tests IF BASED ON THE INSTRUMENTALITY RULE?
A corporation is a legal or juridical person with a personality separate and apart 1. Control, not mere majority or complete stock control, but complete domination,
from its individual SH or members and from any other legal entity to which it may not only of finances but of policy and business practice in respect to the
be connected transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
Q: What is the doctrine of piercing the corporate veil? What is the test? 2. Such control must have been used by the defendant to commit Fraud or wrong,
The court will not hesitate to disregard the corporate veil when it is misused or to perpetuate the violation of a statutory or other positive legal duty, or dishonest
when necessary in the interest of justice. The concept of corporate entity was not and unjust act in contravention of plaintiff's legal rights; and
meant to promote unfair objectives 3. The aforesaid control and breach of duty must proximately cause the injury or
The doctrine is used for unjust loss complained of. (Harm)
o 1. Convenience
o 2. To subserve the ends of justice Q: What is the difference between a corporation and a partnership?
Instances: As to creation
o 1. Separate personality will be disregarded As to # of incorporators
o 2. The veil of corporate fiction will be pierced As to commencement
o 3. A corporation will be treated as a mere alter ego As to powers
Some purposes: As to management
o To defeat public convenience, to justify a wrong, to protect fraud, to As to effect of mismanagement
defend a crime As to existence of right of succession
Caveat: the doctrine is frowned upon and must be proceeded with caution As to extent of liability to third persons
Presumption: Separate and distinct As to transferability of interest
Effect: The corporate character is not necessarily abrogated, but the corporation As to term of existence
continues for legitimate purposes As to firm name
o Effect as to liability: As to dissolution
o 1. Corpo = mere association of persons As to law governing
o 2. SH or members = may be personally liable
o 3. Where there are 2 corpos = merged into 1 Q: Can a corporation become a partner?
GR: No. In entering into partnership, the identity of a corporation is lost or merged
Q: What is the instrumentality or alter ego rule? with that of another and the direction of its affairs is placed in the hands of other
Instrumentality Rule a corporation controls another corporation persons other than those provided for by law of its creation

Nudibranch 1
 o EXPN: o Non-stock Corporation - All other corporations are non-stock
o 1. Corpo may enter into a Joint Venture with another where the nature corporations.
of the venture is in line with the business authorized by its charter Purpose: public goal or welfare
o 2. SEC allowed the JVP As to # of persons:
o 3. Where the agreement provides that the 2 will manage the o Corporation Aggregate
partnership so that the management of the corporate interest is not o Corporation Sole
surrendered As to whether they are for religious purposes or not:
o REQ: o Ecclesiastical Corporation
1. All corpos are managing partners o Lay Corporation
2. Law/charter/AOI expressly allows it As to whether they are for charitable purpose or not:
3. Foreign corpo has license to transact here o Eleemosynary Corporation
o Civil Corporation
Q: What are the advantages and disadvantages of a corporation? As to State under whose laws they have been created:
Advantages (ACS-MS-LAT) o Domestic Corporation
o 1. Legal capacity to Act in its own name o Foreign Corporation
o 2. Continuity of existence As to their legal right to corporate existence
o 3. Credit is Strengthened by continuity o De Jure Corporation
o 4. Management is with BOD o De Facto Corporation
5. Creation, Organization, Management, and Dissollution is As to whether they are open to public ownership or not
Standardized o Open Corporation
o 6. Makes feasible gigantic financial undertakings o Close Corporation
o 7. SH have Limited Liability As to whether their relation to other corporation
o 8. Not general agents o Parent/Holding Corporation
o 9. Shares of stock may be transferred o Subsidiary Corporation
Disadvantages: (CEWL-LGS-TV) o Affiliated Corporation
o 1. Complicated in formation As to whether they are for government purposes
o 2. Entails high cost o Public Corporation mere instrumentality of the State subj to govt
o 3. Credit is weakened visitation and control
o 4. Lack of personal element o Private Corporation - - A contract between the State and corporation
o 5. Greater degree of governmental control not subj to visitation by the State
o 6. Management and control is separated from ownership GOCCs
o 7. Voting rights have become theoretized Quasi-Public Corporation
o 8. SH have little voice As to whether they are corporation in a true sense or limited sense only
Hypos from quiz: o True Corporation
Redeemable shares problem o Quasi-corporation
Can Redeemable shares become treasury shares? Corporation by prescription
Mismanagement problem Corporation by estoppel

Q: What are the classes of corporation?
Sec. 3. Classes of corporations. - Corporations formed or organized under this
Code may be stock or non-stock corporations.
o Stock Corporation - Corporations which have capital stock divided into
shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares
held are stock corporations.
Purpose: profit
Sec. 4. Corporations created by special laws or charters. - Corporations created by special
laws or charters shall be governed primarily by the provisions of the special law or charter
creating them or applicable to them, supplemented by the provisions of this Code, insofar as
they are applicable.
Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those
who compose a corporation, whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.

Nudibranch 2

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a
non-stock corporation are called members.
Q: Who are the persons composing a corporation?
1. Corporators those who compose the corporation whether
o Stockholders; or
o Members
2. Incorporators those corporations mentioned in the AOI as originally forming
and composing a corporation; and who executed and signed the AOI; and
acknowledged the same before a notary public
o Function: to enable a corporation to become a body politic under the
law
3. Stockholders the owners of shares of stock in a stock corporation
4. Members corporators of a stock corporation which has no capital stock
3 OTHER CLASSES:
o 1. Promoter persons who bring about the formation and organization
of a corporation by bringing together incorporators or persons
interested in the enterprise, procuring subscriptions or capital for the
corporation and setting in motion the machinery which leads to the
incorporation of the corporation itself; they lay the groundwork
o 2. Subscriber persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed
o 3. Underwriter
further, That there shall always be a class or series of shares which have complete voting
rights. Any or all of the shares or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not
be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in
respect thereto: Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance
with constitutional or legal requirements.

Q: What are the classifications of shares? Except as otherwise provided in the articles of incorporation and stated in the certificate of
Common stock, each share shall be equal in all respects to every other share.
Preferred
Voting Where the articles of incorporation provide for non-voting shares in the cases allowed by
Non-voting this Code, the holders of such shares shall nevertheless be entitled to vote on the following
Share in escrow matters:
Over-issued 1. Amendment of the articles of incorporation;
Watered 2. Adoption and amendment of by-laws;
Par value 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
No par value the corporate property;
Convertible 4. Incurring, creating or increasing bonded indebtedness;
Fractional 5. Increase or decrease of capital stock;
Promotion 6. Merger or consolidation of the corporation with another corporation or other
Founders corporations;
Redeemable 7. Investment of corporate funds in another corporation or business in accordance with this
Treasury Code; and
8. Dissolution of the corporation.
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such Except as provided in the immediately preceding paragraph, the vote necessary to approve a
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, particular corporate act as provided in this Code shall be deemed to refer only to stocks with
That no share may be deprived of voting rights except those classified and issued as voting rights.
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided,

Nudibranch 3
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years subject to the approval of
the Securities and Exchange Commission. The five-year period shall commence from the date
of the aforesaid approval by the Securities and Exchange Commission.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be purchased or taken up by
the corporation upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said shares.
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation.
Q: What are the qualifications of incorporators a corporation?
(5-MOAN)
1. Not less than 5 but not more than 15
2. Majority must be residents
3. Each must own or subscribe to at least 1 share of the capital stock
4. Of legal age
5. Natural Person not suffering from legal incapacity
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said period is extended. The
corporate term as originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the Securities and
Exchange Commission.
Q: What is the term of existence of a corporation?
GR: Not exceeding 50 years
o Unless: sooner dissolved; period is shortened or extended
o Provided: not earlier than 5 years prior to the expiration date
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EXPN: SEC determines that there are justifiable reasons for
an earlier extension
Extension may be made but not exceeding 50 years in a single instance
There is no limit to the number of extensions
Q: What is the requirement as to capital stock requirement?
GR: Sec. 12. Minimum capital stock required of stock corporations. - Stock
corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock (as long as the paid up capital is not less than
5,000)
EXPN: except as otherwise specifically provided for by special law, and subject to
the provisions of the following section.
o Sec. 13: The 25%-25% rule
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the time of incorporation, and at least
twenty-five (25%) per cent of the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos.
Sec. 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of
the official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special
law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which
is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a
non-stock corporation may not include a purpose which would change or contradict its nature
as such;
3. The place where the principal office of the corporation is to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than
fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with
this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of
the Philippines, the number of shares into which it is divided, and in case the share are par
value shares, the par value of each, the names, nationalities and residences of the original
4
subscribers, and the amount subscribed and paid by each on his subscription, and if some or
all of the shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of incorporation of any
stock corporation unless accompanied by a sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of
the corporation has been subscribed, and at least twenty-five (25%) of the total subscription
has been fully paid to him in actual cash and/or in property the fair valuation of which is equal
to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form:
First Meeting.
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and
the vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote or written assent of at least two-
thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be
set out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by
the corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the
stockholders or members, shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six
(6) months from the date of filing for a cause not attributable to the corporation.
Q: What is a Charter?
It is an instrument or authority from the sovereign power bestowing the right or
privilege to be and act as a corporation
Q: How is it different from a Franchise?
Franchise is the right or privilege itself of being a corporation
Charter applies to the instrument bestowing such right and privilege
Nudibranch
Q: What are the components of a corporate charter?
It depends.
As to corporations formed under the general incorporation law:
1. Law under which it was organized (B.P. 68)
2. Articles of Incorporation
3. By laws
4. All applicable provisions of the Constitution and the general laws of the state in
force at the time the corporation was incorporated
As to corporations created by special laws, the charter consists of:
1. Special law which creates the corporation
2. Executive Orders of the President
3. Rules & Regulations applicable to such corps
4. All laws applicable thereto including the Corporation Code
Q: What are the requirements to Amend the Articles of Incorporation under Section 16?
Not otherwise prohibited by Corporation Code or by special law
For legitimate purposes,
With respect to Stock corporations: (RVS)
o (resolution) By a majority vote of the board of directors or trustees and
o The vote or WRITTEN ASSENT of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders in accordance with the
provisions of this Code,
WRITEN ASSENT the SH vote on the amendment need not
be taken at a meeting
o Submission and filing to SEC
With respect to Non-stock corporations:
o The vote or written assent of at least two-thirds (2/3) of the members if
it be a non-stock corporation.
o Submission and filing to SEC
The original and amended articles together shall contain all provisions required by
law to be set out in the articles of incorporation.
Such articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the
stockholders or members, shall be (submitted) to the Securities and Exchange
Commission. Aside from the filing the amendment, the corresponding fees must
be paid.
Date of effectivity: The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with the said
Commission if not acted upon within six (6) months from the date of filing for a
cause not attributable to the corporation.
Sec. 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance with the
5
requirements of this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles
or amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or
paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government agency
to the effect that such articles or amendment is in accordance with law.
Q: What are the grounds for disapproval or rejection of amendment of the AOI? (NUTO)
1. That the articles of incorporation or any amendment thereto is not substantially
in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed
and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution.
Q: Is the enumeration under Section 17 exclusive?
No. Under PD 902-A, the SEC may suspend or revoke after proper notice and
hearing the franchise of corporations, partnerships or associations upon any of the
grounds:
1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation
3. Refusal to comply with or defiance of a lawful order of the commission
4. Continuous inoperation for a period of at least 5 years
5. Failure to file by laws within the required period
6. Failure to file required reports in appropriate forms as determined by the
commission within the prescribed period
Q: Can you think of any other ground?
Sec. 18. Corporate name. - No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
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protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name.
Q: What are the limitations on the corporate name?
Similarity with another trade name
o This is important for lawyers because the first thing that must be done
when organizing and usually it is done by reserving a corporate name
online
Prohibited use of certain names under special laws
o United Nations/UN
o Bonded if the company is not a licensed bonding company
o Bank, Rural Bank
o Savings and Loan association
o Financing companies
Doctrine of Secondary Meaning
o A word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or other
descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article, in that trade
and to that branch of the purchasing public, the word or phrase has
come to mean that the article was his product
Part of name
o Corporation or Corp; Incorporation or Inc
Q: What is the undertaking required to be submitted to the SEC by the corporation?
The undertaking which is attached to articles of incorporation is that the
corporation will change its name later on in case it is discovered that it is in use
already by an existing corporation
LYCEUM V. CA
Q: What is the meaning of Lyceum?
o Root word Liceo means institution for learning
Q: Wont it be confusingly similar?
o No, in the other schools, they put the geographical phrase so as not to
confuse the public (i.e. Lyceum of Aparri)
TH
7 DAY ADVENTIST V. NORTHEASTERN
Q: One argument was that the church was a de facto government to give them
personality. How did SC rule?
o SC says that not all of the 3 requisites of a de facto corporation was
complied with
Q: Which requisite was not complied with?
o There was no bona fide attempt to organize. There was no application
to become a corporation
Q: Assuming that there was application, is this sufficient?
6
 nd
o No, mere application is not sufficient. In order to complete the 2
requisite, there must be issuance of the Articles of Incorporation by SEC
INDUSTRIAL REFRACTORIES V. CA
Q: What are the instances that made the public confused?
o 1. Both have the same 3 words
o 2. Similar packaging
o 3. They cater to the same clientele steel
Q: How did the SC rule on the issue of jurisdiction?
o The SEC has the authority to approve the corporate name
Q: When does the corporation acquire juridical personality?
Sec. 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law
Q: What is the effect when the AOI are issued by SEC?
The incorporators, stockholders/members and their successors shall constitute a
body politic and corporate under the name stated in the articles of incorporation
for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
Q: What is the corporate maximum term?
50 years extendible for another 50 years
Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding.
Q; Does a de facto corporation have juridical personality?
Yes. A de facto may exercise the same power that a de jure exercises
Q: What is the difference between de facto and de jure as to the exercise of corporate
powers?
No difference, as to the exercise of corporate powers.
De Jure Corporation a corporation created in strict or substantial conformity
with the mandatory or statutory requirements for incorporation and the right of
which to exist as a corporation cannot be successfully attacked or questioned by
any party even in a direct proceeding for that purpose by the state
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De Facto Corporation organized with a colorable compliance with the
requirements of a valid law and its existence cannot be inquired collaterally but
such inquiry may be made by the SolGen in a quo warranto proceeding
Q: What are the requisites of a De Facto Corporation?
(LAC)
1. A valid law under which a corporation with powers assumed might be
incorporated
2. A bona fide attempt in GF to organize a corporation under such law
3. Actual user or exercise in Good Faith of corporate powers upon it by law
Q: What do you mean when you say collateral attack of the corporate existence
One whereby corporate existence is questioned in some incidental proceedings
not provided by law for the express purpose of attacking the corporate existence
Q: So can a private person attack the existence of a corporation?
No. Only the State can do so.
Q: What must be done to attack the corporate existence?
Direct Attack
o One whereby the State, in a proceeding brought for that purpose,
attacks the existence of an association claiming to be a corporation
o Can only be instituted by the Solicitor General by Quo Warranto
proceedings
Q: Instances of De Facto Corporation? What is a good example?
nd
Q: What is meant by the 2 requisite, bona fide intention to organize?
Application to organize corporation
Submission of all requirements
Issuance of AOI
HALL V. PICCIO
To become a De Facto Corporation, the articles of incorporation need to be filed
and the SEC must issue the certificate of incorporation. This is the same doctrine
th
reiterated in the 7 day Adventist case.
Assignment: starting from corporation by estoppel up to Sec. 25 plus 4 addl cases
Second Meeting.
Q: What is a corporation by Estoppel?
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued on
7
 any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation
INTERNATIONAL BUSINESS TRAVEL V. CA & KHAN
Q: Was the doctrine of corporation by estoppel applied here? Yes.
Q: Why did the SC say that the CA misapplied the doctrine?
LIM TONG LIM V. PHILPPINE FISHING GEAR
Q: How did the SC address that he was not even a signatory?
Q: Does the fact that he benefitted mean that he was already part of the
corporation?
LOZANO V. DE LOS SANTOS
Q: Why does the doctrine of corporation by estoppel apply?
Q: So when does the principle only apply?
rd
o When 3 person believed in GF
Q: Is there such a thing as automatic dissolution?
Yes.
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation. If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction
of its businesses or the construction of its works, or to continuously operate is due
to causes beyond the control of the corporation as may be determined by the
Securities and Exchange Commission.
Q: What are the grounds for revocation or suspension?
nd
Sec 22, 2 par: However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or revocation of
its corporate franchise or certificate of incorporation
Q: What is the meaning of failure to formally organize? What acts must be done?
This does NOT include the filing of the AOI. R: If there is already an existing
corporation, it already presupposes that AOI has been filed with the SEC and the
latter has already issued Cert. of Incorporation.
Nudibranch
Refers to the act of conducting election of directors and officers, adoption of by-
laws, and filing of the same with the SEC; establishment of a principal office;
providing for subscription and payment of capital stock
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which
he is a director, which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A majority of the directors or trustees of all
corporations organized under this Code must be residents of the Philippines.
Q: Who is the governing body?
Board of directors which shall exercise the powers of the corporation; enter into
business on behalf of the corporation; and hold the property of the corporation
Q: What is the Business Judgment Rule?
Questions of policy or management are left solely to the honest decisions of
officers and directors of a corporation and so long as they act in GF, their orders
are not reviewable by the courts
GR: Courts cannot interfere acts of directors so long as they are intra vires
o EXPN: The act is so oppressive and it adversely affects the minority
status of the corporation
Q: What is the term of the officers?
1 year until a successor is elected and qualified
There is a hold over status of a member of the Board of Directors (or simply
Director). Meaning, he will continue on the business unless a successor is elected
and qualified
Q: What are the qualifications of a Director?
At least 1 share
o Which must be continuously owned by him. Otherwise, he ceases to
become a director
His name is registered in the books of the corporation
Majority of the members are residents of the Philippines
Q: Can the AOI or By-laws provide for other qualifications?
Yes. Provided, that it will not be in conflict with the qualifications set out in the
Corpo Code
8
GRACE CHRISTIAN HIGH SCHOOL V. CA
Issue as to the validity of the clause granting to a permanent seat on the board.
Doctrine: Directors must be elected, not appointed.
GOKONGWEI V. SEC
Doctrine of Corporate Opportunity Director occupies a position of trust and
confidence; of a fiduciary nature; he cannot take advantage of his position for his
own personal interest
Cannot serve 2 masters
3 issues:
(1) WON the amended by-laws which provide for disqualification is valid? Yes.
(2) WON petitioner has the right to look into the books of the corporation as a
shareholder? The SC did not allow the inspection. Reason?
(3) WON SEC was correct in allowing the ratification of petitioner in investing in a
foreign corporation?
INTER-ASIA INVESTMENTS V. CA
Q: Why was the corporation bound even if there was no delegation?
Q: How did the SC come up with the implied authority?
o The power of buying stocks includes all acts necessary thereto, such as
to enter into a payment scheme in order to settle an obligation of the
corporation
Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must
be present, either in person or by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there be no capital stock, a
majority of the members entitled to vote. The election must be by ballot if requested by any
voting stockholder or member. In stock corporations, every stockholder entitled to vote shall
have the right to vote in person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the corporation, or where
the by-laws are silent, at the time of the election; and said stockholder may vote such number
of shares for as many persons as there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided, That the total number of
votes cast by him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of
incorporation or in the by-laws, members of corporations which have no capital stock may
cast as many votes as there are trustees to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest number of votes shall be declared
elected. Any meeting of the stockholders or members called for an election may adjourn from
day to day or from time to time but not sine die or indefinitely if, for any reason, no election is
held, or if there not present or represented by proxy, at the meeting, the owners of a majority
of the outstanding capital stock, or if there be no capital stock, a majority of the member
entitled to vote
Nudibranch
Q: We said that directors must be elected. What are the limitations/conditions of election?
A meeting must be called for the purpose
o Presence of majority of stockholders representing the outstanding
capital stock/members
Method of voting permitted
o Viva voce (raising of hands), if there is a shareholder who wants to vote
by ballot, then it shall be mandatory
In case of failure of election, then the meeting may adjourn from day-to-day
(except indefinitely)
Q: Is notice required? For what?
Yes. For the meeting
Q: What does the law provide as to owners of delinquent stock?
They cannot vote nor be voted for
Q: Stockholders cannot be deprived of the method of voting. What are the methods?
(1) Straight voting method
o Every SH may vote such number of shares for as many persons as there
are directors to be elected
A shareholder can vote such number of shares for as many
persons as there are directors equally
(2) Cumulative voting for 1 candidate method
o A SH is allowed to concentrate his votes and give one candidate as
many votes as the number of directors to be elected multiplied by the
number of shares shall equal
A shareholder can give one candidate all his votes
(3) Cumulative voting by distribution
o By this method, a SH may cumulate his shares by multiplying also the
number of his shares by the number of directors to be elected and
distribute the same among as many candidates as he shall see fit
A shareholder can distribute his votes to diff directors as he
may see fit
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them
by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or trustees present at a meeting at
9
which there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Q: Who are the corporate officers?
President, Treasurer, and Secretary
Q: Are they exclusive?
No. Can elect as indicated in the AOI or by-laws additional officers as the need of
the nature of the business so require
o Ex: VP, auditor, assistant treasurer or secretary
Q: What are the qualifications to become a president?
Must be a director (he is the only officer required to be a member of the board)
Must own at least 1 share
Q: What are the qualifications to be secretary?
Need not be a director
Resident and citizen
o Does not need to be natural-born citizen. Does not need to own one
share
Q: What are the qualifications to be treasurer?
No requirements
Q: Can a person hold 2 positions?
GR: Yes
o EXPN: A president cannot be a secretary; he also cannot be a treasurer.
These are the Prohibited Concurrent Positions.
Reason: to ensure effective monitoring of each officers
separate functions
Q: What does the term quorom mean?
Requires persons to be present in order to competently transact business
Q: What is the required number of persons to constitute a quorum?
Majority of the directors fixed in the AOI
Q: What is the required vote for a corporate act?
Majority of the directors present of the meeting where there is a quorum (majority
of the quorum itself)
o EXPN: except for the election of officers which shall require the vote of
a majority of all the members of the board.
Ex: there are 5 persons present. The vote of 3 of them would constitute a quorum.
Thus, the vote of 2 is sufficient to pass upon a corporate act
Nudibranch
Q: What is the required vote for purposes of election?
50% of the entire membership
NACPIL V. INTL BROADCASTING CORP
Q: What is the test to determine if the assistant manager is a corporate officer?
o Under the Labor code, there are only 3 corporate officers
However, if there is board approval to constitute one as a
corporate officer, (not just approval of the human
resources), then he is a recognized corporate officer
o The jurisdiction of intra-corporate disputes under PD 902-A has been
transferred from the SEC to the RTC by virtue of the SRC.
o If the employee is not a corporate officer, then the Labor arbiter/NLRC
has jurisdiction
Q: Can directors vote by proxy?
GR: No. They cannot attend or vote by proxy in Board Meetings. R: they are
elected officers
o EXPN: In a Shareholders or Members Meeting
Assignment: Sec. 26-35 plus 5 cases
Third Meeting.
Q: After election, what must be done?
Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30)
days after the election of the directors, trustees and officers of the corporation,
the secretary, or any other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and residences of the
directors, trustees, and officers elected.
Q: What happens when a director, trustee or officer dies?
Should a director, trustee or officer die, resign or in any manner cease to hold
office, his heirs in case of his death, the secretary, or any other officer of the
corporation, or the director, trustee or officer himself, shall immediately report
such fact to the Securities and Exchange Commission.
Q: Aside from the corporate secretary or the officer, who else may report the death?
Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of any corporation.
Q: How may directors, trustees or officers be disqualified?
2 grounds:
o (1) Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years, or
10
 o (2) Commission of a violation of the Corpo Code committed within 5
years prior to the date of his election or appointment
Q: Are the grounds under Sec. 27 exclusive?
No. Refer to the qualifications to become a Director, Corporate Secretary,
Treasurer or any other officer. The absence of a qualification will be a ground for
disqualification
Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds
(2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a
vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special meeting called
for the purpose, and in either case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal of directors or trustees,
or any of them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the outstanding
capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be given by publication or
by written notice prescribed in this Code. Removal may be with or without cause: Provided,
That removal without cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section 24 of this Code.
Q: What is the rule on the removal of a director?
The requisites under Sec. 28 are:
o (1) Meeting
o (2) Notice
rd
o (3) 2/3 vote of the stockholders representing the OCS
Q: Who must call the meeting?
The secretary, upon order of the president; or
Written demand of majority of the stockholders representing the OCS
Q: Before hearing, a notice must be transmitted. How is this done?
Publication; or
Written Notice thru ordinary mail or registered mail or courier mail. It does not
matter, so long as the notice is in writing
Q: Do you need to have cause in order to remove a director?
No. So long as the 3 requisites are present, then removal is valid
Sec 28 provides for only on limitation: Without prejudice to the right of
representation of the minority stockholder under Sec. 24
Nudibranch
Q: What does Sec. 24 provide with respect to minority stockholders? How is
elections related to removal?
Q: Does the proviso apply even if the removal is with cause?
o No. The proviso only applies if the removal is without cause
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration
of term, may be filled by the vote of at least a majority of the remaining directors or trustees,
if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the number of directors
or trustees shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.
Q: Assuming that there has already been a vacancy, when should the vacancy be filled?
In the same meeting which provided for the removal; or
In another regular meeting or special meeting
Q: What are the requirements if the filling the vacancy is done in a separate meeting?
2 Basic Requirements:
o (1) Prior notice
o (2) Meeting called of the specific purpose of filling the vacancy. This
means that that it was the agenda of the meeting
Q: Under Sec. 29, how is a vacancy filled in? (memorize)
With respect to Shareholders: (4)
With respect to Director: (1)
Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive any compensation, as such directors,
except for reasonable pre diems: Provided, however, That any such compensation other than
per diems may be granted to directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during the preceding year
Q: Are directors entitled to compensation under Sec. 30?
GR: No. Except reasonable per diems
o EXPNs:
(1) Provided for under the By-laws
(2) Majority vote of the stockholder representing the OCS
Q: How is Compensation different from Per diem?
Per diem is an allowance; it is the motivation of a director to attend the meetings
11
WESTERN INSTITUTE OF TECHNOLOGY V. SALAS
GR: Directors or Trustees are not entitled to compensation because there is a
presumption that they give their services gratuitously to the corp
EXPN: Unless it is provided under the by-laws or by majority vote by stockholders
representing OCS
Doctrine: When a person holds a position in a capacity other than that of a
director, (i.e. corporate officer), then he is entitled to his income in the capacity in
which he acted
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
Q: What are the instances under Sec. 31 that make a Director, Officer, or Trustee solidarily
liable for damages with the corporation (or personally liable for the actions of the
corporation)?
3 grounds under Sec. 31; Plus 3 more
Q: What is a watered stock?
It is stock issued below its par value
SANTOS
GR: Directors, Trustees, or Officers are not personally liable for the corporations
actions. R: Doctrine of Corporate Entity (Separate and distinct)
EXPNs: see above
In the case at bar, none of the exceptions apply.
SPS. DAVID
This is a good example of the first exception which makes a director personally
liable
Q: What made Sps. David revise the design?
o To reduce the cost of construction. Thus, it is prejudicial to the interest
of Sps. Quiambao. There was the commission of patently unlawful acts
o Doctrine: This is a case where the separate and distinct personality of
the corporation was NOT pierced, however, the corporate
officers/director were still made liable for the corporate acts if they fall
under any of the enumerated exceptions (Sir says this is the same
doctrine enunciated in the Santos case. However, it must be noted that
Nudibranch
the corporate officers were not held personally liable in the Santos
case)
MALAYAN
Same doctrine as the Santos and Sps. David
Sec. 32. Dealings of directors, trustees or officers with the corporation.- A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option
of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.
Q: Who is a self-dealing director under Sec. 32?
When a corporation enters into a contract with a director, the GR is that it is
VOIDABLE at the option of the corporation
EXPN: It could be ratified by the presence of all 4 conditions precedent.
rd
Q: What if only the 3 requisite is present, can there be ratification?
rd
Yes, provided that it is accompanied by 2/3 vote of the stockholders representing
the OCS
This applies in the case of contracts entered into by a Director
Q: What if there is an absence of all the conditions, is it possible that the contract be
ratified?
Yes. The contract is voidable, which means that it is valid until annulled
If no one questions the validity of the contract in a proper suit, then it is ratified
(implied)
PRIME WHITE CEMENT
Although the powers were delegable to Te and the contract were ratified, still Te is
a self-dealing director who failed to prove that the contract complied with Sec. 32.
Thus, the corporation can rescind the contract
The SC ruled that the contract was not fair and reasonable
12
 Q: What was the SCs ruling as to Te entering into contracts with other companies?
Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Q: What is a contract between interlocking directors under Sec. 33?
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account to the latter for all such profits
by refunding the same, unless his act has been ratified by a vote of the stockholders owning
or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director risked his own funds in the venture.
Q: Who is a disloyal director under Sec. 34?
One who acquires for himself a business opportunity in which he gains profit but
which should belong to the corporation
The consequence is that such director must account, return/refund the amount to
the corporation
rd
o EXPN: unless the act was ratified by 2/3 vote of the stockholders
representing the OCS
Give a specific example of a disloyal director
Assignment: 35-45 + cases
Fourth Meeting.
Sec. 35. Executive committee. - The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board, to be appointed by the
board. Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1) approval of any action for which shareholders'
approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal
of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of
the board which by its express terms is not so amendable or repealable; and (5) a distribution
of cash dividends to the shareholders.
Q: What is an executive committee?
Nudibranch
Q: What is its composition?
Q: What are the powers of the executive committee?
Q: Can they issue cash dividends? How about stock dividends? No.
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code
has the power and capacity: (PIMPS-DO-SCAB)
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation
Q: What are the powers of a corporation?
Express
Incidental to its existence
Implied from express power
Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That in case of extension of
13
corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.
Q: What are the requirements of extending or shortening the corporate term
Approval by majority vote of BOD
Written notice
rds
Ratification by SH representing 2/3 of the OCS
A copy of the amended AOI shall be submitted to the SEC for approval
Q: What if notice is thru LBC or Fedex?
o Valid. Reason: it is equivalent to personal service because what you are
doing is to merely deputize the personal service to these couriers
Q: What is the appraisal right of dissenting shareholders?
Q: Is there appraisal right apply both to extending and shortening?
Yes
Sec. 37 applies to extension
Sec. 81 applies to shortening
Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-
par stock thereof actually subscribed, the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par stock subscribed by each, and
the amount paid by each on his subscription in cash or property, or the amount of capital
stock or number of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
Nudibranch
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least twenty-five (25%)
percent of such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof
Q: What are the requirements to increase or decrease capital stock or incur, create, and in
increase?
(PDAF-CART)
Q: What is the limitation to this power?
Q: What are the ways?
(CRAC-PaNuNu)
Q: What is bonded indebtedness?
It is the corporation indebtedness evidenced by bonds or notes
Q: What is the difference between bond v. note?
As to the amount
As to the term
As to the persons involved
Q: What are the parties to a corporate bond?
(1) Borrowing
14
 (2) Bondholder
(3) Trustee
o He has the responsibility to secure the interest of shareholders
Q: Give at least 3 kinds of bond
Mortgage bond
Equipment bond
Collateral trust bond
Straight debenture
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares
to be issued in compliance with laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt.
DEE V. SEC
Q: Why did SC say that there is no pre-emptive right?
Additional issuance of original shares, not new issuances. New issuances arise only
when capital stock is increased
Q: What is a pre-emptive right? When is it available to a shareholder?
The preferential right of SH to subscribe to all issues or disposition of shares of any
class in proportion to their present stockholdings
o Purpose: to enable SH to retain his proportionate control in the
corporation and to retain his equity in the surplus
Q: When will a corporation have new issuances?
When it increases its capital stock
See illustration in book
Q: What is the purpose of giving pre-emptive right?
So the shareholder can retain his interest. Otherwise, his interest will diluted
Q: When is pre-emptive right not available?
Q: How will you deny a shareholder pre-emptive right?
Q: What are the requisites to the validity of the sale of all or substantially all of the property
of the corporation
MCLEOD
GR
4 exceptions
Nudibranch
None of the exceptions apply in the case at bar
31/41 (personally liable)
Andrada v. Mcleod
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on
illegal combinations and monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors
or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the rights of third parties under
any contract relating thereto, without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
Q: What are the requirements?
PARDS
Q: In sale of all or substantially all of the property, is there appraisal right of a dissenting
shareholder?
Yes. It is the right to demand the fair value of the SH share, after dissenting from a
proposed corporate action involving fundamental change in the corporation in
cases provided by law
15

Q: Do all shareholders have such right?
Yes. Shareholders have right to demand payment to the fair value of his share
Q: When do you consider an asset substantial?
Sale or other disposition shall be deemed to cover substantially all the corporate
assets if
o 1. The corporation would be rendered incapable of continuing the
business; or
o 2. Accomplishing the purpose for which it was incorporated
Q: Can board change its mind and not push through with the sale?
Yes. The board has such discretion
ISLAMIC DIRECTORATE
It is a share which is less than 1 corporation share
Ex: if a SH owns 250 shares and corp declares 25% stock dividend, his total shares
will be 312 and shares. The corpo may purchase the fractional shares
Reason why fractional shares must be eliminated: they cannot be represented at
corporate meetings
Q: Can shareholders buy fractional shares? -
Q: What are the requirements before a corporation acquire its own shares?
(CLUG-C)
Its capital is not impaired
Must be for a legitimate corporate purpose
Corporation has unrestricted retained earnings
The corporation act in good faith without prejudice to the rights of the creditors
The conditions of corporate affairs allow it

PNB Q: What is the trust fund doctrine?

The subscribed capital stock of the corporation is a trust fund for the payment of
Fifth meeting. debts of the corporation which the creditors have the right to look up to satisfy
their credits, and which the corporation may not dissipate. The creditors may sue
Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase the SH directly for the latters unpaid subscription.
or acquire its own shares for a legitimate corporate purpose or purposes, including but not The assets of the corporation as represented by its capital stock are TRUST FUNDS
limited to the following cases: Provided, That the corporation has unrestricted retained to be maintained unimpaired and to be used to pay corporate creditor
earnings in its books to cover the shares to be purchased or acquired: o So that there can be no distribution of assets among shareholders
1. To eliminate fractional shares arising out of stock dividends; without first paying the corporate debts
2. To collect or compromise an indebtedness to the corporation, arising out of Any disposition of the corporations assets to the prejudice of creditors who
unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold extended their credit on the faith of the corporations capital stock is VOID
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares Sec. 42. Power to invest corporate funds in another corporation or business or for any other
under the provisions of this Code purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in
any other corporation or business or for any purpose other than the primary purpose for
Q: What are legitimate purposes? which it was organized when approved by a majority of the board of directors or trustees and
Under Sec. 41: (EC-PaTREC) ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital
o To eliminate fractional shares stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at
o To collect or compromise an indebtedness a stockholder's or member's meeting duly called for the purpose. Written notice of the
o To pay the shares of dissenting or withdrawing shareholders proposed investment and the time and place of the meeting shall be addressed to each
The enumeration under Sec. 41 is not exclusive. The following are other instances stockholder or member at his place of residence as shown on the books of the corporation
not included in the enumeration: and deposited to the addressee in the post office with postage prepaid, or served personally:
o To acquire treasury shares Provided, That any dissenting stockholder shall have appraisal right as provided in this Code:
o To acquire redeemable shares Provided, however, That where the investment by the corporation is reasonably necessary to
o To reacquire shares to effect a decrease in the capital stock of a accomplish its primary purpose as stated in the articles of incorporation, the approval of the
corporation stockholders or members shall not be necessary.
o In a close corporation, where there is a deadlock in the management,
SEC may order the purchase of share at their FMV (to remove the Q: What are the requirements before a corporation can invest in another corporation or
deadlock) business?
With respect to purposes other than primary purpose: (A-RAMEN)
Q: What is a fractional share? o Approval by a majority of the board of directors

Nudibranch 16
 o Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock
o Without prejudice to a dissenting stockholders appraisal right
o Meeting duly called for the purpose
o Prior written notice
With respect to primary purpose:
o Ratification by stockholders or member is not necessary
Q: Is investment without the approval of shareholders allowed? Give an example
Yes, with respect to investments by a corporation reasonably necessary to
accomplish a primary purpose which is stated in the AOI
Q: Is there a possibility that an investment can be made in order to accomplish a purpose
other than the primary purpose and still there is no need for ratification by the
stockholders?
Yes, if the purpose is incidental or reasonably necessary to accomplish the primary
purpose
o Ex: Beer manufacturer invests in equipment from another country to
brew beer (See book)
Dividend is that portion of the profits or net earning which the corporation has set
aside for ratable distribution among the shareholders
o They are the assets of the shareholders
o There are generally 3 kinds of dividends:
1. Cash dividend
2. Property dividend
3. Stock dividend
Profit means return to capital rather than earning from labor performed or
services rendered. Profits are not dividends unless declared or set aside by the
corporation
o They are the assets of the corporation
Dividends come from profits while profits are the source of dividends
Q: Who has the power to declare dividends?
Board of directors have the power to declared dividends out of unrestricted
retained earnings
Stock dividends requires ratification of shareholders representing 2/3 of the
outstanding capital stock in a meeting called for the purpose
Other dividends mere approval of the Board is sufficient to declare dividends

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may Q: What is the reason why ratification for stock dividends is required but it is not required in
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in cash dividends? See p. 416 of book
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid Q: What are unrestricted retained earnings?
balance on the subscription plus costs and expenses, while stock dividends shall be withheld Retained earnings = assets liabilities and legal capital
from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, o Excess of the profits Retained Earnings
That no stock dividend shall be issued without the approval of stockholders representing not o Negative balance Deficit
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly Other term: surplus profits
called for the purpose.
Q: What is the meaning of unrestricted?
Stock corporations are prohibited from retaining surplus profits in excess of one hundred Items which are not set aside or earmarked for the some purpose; free to be
(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate distributed
expansion projects or programs approved by the board of directors; or (2) when the Unrestricted free for dividend distribution to shareholders, if they have not been
corporation is prohibited under any loan agreement with any financial institution or creditor, reserved or set aside by the board of directors for some corporate purpose or
whether local or foreign, from declaring dividends without its/his consent, and such consent some other purpose in accordance with managerial, legal, or contractual
has not yet been secured; or (3) when it can be clearly shown that such retention is necessary requirements
under special circumstances obtaining in the corporation, such as when there is need for o Example of purpose that are restrictive:
special reserve for probable contingencies. Corporate expansion
Payments for debt and liabilities
Q: What is a dividend? Insurance reserves
It is that part or portion of the profits of a corporation set aside, declared, and Bank reserves
ordered by the directors to be paid ratably to the shareholders on demand or at a
fixed time Q: May dividends be declared out of capital?
Purpose: return of investment of the stockholders GR: No. A corporation cannot make a valid contract to pay dividends other than
from retained earning or profits and an agreement to pay such dividends out of
Q: What is the difference between dividend and profit? capital is null and void
EXPN:

Nudibranch 17
 o (1) Dividends from investments wasting assets corporation (ex: corp
engaged in mining or timber cutting)
o (2) To utilize a lease or patent
o (3) Liquidating dividends
Q: What are the requirements before dividends may be declared?
With respect to Cash Dividends:
o Existence of unrestricted retained earnings (this is the most basic
requirement)
o Resolution of the Board declaring the payment of such earning to the
shareholders
With respect to Stock Dividends:
o Existence of unrestricted retained earnings
o Resolution of the Board declaring the payment of such earning to the
shareholders
o Approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called
for the purpose.
o Corp must have sufficient number of authorized unissued shares for
distribution to stockholders
Otherwise, it must increase its capital stock to the extent of
the corporate earnings to be declared and distributed as
stock dividends
Q: What are the limitations in retaining surplus profits?
GR: Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock
EXPN: (SLEx)
(1) When justified by definite corporate expansion projects or programs approved
by the board of directors; or
(2) When the corporation is prohibited under any loan agreement with any
financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or
(3) When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
NIELSON CASE
Stock dividends are payable only to shareholders of the corporation and not to
strangers or non-stockholders
o Reason: only shareholders are entitled to ANY KIND OF DIVIDEND
Q: Could there be a possibility that you pay a stranger thru shares of stock?
o Yes
Sec. 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
Nudibranch
outstanding capital stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the pertinent
laws or regulations.
Q: What is a management contract?
It is an agreement whereby a corporation delegates the management of its affairs
to another corporation for a certain period of time (not exceeding 5 years)
o The managed corporation is bound by the acts of the managing
corporation. It is estopped from denying such authority.
Any contract whereby a corporation undertakes or operates all or substantially all
of the business of another corporation whether such contracts are service
contracts, operating agreements or otherwise (Sec. 44)
Q: Can a natural person enter into a management contract with a corporation?
No. The law expressly provides that only a corporation can enter into a
management contract with another corporation. A contract between a
corporation and a natural person is called an employment contract.
Q: What are the requirements of a management contract?
(ARMA-5)
1. Approval by majority of the quorum of the board of directors
2. Ratification by shareholders owning at least majority of the outstanding capital
stock of BOTH:
o The managing corporation
o The managed corporation
3. Meeting duly called for the purpose
4. Approval by the shareholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote:
o (1) Where a stockholder/s representing the same interest of both the
managing and the managed corporations own or control more than 1/3
18
 of the total outstanding capital stock entitled to vote of the managing o Recovery is permitted in most courts by the one who performed and
corporation (INTERLOCKING SHAREHOLDERS); or not the one who received benefits
o (2) Where a majority of the members of the board of directors of the o Other courts unenforceable and orders the person benefitted to
managing corporation also constitute a majority of the members of the return that which is received/pay its reasonable value
board of directors of the managed corporation (INTERLOCKING Contracts ultra vires in part:
DIRECTORS o If separable, sustain/enforce the part which is not ultra vires and hold
See illustrations of these 2 cases in the book invalid the ultra vires part
5. GR: No management contract shall be entered into for a period longer than 5 Executory contract no enforcement even at the suit of either party (void or
years for any one term unenforceable)
o EXPN: Contracts which relate to exploration, development, exploitation Executed contract courts will not set aside or interfere with such contracts
or utilization of natural resources that may be entered into for such Part executed and part authorized principle of no unjust enrichment at the
periods as may be provided for by law expense of another shall apply
Executory contract apparently authorized but Ultra Vires the principal of
Q: What are the limitations of a management contract estoppel shall apply
Must comply with: (1) Approval of the board, (2) Ratification of the SH or (4)
Approval of SH if falling under either of the 2 cases, and (5) Period of contract. HYDRO
In the case of Interlocking directors, the contract must comply with the Doctrine of apparent authority
requirements of Sec. 33
Also, a management contract cannot delegate entire supervision and control over Q: Is an ultra vires act an illegal act? What is the difference between ultra vires act and
the officers and business of a corporation to another. In other words, there is no other acts
total abdication of the powers of the corporation By itself, it is not necessarily illegal.
o Otherwise it will contravene Sec. 23, which provides for the rule that Ultra Vires Acts Illegal Acts
the corporate powers of all corporations shall be exercised by the As to nature Not necessarily unlawful, but Unlawful; against law, public
board outside the powers of the morals, public policy, and
corp public order
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or As to susceptibility of Can be ratified (expressly or Cannot be ratified because
exercise any corporate powers except those conferred by this Code or by its articles of ratification impliedly) by the they are void ab initio
incorporation and except such as are necessary or incidental to the exercise of the powers so shareholders. Reason: Such
conferred. acts are merely voidable

Q: What is an ultra vires act? As to binding effect Can bind parties wholly or Cannot bind the parties
Not within express, implied, and incidental powers. Not expressly, but rather partly executed on the basis
impliedly forbidden since it is not recognized power of the corporation of estoppel
Intra vires acts done within the legitimate powers of the corporation Ultra Vires Acts Acts beyond the powers of particular
It is an act committed outside the object for which a corporation is created as officers or directors
defined by the law of its organization and therefore beyond the powers conferred
Ultra Vires Acts Acts done w/o complying with certain
upon it by law
conditions and formalities
Q: What are the consequences/effects of an ultra vires act? Ultra Vires Acts Acts involving inexistent contracts
Ultra vires contract which is executory on both sides:
o Unenforceable by either party
This means that neither party can demand the performance Q: Is an ultra vires act subject to ratification?
of the obligation With respect to contract or act illegal per se:
Ultra vires contract which has been performed on both sides: o No. it is wholly void and inexistent. It cannot be ratified. The doctrine of
o Neither party can maintain an action to set aside transaction/recover estoppel cannot operate to give effect to a void act
Ultra vires contract which has been performed on one side: With respect to contract or act not illegal per se:
o Merely voidable and may be ratified or doctrine of estoppel may be
enforced

Nudibranch 19
 o Provided that ratification must be by the officer or governing body
having authority to make the contract
GR: Approval of the Board is sufficient to ratify an ultra vires
act
EXPN: Instances which require ratification of stockholders
Assignment:
Up to Sec. 59 plus cases
Sixth meeting.
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one
(1) month after receipt of official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative
vote of the stockholders representing at least a majority of the outstanding capital stock, or of
at least a majority of the members in case of non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the stockholders or
members during office hours. A copy thereof, duly certified to by a majority of the directors
or trustees countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and
filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or amendments are in accordance with
law
Q: What are by-laws?
By-Laws - the rules of action adopted by a corporation for its internal government
and for the government of its stockholders or members and those having the
direction, management, and control of its affairs in their relation to the
corporation and among themselves
o It includes rules for routine matters (i.e. calling meetings, etc)
The power to adopt by-laws is inherent in every corporation
Nudibranch
The word by-law signifies a rule for future action (that is why it cannot be
retroactively applied if it will impair existing contracts or vested right)
Q: What are the functions of by-laws? (SuSoDeRegla)
(1) To supplement the AOI
(2) To be the source of authority for corporate officers and agents
(3) To define the rights and duties of the corporate officers and directors/trustees
as well as of stockholders/members towards the corporation and among
themselves
(4) To regulate business transactions of the corporation in a particular way
Q: Why does a corporation need to adopt by-laws?
When a corporation comes to existence upon the issuance of the certificate of
corporation, it does not mean that it is already prepared to do business. It may be
in existence, but it is not yet organized.
To be organized, it is required that: (1) There are executive officers charged with
the management of the corporations affairs, and (2) There are rules governing the
management of its affairs
Q: What are the requirements for the adoption of by-laws?
With respect to by-laws adopted PRIOR to incorporation:
o The by-laws must be signed and approved by ALL the incorporators and
submitted with the SEC together with the AOI
o Q: What specific time should you file or submit the by-laws if you file
PRIOR to incorporation?
Upon filing of the AOI. Since the SEC already provides for a
ready-made form which contains AOI and by-law, what
needs to be done is to fill it up.
With respect to by-laws adopted and filed AFTER incorporation
o The by-laws must be adopted within 1 month after receipt of notice of
issuance of the certificate of incorporation by the SEC
o The affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the
members in case of non-stock corporations
In either of the above cases, the following are also required:
o With respect to special corporations governed by special laws, the SEC
shall not accept their by-laws/amendment thereto unless accompanied
by a certification by the appropriate government agency to the effect
that such by-laws/amendments are in accordance with law
o Must be signed by the voting stockholders and members voting for
them
o Must be kept in the principal office of the corporation subject to the
inspection of the stockholders or members during office hours
o Must file a copy of the entire by-laws (certified by majority of the
directors/trustees and countersigned by the corporate secretary) with
the SEC who will attach the same to the original AOI (but this is only a
formal requisite according to an SEC Opinion)
20

Q: When do by-laws take effect?
Upon the issuance SEC of a certification that the by-laws are not inconsistent with
the Corporation Code
Q: Is the 30-day period mandatory? What is the effect if the corporation does not file the by-
laws within the required period?
No, it is not mandatory. Failure to file the by-laws within 30 days from
incorporation does not automatically dissolve the corporation
o Reason: It is merely a ground for suspension or revocation of its charter
(See Sec. 22(2)) or imposition of administrative fine after notice and
hearing
o This was the doctrine cited in LOYOLA V. CA
By failing to submit its by-laws within the prescribed period, a corporation can be
considered as a de facto corporation which cannot be collaterally attacked.
Under the rules and regulations of the SEC, the failure may be merely with the
imposition of an administrative fine
Q: What are the elements of valid by-laws? (LaMOG-CR)
(1) Must not be contrary to existing law and inconsistent with the Corporation
Code (See Sec. 47)
o SC declared invalid the automatic and permanent seat in the Board of
Directors contrary to Sec. 23 of the Corpo Code. By-laws contrary to law
cannot attain validity on the basis of long practice nor give rise to any
vested rights (Grace Christian High School v. CA)
(2) Must not be contrary to morals and public policy
(3) Must not impair existing obligations of contracts or rights
o SALAFRANCA V. PHILAMLIFE
The right to amend the by-laws lie solely in the discretion of
the employer corporation. However, the right cannot impair
the obligation of existing rights such as the right to security
of tenure of regular EEs under the LC
Q: What right was violated?
The security of tenure which is granted to an
employee who was become regular after working
for more than 1 year. Such regular employee
cannot be dismissed without just or authorized
cause under the Labor Code
(4) Must be general and uniform in their operation and not directed against
particular individuals (or not discriminatory)
o A by-law disqualifying a person from being elected as a director if he is
already a director in a competitor corporation is VALID if it equally
applies to all stockholders (Gokongwei v. SEC)
(5) Must be consistent with the charter or AOI
o By-laws are subordinate to the charter and AOI
(6) Must be reasonable
Nudibranch
Q: Explain the binding effect of the by-laws.
Until repealed or amended, a by-law is a continuing rule for the govt of the
corporation and the individuals composing it
As to members and 1. They have the force of contract between the members
shareholders themselves
2. There is a conclusive presumption that they know the
provisions of the corporate by-laws by the fact of their being
such is charged with notice of by-laws. If he remains actually
ignorant of the provisions, he does so at his peril
As to corporate directors 1. They have force and effect of laws of the corporation
and its officers 2. They are bound by and must comply with them unless and
until they are changed
3. Subordinate employees without actual knowledge of the by-
laws are not bound
As to third persons GR: They are not bound to know the by-laws. Reason: by-laws
merely operate as internal rules among the stockholders
EXPN: unless they have notice/actual or constructive knowledge.
CHINA BANK V. CA
Q: So who has the better right to the stock
certificate?
o China Bank because at the time it entered into
the transaction with the SH, it was not given
notice as to the by-laws of VGCCI and thus, is
not bound thereby
Q: Why did the SEC have jurisdiction?
o SC ruled that the interpretation of the by-laws
is clearly an intra-corporate dispute which may
be resolved thru the technical expertise of the
SEC
Q: What must be contained in the by-laws? Give at least 5
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may provide in its by-laws
for: (TiTiQuoP-D-Ho-Ma-PeStO)
1. The time, place and manner of calling and conducting regular or special meetings
of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;
a. Q: Why does this item not provide for the PLACE whereas in the 1
st
item it does?
i. The reason is because with respect to a board meeting, the
place of meeting may be ANYWHERE in or out of the
Philippines; Whereas the place of a SH/Ms meeting is
either:
1. The city/municipality where the principal office
of the corporation is located; or
2. The principal office of the corporation
21
 3. The required quorum in meetings of stockholders or members and the manner of Q: When is the delegated power revoked?
voting therein; The power delegated to the board of directors or
4. The form for proxies of stockholders and members and the manner of voting trustees to amend or repeal any by-laws or adopt
them; new by-laws shall be considered as REVOKED
5. The qualifications, duties and compensation of directors or trustees, officers and whenever stockholders owning or representing a
employees; majority of the outstanding capital stock or a
6. The time for holding the annual election of directors of trustees and the mode or majority of the members in non-stock
manner of giving notice thereof; corporations, shall so vote at a regular or special
7. The manner of election or appointment and the term of office of all officers other meeting.
than directors or trustees; Q: In the second way that by-laws may be amended, is a
8. The penalties for violation of the by-laws; meeting required?
9. In the case of stock corporations, the manner of issuing stock certificates; and Yes. Although there is no express requirement of
10. Such other matters as may be necessary for the proper or convenient transaction a meeting in this case, such meeting is necessary.
of its corporate business and affairs. Reason: if revocation of the delegated power
requires a meeting, there is no reason why a
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote meeting is not also required in the delegation of
thereof, and the owners of at least a majority of the outstanding capital stock, or at least a such power
majority of the members of a non-stock corporation, at a regular or special meeting duly Q: What are the formal requirements?
called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners o A meeting is required (Whether in majority vote, delegation, or
of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a revocation of delegated authority, meeting is required)
non-stock corporation may delegate to the board of directors or trustees the power to amend o The amended or new by-laws shall be attached to the original by-laws
or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board in the office of the corporation
of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be o A copy of the amended or new by-laws shall be duly certified under
considered as revoked whenever stockholders owning or representing a majority of the oath by the corporate secretary and a majority of the directors or
outstanding capital stock or a majority of the members in non-stock corporations, shall so trustees and shall be filed with the SEC the same to be attached to the
vote at a regular or special meeting. original articles of incorporation and original by-laws.
o With respect to special corporations governed by special laws, the SEC
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall not accept their by-laws/amendment thereto unless accompanied
shall be attached to the original by-laws in the office of the corporation, and a copy thereof, by a certification by the appropriate government agency to the effect
duly certified under oath by the corporate secretary and a majority of the directors or that such by-laws/amendments are in accordance with law
trustees, shall be filed with the Securities and Exchange Commission the same to be attached Although this requirement is embodied under Sec. 46 and
to the original articles of incorporation and original by-laws. not in 48, still it is required. Reason: Since the power to
make by-laws implies the power to alter, amend, or enact
The amended or new by-laws shall only be effective upon the issuance by the Securities and new ones, it follows that the latter power has the same
Exchange Commission of a certification that the same are not inconsistent with this Code limits as the former power

Q: How may by-laws be amended/repealed or new by-laws be adopted? Q: When do the amended or new by-laws take effect?
There are 2 ways: The amended or new by-laws shall only be effective upon the issuance by the
o (1) By majority vote of the board of directors or trustees AND the Securities and Exchange Commission of a certification that the same are not
owners of at least a majority of the outstanding capital stock, or at least inconsistent with this Code
a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any Q: What is the difference between by-laws and resolution?
by-laws or adopt new by-laws Resolution By-Laws
o (2) The owners of 2/3 of the outstanding capital stock or 2/3 of the Nature and subj-matter Mere declaration of the Permanent rule of action of
members in a non-stock corporation may delegate to the board of corporate will; applies to a the conduct of corporate
directors or trustees the power to amend or repeal any by-laws or single act of the corporation affairs
adopt new by-laws. Rule in case of conflict Subordinate Prevails over resolution

Nudibranch 22
Necessity of approval by SEC No need for SEC approval Subj to the approval of SEC the principal office of the corporation is located, and if practicable in the principal office of
unless required by law the corporation: Provided, That Metro Manila shall, for purposes of this section, be
considered a city or municipality.
Q: What is the difference between by-laws and AOI?
AOI By-Laws Notice of meetings shall be in writing, and the time and place thereof stated therein.
As to nature Condition precedent to Condition subsequent; its
corporate existence absence is only a ground for All proceedings had and any business transacted at any meeting of the stockholders or
revocation/suspension of members, if within the powers or authority of the corporation, shall be valid even if the
charter meeting be improperly held or called, provided all the stockholders or members of the
As to purpose Constitutes the charter of Merely rules and regulations corporation are present or duly represented at the meeting.
the corporation of the corporation
As to time of execution Executed before Executed within 1 month Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings of the
incorporation after certificate of board of directors or trustees of every corporation shall be held monthly, unless the by-laws
incorporation (but may be provide otherwise.
prior thereto) Special meetings of the board of directors or trustees may be held at any time upon the call of
As to Amendment Amended by majority vote Amended by majority vote of the president or as provided in the by-laws.
by the Board AND the Board AND owners of at
stockholders representing least majority of OCS Meetings of directors or trustees of corporations may be held anywhere in or outside of the
2/3 of OCS Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings
stating the date, time and place of the meeting must be sent to every director or trustee at
As to delegation of power to Cannot be delegated May be delegated to the
amend Board by owners of at least least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A
director or trustee may waive this requirement, either expressly or impliedly.
2/3 of the OCS
Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings of the
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may
directors or trustee as well as of the stockholders or members, unless the by-laws provide
be regular or special.
otherwise.
Sec. 50. Regular and special meetings of stockholders or members. - Regular meetings of
Q: What are the kinds of meetings?
stockholders or members shall be held annually on a date fixed in the by-laws, or if not so
SH/M meeting
fixed, on any date in April of every year as determined by the board of directors or trustees:
o Regular
Provided, That written notice of regular meetings shall be sent to all stockholders or members
o Special
of record at least two (2) weeks prior to the meeting, unless a different period is required by
D/T meeting (or Board Meeting)
the by-laws.
o Regular
o Special
Special meetings of stockholders or members shall be held at any time deemed necessary or
as provided in the by-laws: Provided, however, That at least one (1) week written notice shall
Q: What is the importance of the meeting?
be sent to all stockholders or members, unless otherwise provided in the by-laws.
So that the persons SH/M or D/T may act upon certain corporate matters, discuss
issues, and exercise their right to vote in appropriate case under the Corpo Code.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and
Q: Is there Any instance wherein a meeting is no longer required?
Exchange Commission, upon petition of a stockholder or member on a showing of good cause
Yes.
therefor, may issue an order to the petitioning stockholder or member directing him to call a
GR: A meeting is always needed
meeting of the corporation by giving proper notice required by this Code or by the by-laws.
o EXPN: With respect to the amendment of the AOI, mere WRITTEN
The petitioning stockholder or member shall preside thereat until at least a majority of the
ASSENT is required
stockholders or members present have been chosen one of their number as presiding officer.
Q: For example, the principal office is located in Las Pinas, can the SH meeting be held in
Sec. 51. Place and time of meetings of stockholders or members. - Stockholders' or
Muntinlupa?
members' meetings, whether regular or special, shall be held in the city or municipality where

Nudibranch 23
 Yes. With respect to the place of SH/M meeting, Metro Manila shall be considered Provided, That Metro
as a city Manila shall, for
purposes of this section,
Q: Can the SEC call for a meeting? be considered a city or
No. municipality
A stockholder may petition before the SEC when there is no person authorized to
call the meeting and if the SEC finds good cause, it will direct the petitioning SH/M EXPN: If the meeting be improperly
to call the meeting held or called, it is still VALID,
The SEC will not call the meeting, it may only make an order directing SH to hold a provided:
meeting 1. The proceedings had and any
business transacted are within the
Q: Is there any instance wherein a SH/M may preside in a meeting? powers or authority of the
Yes corporation (not ultra vires); and
Q: So any ordinary SH/M may preside? 2. ALL the SH/M of the corporation
o No are present or duly represented at
the meeting
Q: If the by-laws are silent, who shall preside? Notice Written notice Written notice Written notice must be given to every
must be given to must be given Director or Trustee at least 1 day prior
EXPERT TRAVEL SH/M at least 2 to SH/M at to the meeting, unless: 1. Otherwise
A foreign corporations resident agent who is a lawyer is not authorized to sign the weeks prior to least 1 week provided under the by-laws, or 2.
certification or verification of non-forum shopping in the absence of a Board the meeting, prior to the Waived by the D/T
Resolution authorizing him to do so and such is submitted to the court unless: 1. meeting,
The SC recognized teleconferencing, videoconferencing, audio-conferencing as a Otherwise unless: 1.
means to conduct business. However, these modes cannot be used to substitute a provided in by- Otherwise
written board resolution laws, or 2. provided in by-
o Bases: Waived by the laws, or 2.
1. R.A. 8792 E-Commerce Act SH/M Waived by the
2. SEC memorandum no. 15 guidelines to be complied with SH/M
a. (Sabi ni sir take a look at these) Requisites of notice of meeting: (AW-DaBus-TiLaw)
1. Must be issued by one who has authority to issue it
STOCKHOLDERS/MEMBERS MTG. DIRECTORS/TRUSTEES MEETING 2. Must be in writing
Time Regular meeting Special Regular meeting Special meeting 3. Must state date, time, and place unless otherwise provided in by-
those held Meeting those held by the those held by the laws
ANNUALLY: those held at board MONTHLY, board at ANY 4. Must state business to be transacted
1. On a date ANY TIME: unless the by- TIME: 5. Must be sent at a certain time before scheduled
fixed in the by- 1. Deemed laws provide or 1. Upon the call of 6. Must comply with any other requirements prescribed by law or by-
laws, or necessary or otherwise the president or laws
2. On any date in 2. As provided 2. As otherwise Who may call 1. Person/s designated in by-laws By the President, unless otherwise
April of every in the by-laws provided in the by- have authority to call SH/M provided in the by-laws
year as laws meeting;
determined by 2. In the absence of such provision
the Board in by-laws, it may be called by a D/T
Place GR: (1) In the CITY OR MUNICIPALITY ANYWHERE in or out of the Philippines, or by an officer entrusted with the
where the principal office of the unless the by-laws provide otherwise management of the corp;
corporation is located, and (2) if 3. A petitioning SH/M may make the
practicable in the PRINCIPAL OFFICE call upon the order of the SEC
of the corporation: whenever for any cause, there is no

Nudibranch 24
 person authorized to call the Once there is a quorum at the time the meeting is called to order, even if some
meeting; people walked out leaving less than the majority, the proceedings will be valid. A
4. A special meeting for removal of minority group cannot prevent corporate action by walking out
D/T may be called by the secretary
or by SH/M Seventh meeting.
Who may 1. President presides the meetings President presides the meetings unless
preside unless the by-laws provide the by-laws provide otherwise Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or
otherwise mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly
2. A SH/M may preside in a given by the pledgor or mortgagor such right in writing which is recorded on the appropriate
temporary capacity where the corporate books.
person authorized to preside is
absent Executors, administrators, receivers, and other legal representatives duly appointed by the
court may attend and vote in behalf of the stockholders or members without need of any
3. The petitioning SH/M shall written proxy.
preside until at least a majority of
the SH/M present have chosen one Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock owned jointly
of their number as presiding officer by two or more persons, in order to vote the same, the consent of all the co-owners shall be
(in rel. to #3 of Who may call necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or
Allowance of Proxy is allowed Proxy is not allowed some of them or any other person to vote such share or shares: Provided, That when the
proxy shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners
Requirements (PDP-NoQ) can vote said shares or appoint a proxy therefor
1. Held at the proper place
2. Held at the stated date and appointed time or a reasonable time Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long
thereafter as such shares remain in the Treasury
3. Called by the proper person
4. There must be previous notice Q: Explain the right to vote.
5. There must be a quorum With respect to stock corporations:
o Voting is based on the number of shares owned and not on the
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a number of stockholders or per capita
quorum shall consist of the stockholders representing a majority of the outstanding capital o Thru the right to vote, the SH participates in the management of the
stock or a majority of the members in the case of non-stock corporations corporation
o It is the SHs supreme right and main protection
Q: What is quorum? o It is an incident of ownership or the property in the stock of which the
It is that number of members of a body which when legally assembled in their SH cannot be deprived without his consent and he may vote it as he
proper places will enable the body to transact its proper business chooses, although not in the manner or for the purposes contrary to
With respect to Stockholders or members meetings: law, public policy or fraudulently
o GR: A quorum shall consist of the SH representing a majority of the OCS o This right may be lawfully denied under the AOI/By-laws
or a majority of the member of a non-stock corporation o The right to vote does not impose a legal duty to vote
So with respect to Stock corporation, it is majority of the o The vote is based on the number of shares represented, not the
OCS while in non-stock, it is the number of the members of number of SHs present
the corporation o A director has the right to vote as a director or as a SH
o EXPN: Unless otherwise provided for in the Corpo Code or in the By- With respect to non-stock corporations:
laws (but not less than 2 SH/M may constitute a quorum) o GR: Each member shall be entitled to one vote
EXPN: The right of the members of any class to vote may be
Q: What happens when some of the shareholders or members walked out in the middle of limited, broadened or denied to the extent specified in the
the meeting and there is no more quorum, what is the effect? AOI or by-laws (Sec. 89)

Nudibranch 25

Q: Who are entitled to vote? Who are not entitled to vote?
It depends upon the kind of share.
Voting shares Only the legal owners of shares have the right to attend and vote
in a corporate meeting
Sequestered shares
o GR: the registered owners of shares sequestered by govt (PCGG) or
their duly authorized representatives or proxies may vote. The govt is
merely a conservator and cannot vote.
Q: How do you know if PCGG may vote sequestered shares?
#1 EXPN: The 2-Tiered Test:
1. WON there is prima facie evid showing that the shares
are ill gotten wealth and thus belong to the State
2. WON there is an immediate danger of dissipation thus
necessitating their continued sequestration and voting
by the PCGG while the main issue is pending with the
Sandiganbayan
o REPUBLIC V. COCOFED
#2 EXPN: Public Charter Exception: The 2-tiered test does
not apply in cases of sequestered shares purchased with
public funds or prima facie public funds or at least funds
affected with public interest even though the case is still
pending
In the case of COCOFED, coco levy funds partake
the nature of taxes. The beneficial ownership
belong to the government although the shares
are in the name of Eduardo Cojuangco.
Thus, the govt has the authority vote:
1. Where govt shares are taken over by private
persons or entities which registered them in their
own names; and
2. Where the capitalization or shares that were
acquired with public funds somehow landed in
private hands
Non-voting shares the owners may vote in certain instances:
o When law provides that 2/3 or majority vote of OCS entitled to vote,
the excludes non-voting shares
o GR: In all corporate acts, only voting shares are entitled to vote
EXPN: Holders of non-voting shares may vote in cases
provided in Section 6, par. 6, nos. 1-8
Disqualified shares not entitled to vote
Preferred and redeemable entitled to vote, but may be denied under the AOI
Delinquent shares not entitled to vote
Treasury shares have no voting rights so long as they remain in treasury
o Reason: these shares are not part of the OCS. The only right a corp has
over them are to reissue them for a valuable consideration
Nudibranch
o To give voting rights to these shares could enable the directors to
prolong their stay in office against the wishes of the holders of majority
of the shares.
Fractional shares not entitled to vote
Unpaid shares if they are not delinquent, they are entitled to vote
Escrow shares not entitled to vote before fulfillment of the condition imposed
Pledged or mortgaged shares
o GR: The pledgor or mortgagor shall have the right to attend and vote at
meetings of stockholders
Q: So what is the effect of a pledge on the right to vote on a
SH who pledges his shares?
No effect at all.
o EXPN: Unless the pledgee or mortgagee is
1. Expressly given by the pledgor or mortgagor such right in writing
2. Which is recorded on the appropriate corporate books.
a. Q: Who must record this authority?
i. The PLEDGOR
Voting rights for shares a deceased stockholder
o Exercised only where a legal representative has been appointed
o Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy.
Shares jointly owned (effect by 2 or more persons own shares jointly)
o GR: In order to vote the same, the consent of all the co-owners shall be
necessary,
o EXPNs:
1. Unless there is a written proxy, signed by all the co-owners,
authorizing one or some of them or any other person to vote such
share or shares
2. Provided, that when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor
Q: Explain the manner of voting.
A SH/M may vote:
o 1. Directly (in person)
o 2. Indirectly, through a representative (PTA)
By means of a proxy
By a trustee under a trust agreement
By executor, administrators, receivers, or other legal
representatives duly appointed by the court
Voting may either be straight or cumulative (Sec. 24)
Q: How about parents, can the vote for the minor childrens shares?
Yes. Under the family code, parents are considered JOINT ADMINISTRATORS of the
property of the minor children
26
Q: What if the person represented is not a minor, there is no proxy, no trustee, no legal
representative, and he dies. Who may represent him?
No one.
Q: What is the remedy of the heirs who want to vote?
o They must file an action for partition
CHUA v. CA
The 2 requirements of a derivative suit are:
o 1. It must be alleged that it is a derivative suit, meaning it is filed on
behalf of the corporation
o 2. It must include all indispensible parties, meaning that the
corporation itself must be impleaded
A derivative suit may be filed by a SH on behalf of the corporation as the real party
in interest only when the Board of directors do NOT file a case. Reason: the power
to sue in the name of the corp resides with the board.
The SH may enforce a corporate cause of action thru a derivative suit
In the case at bar, the petition was for certiorari and was not alleged to be a
derivative suit nor was the corporation impleaded as a party.
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings
of stockholders or members. Proxies shall in writing, signed by the stockholder or member
and filed before the scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5) years at any one time
Q: What is proxy?
nd
Written authorization given by one person to another so that the 2 person can
act for the first
Used to apply to the holder of the authority or person authorized by an absent
SH/M to vote for him at a SH/Ms meeting
Nature of proxy: purely personal. The right to appoint is an incident of ownership.
Q: What are the requisites for a valid proxy?
F5-SWV
1. Filed before the scheduled meeting with the corporate secretary
2. No proxy shall be valid and effective for a period longer than 5 years at any time
3. It shall be signed by the SH/M concerned
4. Proxies shall be in writing
o Oral proxies are not allowed
5. Unless otherwise provided in the proxy, it shall be valid only for the meeting
which it was intended
Q: What are the kinds of proxy?
1. General Proxy confers a general discretionary power of attorney to attend and
vote at an annual meeting with all the powers the undersigned would possess if
personally present
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2. Limited Proxy restricts the authority to vote specified matters only and direct
the manner in which the vote shall be cast
3. Specific Proxy the authority granted is merely for a particular meeting on a
specific date
4. Continuing Proxy authority given is to represent the SHs at any and all regular
and special SHs meetings unless the SH revokes the same
Q: What is the purpose of proxy?
1. For convenience or favor to the distant and indifferent SH
2. Assured the presence of a quorum
3. Enables those who do not wish to attend a SH/Ms meeting to protect their
interest by exercising their right to vote thru representative
4. Secure voting control or management control in corporation
Q: What are the instances wherein the right to vote by proxy may be exercised?
1. Election of the Board of D/T (Sec. 24)
2. Voting in case of joint ownership stock (Sec. 56)
3. Voting by trustee under voting trust agreement (Sec. 59)
4. Voting by members in a non-stock corporation (Sec. 89)
5. Pledge or mortgage of shares
6. As may be provided for in its by-laws
Q: Who may be appointed as a proxy?
No limitation under Sec. 58
A SH/M may appoint anyone he sees fit to represent him. Such right cannot be
restricted by the by-laws (otherwise, such provision would be void) with respect to
Stock corporations. It may be denied with respect to non-stock corporations, but
the same must not be discriminatory
D/T cannot attend or vote by proxy in Board Meetings
Q: May proxies be revoked? Yes. How? Explain the rules
Proxies, even those with irrevocable terms, have always been considered
revocable, unless coupled with an interest
Q: How may revocation be done?
1. Formal notice
2. Verbal communication
3. Conduct
Q: What are the rules on revocation?
Last proxy given revokes all previous proxies
Where proxies are undated, the postmark dates become important
Q: What are the powers and rights of a trustee?
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees:
27
 o 1. The right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time: Provided, That in the
case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities
and Exchange Commission; otherwise, said agreement is ineffective and
unenforceable.
o 2. The certificate or certificates of stock covered by the voting trust
agreement shall be canceled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
o The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same manner
and with the same effect as certificates of stock.
o 3. The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.
o Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
o No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
o Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of stock in the name
of the trustee or trustees shall thereby be deemed canceled and new
certificates of stock shall be reissued in the name of the transferors.
o 4. The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise.
Q: What is a voting trust agreement?
It is an agreement whereby a SH of a stock corporation confers upon a trustee/s
the right to vote and other rights pertaining to the shares for a period not 5 years
at any time
It is not governed by the law on agency. Unlike agency, a voting trust agreement is
not revocable at will
Nudibranch
Q: What are the purposes of voting trust agreement?
Unified control of the affairs of the corporation and consistent policy and
management especially of a new corporation desirous of attracting investors
Assure continuity of policy and management especially of a new corporation
desirous of attracting investors
Enable owners of majority of the stock of the corp to control the corp
Vest and retain the management of the corporation in the persons originally
promoting it
Prevent a rival concern from acquiring control of the corp
To carry out a proposed sale of the corps assets and to facilitate dissolution
To enable 2 holding companies to operate jointly a corporation controlled by them
To effect a plan for reorganization of a corp in financial difficulty or in bankruptcy
proceedings
To aid a financially embarrassed corp to obtain a loan and protect its creditor
Q: What are the limitations (requirements) of a voting stock agreement?
Not more than 5 years at any 1 time
Not used to circumvent the law against monopolies/illegal combinations in
restraint of trade
Must be in writing, notarized, specifying the terms and conditions
Certified copy must be filed with the Corporation and SEC
Subject to examination by the SH
Right automatically expired at the end of the period.
Q: What is the difference between voting trust agreement and proxy?
MIDTERM EXAM
MULTIPLE CHOICE
VOTING TRUST AGREEMENT
o What are valid purposes?
o What is the difference between a voting trust agreement and all other
kinds of trust pools/arrangements?
o Something about liability for damages
DIVIDEND
o How do you compute a guaranteed cumulative dividend?
TELECONFERENCING
o Can you conduct a SH meeting thru teleconferencing?
VOTING
o When is it required that the majority vote of the board + majority vote
of SH representing 2/3 of the OCS be obtained?
o When may preferred or redeemable shares vote?
ESSAY
ECE had a lot registered in its name. FHM took possession of the land. ECE filed a
complaint against FHM. The court ruled in ECEs favor. A writ of execution was
filed against FHM to deliver. FHM bought a substantial amount of the shares from
28
 ECE. FHM refused to obey the writ and argued that there its acquisition of shares STOCKS AND STOCKHOLDERS
was a supervening event the effect of which makes FHM not liable.
No pre-emptive rights on additionally issued shares Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in an
Non-filing the by-laws within 30 days does not make a corporation a de facto existing corporation or a corporation still to be formed shall be deemed a subscription within
corporation the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
Ratification of 2/3 of SH is required under Sec. 40 if sale of all or substantially all some other contract.
the assests of the corporation
Q: What is a subscription contract? Nature?
EXPLAIN Any CONTRACT for the acquisition of unissued stock in an existing corporation or
Identity doctrine a corporation still to be formed shall be deemed a SUBSCRIPTION
Instrumentality rule Unissued stock = stock never been issued (original issuance or the increase of
Alter ego doctrine capital stock)
Trust fund doctrine No required form
Business judgment rule By accepting a stock certificate, or acting as SH (i.e. participate in SH meeting,
make payment), a person becomes a SH even without express contract
DOCTRINES The subscription contract may cover one or more shares. Still, it remains an
Francisco v. CA indivisible contract
Nature: The subscription contract is a consensual contract that is perfected upon
Cruz v. Dalisay
meeting of the minds of the parties . The name of the subscriber is recorded in the
Seventh day adventist v. Northeastern
stock and transfer book. From that time, the subscriber becomes a SH of record
Grace Christian Highschool
and is entitled to all rights of a SH. Until the stocks are fully paid, it continues to be
Western Institute v. Salas
a subsisting liability that is legally enforceable
Santos v. NLRC
PNB v. Andrada Q: What are the kinds of subscription contract? (Give an example for each)
Salafranca v. Philamlife (PrePo-CAS)
Chua v. CA 1. Pre-incorporation subscription entered into BEFORE INCORPORATION. It
Lyceum v. CA constitutes as a binding contract among subscribers (See: Sec. 61)
2. Post-incorporation subscription entered into AFTER INCORPORATION for the
acquisition of unissued stock
o It shall be deemed a subscription notwithstanding the fact that the
parties refer to it as a purchase or some other contract.
o Q: When does a subscriber become a SH?
Upon acceptance by the corporation of the subscribers offer
or by acceptance of subscriber of the corporations offer
(unless the agreement or law provides otherwise, and in
case of increase in ACS) even before full payment
3. Conditional subscription SUBJECT TO A CONDITION, which may be a past
event unknown to the parties or a future, uncertain event, that is, an event which
may or may not happen. (The subscriber becomes a SH only upon fulfillment of
condition)
4. Absolute subscription NOT SUBJECT TO ANY CONDITION. (Subscriber becomes
liable on subscription and acquires rights of a SH from time the subscription is
accepted)
5. Subscription with a special term where the corporation AGREES TO DO
SOMETHING, the fulfillment of which NOT being a condition precedent to liability
FINALS of subscriber or acquisition of rights as SH. It is an absolute subscription.

TITLE VII

Nudibranch 29
Q: Are SH liable to corporate creditors for unpaid subscriptions?
Generally, SH cannot be compelled to make good deficiency when corporation is
not able to meet its obligation. Reason: persons dealing with the corporation are
presumed to know that they can have recourse only to property of the
corporation.
However, stock subscriptions are in the nature of a Trust Fund since they are to be
maintained unimpaired for the protection of the corporate creditor. Subscribers
who have not paid in full are debtors of the corporation for the balance and if the
corporation does not enforce the liability, the creditors may do so.
An unpaid subscription is an asset which the corporate creditors may look for
payment and may insist that it be collected
Trust Fund Doctrine - the subscribed capital stock of the corporation is a trust fund
for the payment of debts of the corporation which the creditors have the right to
look up to satisfy their credits, and which the corporation may not dissipate. The
creditors may sue the SH directly for the latters unpaid subscription
Q: When is rescission available in a subscription contract?
When there is material or substantial breach of the contract.
Q: Example of material breach?
ONG YONG TIU
If there is no material or substantial breach in the subscription contract, rescission
is not allowed
If the court will interfere, there will be a violation of the business judgment rule
Q: What should have been the proper remedy in this case?
o Specific performance
Rescission is not proper remedy for distribution of capital assets and property of
the corporation - even if subscribers have legal standing to sue for rescission of
subscription contract based on breach of contract, such action cannot prosper
since rescission will violate the Trust Fund Doctrine and the procedures for the
valid distribution of assets and properties under the Corpo Code.
o Otherwise, any SH may demand rescission for his subscription and call
for distribution of corporate assets to him without complying with the
requirements under the Corpo Code
Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation
still to be formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission.
Q: Is pre-incorporation subscription required?
Yes, it is mandatory.
Nudibranch
Recall 25%-25% Rule under Sections 13 and 14. The SEC shall not accept the AOI of
any stock corporation unless at least 25% of the ACS has been subscribed and at
least 25% of the total subscription has been fully paid.
Q: When is the pre-incorporation subscription irrevocable?
RULE 1: It is irrevocable for a period of 6 months from the date of subscription,
unless:
o All of the other subscribers consent to the revocation
o The incorporation fails to materialize
Q: Other than these 2 exceptions, are there any other circumstances in which the
subscription is revocable?
o Yes. If the 6-month period has already lapsed, the subscription
becomes revocable.
RULE 2: It becomes irrevocable after the submission of AOI to the SEC
Reason for irrevocability it prevents a subscriber from speculating on the stocks
of a proposed corporation. Furthermore, the rule protects the corporation from
financially irresponsible subscribes
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the
par or issued price thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value
of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be determined by the incorporators
or the board of directors, subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may
be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the stockholders representing at least a majority of
the outstanding capital stock at a meeting duly called for the purpose.
Q: What are valid considerations in subscription agreements? (Explain each)
(CaPLa-PAO)
1. Actual cash paid to the corporation;
30
 o Q: What is evidence that cash has been paid?
In practice, the bank will allow the opening of a temporary
account in the name of the future corporation where a
deposit shall be made in compliance with the 25%-25% rule
(25% of the ACS must be subscribed, 25% of the subscribed
capital must be fully paid. The bank shall await the approval
of the SEC. Payment of cash is evidence by a certificate
requested from the bank that a deposit has been made to
said temporary account
o With respect to items 1 and 2, payment for shares of stock must be
actually received by the corporation.
o Thus, receivables cannot be treated as cash since payment is to take
place in the future. (However, they may be treated as property
payment subject to SEC verification as to existence and credibility and
to the condition that the same shall be held in escrow until actual
payment or collection of the receivables)
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal to
the par or issued value of the stock issued;
o Q: What are the requisites/conditions for property to be valid
consideration for a subscription agreement?
(RNV3-T)
1. Property is actually received
2. Necessary and convenient for the use and for lawful
purposes of the corporation
3. Property is based on a fair valuation equal to the par or
issued value of the stock issued
4. The valuation is INITIALLY determined by BOD or
incorporators
5. The valuation is subject to SEC approval
6. Capable of being transferred to the corporation and
applied to payment of debts
o Q: Example of intangible property?
Patents; copyrights; mining claim
o Where the consideration is other than actual cash, or consists of
intangible property such as patents or copyrights, the VALUATION
thereof shall initially be determined by the incorporators or the board
of directors, subject to APPROVAL by the Securities and Exchange
Commission.
o True Value Rule if the consideration is other than actual cash (2-4), its
value must be worth the value of the stocks issued. That is why SEC
approval is required.
o US dollars should be duly converted to peso, otherwise they will be
considered payment by way of property
o Financial instruments may be considered as personal property and may
be legally accepted as capital contribution
3. Labor performed for or services ACTUALLY rendered to the corporation;
Nudibranch
o Corporation is allowed to receive as payment for its stocks labor or
services actually performed/rendered, provided that the transaction
must be done in GF + no fraud is perpetrated upon SHs and creditors
o Compensation payable/services actually rendered to corporation is
CREDIT which has ascertainable value.
o Future services is not acceptable as payment.
4. Previously incurred indebtedness of the corporation;
o Sec. 62(4) expressly allows set off or satisfaction of previously incurred
indebtedness of a corporation by issuance of its shares of stock where
conflicting rights of creditor are not involved
o The indebtedness must be the kind that is ACKNOWLEDGED by the
board of directors
o Set off = payment to creditor with shares of stock of debtor corporation
in the form of property [See62(2)] in lieu of cash [62(1)] at the option of
the corporation
o Should the corporation enters into such set off, the SEC requires that
the corporation submit a report on the matter indicating the total
number of shares and the total amount to be paid for each claim and a
deed of assignment executed by subscriber/creditor applying his claim
in consideration of the shares of stock.
5. Amounts transferred from unrestricted retained earnings to stated capital; and
o This means declaration of Stock Dividends.
o If stocks are issued in consideration of profits earned by the
corporation but not distributed among the SH, such issue is called stock
dividends. Such consideration is permitted under Sec. 62(5). Once
declared and issued, stock dividends are fully paid.
o Stock dividends involve issuance of stock directly paid from amounts
transferred from URE to stated capital. Since the retained earnings have
already been applied as payment to issuance of shares covering stock
dividend declaration, the same can no longer be reapplied as payment
to subsequent subscription rights.
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
o Q: What does conversion mean?
Conversion from a sole proprietorship or a partnership to a
corporation. The consideration shall be the net assets of
those enterprises/units.
o A corporation may reclassify its shares by amending its AOI and
exchange outstanding shares of SHs for stocks reclassified or converted
from one class to another.
o Thus, a holder of preferred shares with conversion privilege may give
his convertible preferred shares as a consideration for the issuance of a
certain number of common shares
A corporation cannot issue its stock as a gratuity
Q: What are the conditions that must complied with respect to the valid consideration?
31
 1. Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
DETERMINED by the incorporators or the board of directors, subject to APPORVAL
by the Securities and Exchange Commission.
2. Shares of stock shall not be issued in exchange for promissory notes or future
service.
o The same considerations provided for in this section, insofar as they
may be applicable, may be used for the issuance of bonds by the
corporation.
3. The issued price of no-par value shares may be FIXED: (ABS)
a. In the articles of incorporation or
b. By the board of directors pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or
c. In the absence thereof, by the stockholders representing at least a majority
of the outstanding capital stock at a meeting duly called for the purpose.
o Thus, the Issued Value of no-par value shares may vary from time to
time
o But they may not be issued for a consideration less than 5 pesos [Sec.
6(3)]
o However, the Stated Value of the issued no par value shares cannot be
changed anymore because they are deemed fully paid and non-
assessable upon issuance [Sec.6(3)]
Q: What are watered stocks? What is the consequence of issuing watered stocks? (See Sec.
65)
Q: What is the difference between par value and issued value?
Par value the value of a share as fixed in the AOI and reflected in the certificate
of stock
Issued value the value fixed by the Board of Directors which can be higher than
the par vale
Q: What should be the amount of the consideration?
GR: Under Section 65, shares of stock shall NOT be issued for a consideration LESS
than the par or issued price thereof
o Watered stocks stocks issued for a consideration less than their par
or issued price
EXPN: treasury shares so long as the price is reasonable (Sec. 9)
It is implied under Sec. 62 that a corporation may issue shares of stock at a price
ABOVE the par or issued value. This does not necessarily reflect the true or actual
value of stock since book or market vale normally fluctuates
However, a new issue of capital stock above par value may be issued, provided
that old SHs are given the right to purchase their proportionate part of the issue
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the
Nudibranch
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and MAY be transferred by delivery of the certificate or certificates
endorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation.
Q: What is a certificate of stock?
Certificate of stock a WRITTEN INSTRUMENT signed by the proper officer of a
corporation stating or acknowledging that the person named therein is the owner
of a designated number of shares of its stock
Q: Who is the proper officer referred to?
o The certificate must be signed by the PRESIDENT OR VICE PRESIDENT,
countersigned by the SECRETARY OR ASSISTANT SECRETARY
The Certificate must indicate:
o The name of the holder
o The number, kinds, and class of shares represented, and
o The date of issuance
Certificate is NOT STOCK but is merely evidence of the holders interest and
status in the corporation. It is not equivalent to ownership. It expresses the
contract between the corporation and SH. It is based on the # of shared owned by
SH.
Certificate is not essential to the existence of a share of stock
It is prima facie evid that the holder is a SH in the corporation
The certificate itself is property, but it has a value separate and distinct from the
value of the shares represented
As between a General Information Sheet and corporate books, the latter controls
Only stock corporations can issue shares of stock
A certificate of stock is not necessary to render one a SH
Q: Is a certificate of stock a negotiable instrument?
No. Reason: A certificate of stock can only be issued to the registered owner
Also, a certificate of stock does NOT comply with Section 1 of the Negotiable
Instruments Law.
o Section 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
32
 (e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
It is not a negotiable instrument. However, it is sometimes regarded as quasi-
negotiable in the sense that it may be transferred by indorsement coupled by
delivery, it is well-settled that it is non-negotiable because the holder takes it
without prejudice to the right or defenses as the registered owners or transferors
creditor may have under the law
o EXPN: When estoppel arises. Street Certificate of Stock is one which is
indorsed in blank by the owner thereof and thus is transferrable by
mere delivery. If a street certificate is delivered by the owner to a
broker who pledged it to a bank which had no knowledge that the
certificate did not belong to the broker, he is estopped from claiming
title or interest against the pledgee bank
Q: What are the REQ for the issuance of Certificate of stock?
(SSID-RFSO)
1. Certificate must be signed by the president or vice president, countersigned by
the secretary or assistant secretary, and
2. Sealed with the seal of the corporation
3. Issued in accordance with the by-laws.
4. Delivery of the certificate with endorsement
5. To be valid against third persons, the transfer is recorded in the stock and
transfer books of the corporation
6. The par value, as to par value shares, or the full subscription as to no par value
shares, must first be fully paid
7. The original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from the SH
8. Such other requirements as may be pursuant to AOI or valid by-laws
Q: What must be recorded in the books of the corporation?
(NaDaNuNu)
1. The names of the parties to the transaction,
2. The date of the transfer,
3. The number of the certificate or certificates and
4. The number of shares transferred.
Q: What are the remedies where the corporation refuses to issue a certificate?
1. A petition for mandamus
o See: Ponce v. Alsons
o Mandamus will not lie where the certificate was not indorsed by the
owner
2. A suit for specific performance of an express or implied contract
3. May sue for damages where specific performance cannot be granted
4. Rescission of contract of subscription and recover the consideration paid
Q: Can you transfer shares?
Yes
Nudibranch
(See modes and requirements below)
Q: What are the modes of stock transfer?
According to De Leon, there is more than 1 mode of transferring stock. Reason:
Section 63 states: Shares of stock so issued are personal property and MAY be
transferred.
o 1. Indorsement and delivery of stock certificate and to issue a new
certificate unless the original certificate is surrendered unless the
original certificate is surrendered for cancellation or is clearly shown to
have been lost, stolen, or destroyed
o 2. Transfer made in a separate instrument this mean the transfer of
stock by the execution of a Deed of Sale or Assignment. While an
assignment may be valid and binding between the parties despite non-
compliance with the requisite endorsement and delivery, it does not
necessarily make the transfer effective for the assignee cannot enjoy
the status of a SH until and unless the issue of ownership is resolved
with finality
o 3. Judicial or extra-judicial settlement of estate upon the death of
the SH, his administrator or executor becomes vested with the legal
title of the stock until the settlement and division of the estate is made
However, jurisprudence (Rural Bank v. CA) provides that there is really only 1
mode: Indorsement + Delivery (in order to bind the parties) + Registration in the
corporate books (in order to bind the corporation). Without delivery and
indorsement at the very least, the transfer shall be fatally defective
Q: What are the requirements for a valid stock transfer?
RURAL BANK OF LIPA V. CA in case of shares represented by a certificate, the
transfer must strictly comply with the ff conditions:
o 1. There must be DELIVERY of the certificate
o 2. The share must be INDORSED by the owner or his attorney-in-fact or
any authorized person
rd
o 3. To be valid to the corporation and 3 persons, the transfer must be
duly REGISTERED in the books of the corporation
While an assignment or sale may be valid between the
parties, even without endorsement and delivery, it does not
necessarily make the transfer effective, for the assignee
cannot enjoy the status of a SH; and the assignor cannot yet
be deprived of his rights as SH until and unless the issue of
ownership and transfer of the shares in question is resolved
with finality
If there is no certificate that has been issued yet, or where it is not in the possession
of the SH shares may be transferred by means of a deed of assignment duly
recorded in the corporate books
Q: Who causes the registration?
33
 The registration of transfers of shares of stock in the stock and transfer books is a
function which usually pertains to that of the corporate secretary or the transfer
agent of the corporation (Lim Tay v. CA)
The registered owner will REQUEST from the Secretary or transfer agent to change
the name under the certificate to the transferees name.
Q: What are the effects of unregistered transfer of shares?
1. It is valid and binding as between the transferor and the transferee
2. It is void as to the corporation except when notice is given to the corporation for
purposes of registration
3. It is void as against corporate creditors, and the transferor is still liable to the
corporation
4. It is void as to the attaching or executing creditors of the transferor, as well as
subsequent purchasers in good faith without notice of the transfer
5. Where no certificate has been issued or for some reason, it is not in the
possession of the SH, it may be transferred by means of a deed of assignment but
the same must be duly recorder in the books of the corporation
Q: What is an unpaid claim?
Unpaid claim those claims arising from unpaid subscription and not to any
indebtedness which a subscription may owe the corporation arising from any
other transaction
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
PONCE v. ALSONS CEMENT
Q: Is a corporation justified in refusing to register the transfer even though
delivery and indorsement has been made?
o Yes. The buyer/assignee of shares cannot just go to the corporation and
have the transfer registered in the corporate books. Only the
registered owner, his attorney, or any authorized person, may cause
registration. Absent any instruction and despite the fact that there is
valid indorsement and delivery, the transfer is not consummated
because there is no valid registration.
Q: What must the assignee do to protect his interest?
o He must secure a SPA executed by the registered owner of the share
authorizing the transferor to demand transfer in the stock and transfer
book
o The transferee must present the indorsed certificate to the corporate
secretary who shall effect the transfer in the corporate books, issue a
new stock certificate in favor of the transferee and cancel the former
certificate
Mandamus as a remedy where corporation refuses to issue certificate
mandamus should not issue to compel the secretary of the corporation to make a
transfer of the stock on the books of the corporation UNLESS it affirmatively
appears that he has failed or refused to do so upon demand of the proper person
Nudibranch
Considering that the law does not prescribe a period within which the registration
of the transfer of shares should be effected, the action to enforce the right does
not accrue until there has been a demand and a refusal concerning the transfer
NAVA V. PEERS
As to the issue on assignment, in the absence of a certificate of stock, there can be
no transfer of shares of stock
A stock subscription is a subsisting liability from the time it is made. The
subscriber is as much bound to pay his subscription, as he would be to pay any
other debt. The right of the corporation to demand payment is no less
incontestable, and this is true even in then absence of an express promise to pay
the amount subscribed.
Restrictions on transfer of stock the power to impose restrictions on transfer of
shares cannot be exercised unless conferred upon the corporation by law or it AOI
Indorsement and delivery The certificate must be properly indorsed and title is
vested to certificate by delivery of the duly indorsed certificate even without
executing a deed of assignment or sale of shares which is necessary only when no
certificate of stock has as yet been issued or where the same is not in the
possession for whatever reason of the transferor.
LIM TAY V. CA
A mere pledgee of shares of stock does not have ownership over the shares. If the
obligation is not paid, the creditor (in this case, Lim Tay) should have foreclosed
the shares or caused the transfer in his own name. There is no automatic
appropriation allowed. In credit transactions, automatic appropriation is referred
to as pactum commissorium and is void.
Validity of stock transfer A bona fide transfer of shares of a corporation not
registered or noted in the books, is invalid as against a subsequent lawful
attachment or execution of said shares regardless of whether the attaching
creditor had actual notice of the transfer or not. And indeed, as to all persons
interested, except the parties to the transfer
Sec. 63 strictly requires the recording of the transfer in the corporate books, and
rd
not elsewhere, to be valid as against 3 parties
Reason for requiring registration of stock transfer intended principally for the
benefit and protection of the corporation to whom it must accord the right
granted to them by law and against whom it can enforce liability that may arise
from ownership of stock
Right of corporation to refuse registration of transfer the registration of
transfers of shares of stock in the stock and transfer books is a function which
usually pertains to that of the corporate secretary or the transfer agent of the
corporation
Assignment: Up to Sec. 73.
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
34

Q: Can the corporation issue stock certificates without full payment of the subscription?
No. No certificate of stock shall be issued to a subscriber until the FULL AMOUNT
of his subscription together with interest and b (in case of delinquent shares), if any
is due, has been PAID
Q: For instance, you subscribe to 5 shares at a par value of P100 for each share, the full
amount of which is P500. You paid P200 as down payment and have a balance of P300. Can
the corporation issue stock certificate?
Generally, no. No stock certificate shall be issued until full payment of
subscription. Reason: Subscription is an indivisible contract. The prohibition in Sec.
64 is to prevent partial disposition of subscription when it is not yet fully paid
However, De Leon has the following contrary view: when it is not restricted by
the by-laws, a corporation has the option to issue stock certificates with respect to
the shares that may be covered by the amount paid (pro-rata)
o Note: Sir says that since this view is based on an SC case promulgated in
1965 (prior to the enactment of the present corpo code), the view is
obsolete and Sec. 64 prevails. This was in essence embodied in a SEC
opinion.
Sec. 65. Liability of directors for watered stocks. - Any director or officer of a corporation
consenting to the issuance of stocks for a consideration less than its par or issued value or for
a consideration in any form other than cash, valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his objection in writing and file the same with
the corporate secretary, shall be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same.
Q: What is a watered stock? What are the instances wherein a watered stock is issued?
Watered stock It is a stock issued not in exchange for its equivalent either in
case, property, share, stock dividends, or services. It includes stock
o 1. Issued without corporation (bonus share)
o 2. Issued as fully paid when the corporation has received a lesser sum
than its par or issued value (discount share); or
o 3. Issued for a consideration other than actual cash, such as property or
services, the fair valuation of which is less than its par or issued value
o 4. Issued as stock dividend when there are no sufficient retained
earning or surplus to justify it
Purpose of prohibition against issuance of Watered stock: to protect persons who
may acquire stock and the creditors of the corporation particularly those who may
become such on the faith of its outstanding capital stock being fully paid
Q: What is the liability may be liable for issuance of watered stock?
Any director or officer of a corporation:
o 1. Consenting to the issuance of watered stocks or,
o 2. Having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporate secretary,
Nudibranch
o = shall be SOLIDARILY LIABLE with the stockholder concerned to the
corporation and its creditors
Q: For how much?
o For the difference between the FAIR VALUE received at the time of
issuance of the stock and the PAR OR ISSUED VALUE of the same.
o Par value the value of a share as fixed in the AOI and reflected in the
certificate of stock
o Issued value the value fixed by the Board of Directors which can be
higher than the par vale
Q: Is there any way to escape liability?
o Yes. Upon having knowledge of the issuance of the watered stock, the
director/officer must immediately file his written objection to the
issuance with the corporate secretary
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date of subscription, if so required by, and at the
rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate
Q: When is a subscriber liable to pay interest for unpaid subscription?
If so required by the by-laws and/or subscription contract
Q: What is the rate of interest?
Generally, the rate fixed in the by-laws
In the absence thereof, the legal rate of 12% per annum
Q: When should you reckon the payment interest?
From the date of subscription until the payment of such interest is made
Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract of
subscription, the board of directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock and may collect the same
or such percentage thereof, in either case with accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the
date stated in the call made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon become delinquent and shall be
subject to sale as hereinafter provided, unless the board of directors orders otherwise
Q: When does a stock become delinquent?
When the subscriber fails to pay the unpaid subscription or balance within 30 days
Q: When is the 30-day period reckoned?
35
 o 1. From the date fixed in the subscription contract to make payment;
OR
o 2. From the date fixed or stated in the call, if there is no date fixed in
the subscription contract
Q: What is the effect if stock is declared delinquent?
o It may be subject to sale by the corporation
Q: What is a call?
Call a declaration officially made by a corporation requiring payment of all or a
certain prescribed portion of a shareholders stock subscription
Q: What must be the form of the call?
o Resolution of the BOD
Q: What must the resolution contain?
o The date in which payment is to be made (otherwise, non-payment will
make stock delinquent)
Q: Is call always necessary in order to make a stock delinquent?
No. Even if there is no call, but the date of payment is fixed in the subscription
contract, a stock may become delinquent due to continuous non-payment for 30
days from the date fixed in the subscription contract
Q: What are the REQ for a valid call?
1. Made by the BOD (thru a resolution)
2. Made in the manner prescribed by law
3. Must operate uniformly to all SH
Q: What is the meaning of operate uniformly? Example?
Firstly, when a call is made, it must be applied to all subscribers with unpaid
subscriptions
Q: Assuming that the call complies with the first, is there any other way that the
rd
3 requisite is violated? In other words, is there any other form of
discrimination?
o Yes. When some subscribers are called to pay a HIGHER RATE or price
than other, then the call does not operate uniformly
Q: What are the remedies to enforce payment of stock subscription?
1. Extrajudicial (Sec. 67-69)
2. Judicial (Sec. 70)
3. Collection of Cash Dividends deduct the cash dividends before issuing them
4. Withholding of Stock Dividends (recall Sec. 43)
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each subscription plus all
accrued interest, and the date, time and place of the sale which shall not be less than thirty
(30) days nor more than sixty (60) days from the date the stocks become delinquent.
Nudibranch
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder
either personally or by registered mail. The same shall furthermore be published once a week
for two (2) consecutive weeks in a newspaper of general circulation in the province or city
where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for
the sale of the delinquent stock, the balance due on his subscription, plus accrued interest,
costs of advertisement and expenses of sale, or unless the board of directors otherwise
orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to
pay the full amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or fraction of a
share. The stock so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor. The remaining shares,
if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the same, and the total amount due shall
be credited as paid in full in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code.
Q: What is delinquency sale?
Sale of delinquent stocks in a public auction to the highest bidder
Q: What is the procedure for the sale of delinquent stock?
1. RESOLUTION declaring unpaid subscriptions payable
o This means that the BOD shall make a call for payment
o Q: What are the contents of the resolution?
The date which payment is to be made. Reason why this is
necessary: to know when to reckon the 30-day period in
determining when stock becomes delinquent
2. NOTICE to SHs of resolution
o Must give notice to SH to make payment, otherwise the stock shall be
delinquent
o The corporation must wait for 30 days to lapse
o After the days and the SH fails to make payment, the next step is:
3. RESOLUTION ordering sale of delinquent sale
o Q: What are the contents of the resolution?
FULL AMOUNT = Amount due + interest + costs of
advertisements + expenses of sale
Date, time, and place of sale which is not less than 30 days
but not more than 60 days from date stock becomes
delinquent
4. NOTICE AND PUBLICATION of sale
36
 o The SH shall be notified personally or thru registered mail
o Publication once a week for two (2) consecutive weeks in a newspaper
of general circulation in the province or city where the principal office
of the corporation is located
5. SALE of delinquent stocks
o Sale of so many shares so as to effect payment of the full amount to the
highest bidder
Q: Who is the highest bidder?
Highest bidder such bidder who shall offer to pay the full amount of the balance
on the subscription (together with accrued interest, costs of advertisement and
expenses of sale) for the smallest number of shares or fraction of a share
Q: For instance, the corporation is offering 5 shares with a par value of 100 peso each or a
total amount of 500 for subscription for each SH. A subscribed to 5 shares and paid the full
subscription of 500. B only paid the amount of 300, the leaving 200 remaining unpaid. The
corporation made a call and gave notice to the SH but still B was not able to pay. The
corporation made a call for payment but B failed to pay. The corporation declared the
unpaid stock of B delinquent and caused its sale after notice and publication. There where 3
dealers who wanted to buy the remaining shares: X bid 200 for 2 shares, Y bid 25 for 2
shares, and Z bid 250 for 1 share. The interest and cost and expenses cost 50 pesos
Q: What is the minimum bid?
o The minimum bid is 250. The full amount = amount due, which is 200; +
interest and costs and expenses, which is 50. Thus, yielding a full
amount of 250
Q: Who is the highest bidder?
o Z is the highest bidder because he offers to pay the full amount of the
unpaid subscription for the smallest number of shares (250 for 1 share.
o X is not the highest bidder because he does not even meet the
minimum bid of 250
o Y is no the highest bidder because he is offering to buy 2 shares at 250,
which is equivalent only to 125 per share. Thus, his offer does not even
meet the minimum bid
Q: Where shall each share go?
o Of the total subscription of 5 shares:
B shall retain the 3 shares that he has already paid
Z, being the highest bidder of the sale shall own 1 share
And the remaining 1 share shall be deemed fully paid and
shall be credited to the delinquent SH, B.
Q: What if there are no bidders, can the corporation forfeit the delinquent stock?
NO. The corporation may only purchase the stock from the net earning or from the
URE
Q: What doctrine will be violated if no URE?
o The Trust Fund Doctrine which provides that the subscribed capital
stock shall not be impaired because it is the common fund which shall
be for the payment of creditors
Nudibranch
Q: Assuming that there is already a highest bidder, is the corpo bound to accept the offer of
the highest bidder?
NO. In a public auction, the bidders are the ones who are making their offers to
the corporation. Thus, the BOD have the discretion whether or not to accept their
offer.
Sec. 69. When sale may be questioned. - No action to recover delinquent stock sold can be
sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of
the delinquent stock, unless the party seeking to maintain such action first pays or tenders to
the party holding the stock the sum for which the same was sold, with interest from the date
of sale at the legal rate; and no such action shall be maintained unless it is commenced by the
filing of a complaint within six (6) months from the date of sale.
Q: What are the grounds to question a delinquency sale? Example?
IRREGULARITY or DEFECT:
o 1. In the notice of the sale
Ex: No notice was made; the date of sale in the notice was
incorrect (not less than 30 days, not more than 60 days from
delinquency); no publication or the publication was not fully
complied with (I.e. only 1 week of publication)
o 2. In the sale itself of the delinquents stock
Ex: Failure to conduct a public bidding or auction (i.e. the
corporation sold it to whomever it wishes); incorrect
determination of the correct full amount due
Q: Is Irregularity in call a ground to question the sale? Why or why not?
No.
Q: What are the requisites before filing an action questioning the delinquency sale?
REQ:
1. Pay or tender the sum + interest
o Sum the amount for which the stock was sold
2. Commence and file the action within 6 months from the date of sale
o Otherwise, the action will be barred/Prescribed
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the
corporation from collecting by action in a court of proper jurisdiction the amount due on any
unpaid subscription, with accrued interest, costs and expenses.
Q: What are the requisites for judicial action?
REQ:
1. Prior call
o Q: Why do you need a call?
o Reason: In oblicon, an obligation becomes due upon demand. The call
serves as a demand because it is the resolution by the board calling out
37
 to all SH to pay their unpaid subscriptions. A call is necessary to make
the obligation to pay due and demandable.
2. The action must be filed within the prescriptive period
o With respect to written subscription contract = 10 YEARS reckoned
from the date the right of action accrues (meaning from the date of the
subscription itself
o With respect to verbal subscription = 6 YEARS reckoned from the LAST
DEMAND
3. The amount must be limited to the amount due on any unpaid subscription
o Amount due = balance of unpaid subscription + Interest + Costs of SUIT
+ Expenses of LITIGATION
4. With respect to the jurisdiction, the commercial courts of the RTC have
jurisdiction
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to vote or
to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any
of the rights of a stockholder except the right to dividends in accordance with the provisions
of this Code, until and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any.
Q: What are the effects of stock delinquency?
1. The SH cannot vote or be voted upon and to be represented in a SH meeting
2. GR: All other rights are lost
o EXPN: The right to receive dividends
o Reason: One of the modes to collect payment of unpaid subscription is
through these dividends (i.e. collection of cash dividends; withholding
of stock dividends)
3. Subject the stock to delinquency sale (depending upon BODs discretion) unless
otherwise ordered by the board
4. Directors who are elected by virtue of delinquency stock may be subject to quo
warranto proceedings
o Reason:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
Q: If you are a subscriber with unpaid stock, do you lose all your rights as a SH?
No. The subscriber is still entitled to all rights of a SH until the stock has been
declared delinquent
However, the subscriber is liable for interest on his unpaid subscription, provided:
o It is required under the By-Laws. The amount of interest shall be that
stated in the Subscription Contract or By-Laws. In the absence thereof,
the interest shall be charged at the legal rate of 12%
o The liability to pay interest shall be reckoned from the date of
subscription
Nudibranch
Sec. 73. Lost or destroyed certificates. - The following procedure shall be followed for the
issuance by a corporation of new certificates of stock in lieu of those which have been lost,
stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative
shall file with the corporation an affidavit in triplicate setting forth, if possible, the
circumstances as to how the certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and the name of the
corporation which issued the same. He shall also submit such other information and evidence
which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the
corporation, said corporation shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of said corporation, the
name of the registered owner and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the expiration of one (1) year from the
date of the last publication, if no contest has been presented to said corporation regarding
said certificate of stock, the right to make such contest shall be barred and said corporation
shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for a period of one (1) year, for such
amount and in such form and with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a contest has been presented to said
corporation or if an action is pending in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the final decision by the court regarding the ownership
of said certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers,
no action may be brought against any corporation which shall have issued certificate of stock
in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.
Q: What must a SH do if his stock certificate is lost or destroyed?
1. File an AFFIDVIT (of loss) in triplicate containing the following:
o 1. The circumstances as to how the certificate was lost, stolen or
destroyed,
o 2. The number of shares represented by such certificate,
o 3. The serial number of the certificate and
o 4. The name of the corporation which issued the same
He shall also submit such other information and evidence which he may deem
necessary.
Q: What could be evidence in addition to the affidavit of loss? What could be
supporting documents?
38
 o Blotter in the barangay; police report; Certified True Copy of either. The
purpose of additional evidence is to prove to the corporate secretary
that the certificate was indeed lost
2. VERIFICATION of the affidavit and other information and evidence
Q: Why is it necessary for the affidavit, etc. to be verified?
o In order to compare the same with the corporate books. (i.e. the serial
number and other details correspond with that reflected in the books)
3. PUBLICATION of a notice in a newspaper of general circulation in the place
where the corporation has its principal office, once a week for 3 consecutive
weeks at the expense of the registered owner of the certificate of stock. The
notice shall contain the ff:
o The name of said corporation,
o The name of the registered owner and
o The serial number of said certificate, and
o The number of shares represented by such certificate, and
o That after the expiration of one 1 year from the date of the last
publication, if no contest has been presented to said corporation
regarding said certificate of stock, the RIGHT TO CONTEST shall be
barred and said corporation shall cancel in its books the certificate of
stock which has been lost, stolen or destroyed and issue in lieu thereof
new certificate of stock
o Q: When may the 1 year period be dispensed with?
unless the registered owner files a BOND or other SECURITY
in lieu thereof as may be required, effective for a period of
one (1) year, for such amount and in such form and with
such sureties as may be satisfactory to the board of
directors
o Q: What if there is a contest?
If a contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed,
the issuance of the new certificate of stock in lieu thereof
shall be SUSPENDED until the final decision by the court
regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed
Q: Can you sue a corporation for issuing new stock certificates?
GR: No action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
EXPN: in case of fraud, bad faith, or negligence on the part of the corporation and
its officers
Q: What must the corporate secretary do?
Assign: Sec. 74-80
Nudibranch
TITLE VIII
CORPORATE BOOKS AND RECORDS
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all
meetings of stockholders or members, or of the board of directors or trustees, in which shall
be set forth in detail the time and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar demand,
the yeas and nays must be taken on any motion or proposition, and a record thereof carefully
made. The protest of any director, trustee, stockholder or member on any action or proposed
action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, writing, for a copy of
excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to whom made; and such other entries as the by-
laws may prescribe. The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he
secures a license from the Securities and Exchange Commission and pays a fee as may be
fixed by the Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own stocks, in which
39
case all the rules and regulations imposed on stock transfer agents, except the payment of a
license fee herein provided, shall be applicable.
Q: What are the documents that must be kept in the principal office of a corporation?
1. A record of all business transactions
2. Minutes of the SH/members meetings
3. Minutes of the Board/trustees meetings
4. Stock and transfer books (with respect to stock corporations only)
Q: What do you mean by Stock and Transfer Books?
Records all stock ownership, as well as any alienation, sale or transfer of stocks.
Before incorporation, the corporation must buy a blue book with the SEC which is
kept therein worth around 500 pesos
Q: What do you mean by record of business transactions?
Includes all papers pertaining to the operation of the corporation to its SHs, such
as: journal, ledger, financial statement, income tax returns, vouchers, receipts,
contracts, etc.
Q: A corporation applied a loan with BPI. What should be kept in relation to the
transaction?
Promissory note (to prove contract of loan);
A Rea Estate Mortgage or Chattel mortgage (to prove that the loan is secured by a
mortgage)
Receipts or bank deposits (to prove payment, assuming that the corporation
All other records in relation to the transaction must be kept at the principal office
Q: What do you mean by minutes?
All matters taken up during the meeting. It does not only include the time it
started and adjourned.
Q: Every SH is entitled to inspect corporate books. What are the remedies in case a SHs
right is violated?
1. Petition for Mandamus
2. Civil Action
3. Criminal Action based on Section 144 which is the penal provision of the
Corporation Code
Q: What could be the grounds to deny the right to inspect corporate books?
1. Misuse of information previously obtained by the SH
2. The SH acted in bad faith
o Ex: to obtain trade secrets for the SHs own benefit or to be divulged to
competitors
3. The exercise of the right was not for a legitimate purpose
o This applies when the SH did not act in BF but his purpose was not
legitimate
Nudibranch
o A legitimate purpose could be to determine whether the fund used to
distribute dividends really come from URE, otherwise the trust fund
doctrine will be violated
o Ex of not legitimate purpose?
GONZALES V. PNB
A SH can inspect corporate books, subject to limitations (the right is not absolute).
The SC ruled that the SH, Gonzales, acted on ulterior motives and in bad faith. He
only owned 1 share of stock. The significance of this is that he acquired only 1
share not for the purpose of investing in the corporations business, but to get
information relevant to his case with PNB (since he sued PNB for several
transactions)
Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a written
request of any stockholder or member, the corporation shall furnish to him its most recent
financial statement, which shall include a balance sheet as of the end of the last taxable year
and a profit or loss statement for said taxable year, showing in reasonable detail its assets and
liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall
present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed and
certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of the
corporation.
Q: What is included in the right to financial statements?
1. Balance Sheet as of the end of the last taxable year
2. Income Statement (profit or loss statement for the taxable year, stating in detail
the assets and liabilities of the corporation)
Q: Is it necessary to always have a request?
No. There shall be an annual SH/members meeting and each SH shall receive a
copy of the financial statement
Q: Who shall CERTIFY the financial statement?
o It depends
o If the paid-up capital of the corporation is MORE than P50,000.00 - By
an Independent CPA
o If the paid-up capital of the corporation is LESS than P50,000.00 - the
financial statements may be certified under oath by the TREASURER
only (or any responsible officer of the corporation Sir did not mention
this)
Q: Who shall SIGN the financial statement?
o Aside from the independent CPA, the other signatories are: the
President OR Vice-president
40
 TITLE IX
MERGER AND CONSOLIDATION
Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new
single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to
as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the
board of directors or trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the stockholders or members of
each of such corporations at separate corporate meetings duly called for the purpose. Notice
of such meetings shall be given to all stockholders or members of the respective corporations,
at least two (2) weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary
of the plan of merger or consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations
shall be necessary for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with the Code: Provided, That if
after the approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees of
all the constituent corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of
the members of each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or consolidation.
Sec. 78. Articles of merger or consolidation. - After the approval by the stockholders or
members as required by the preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be signed by the president or
vice-president and certified by the secretary or assistant secretary of each corporation setting
forth:
Nudibranch
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against such plan,
respectively.
Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation,
signed and certified as herein above required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger
or consolidation of banks or banking institutions, building and loan associations, trust
companies, insurance companies, public utilities, educational institutions and other special
corporations governed by special laws, the favorable recommendation of the appropriate
government agency shall first be obtained. If the Commission is satisfied that the merger or
consolidation of the corporations concerned is not inconsistent with the provisions of this
Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time
the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time and place of hearing shall be given
to each constituent corporation at least two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code.
Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall have the
following effects:
1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises of each of the constituent corporations; and
all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred such liabilities or obligations;
and any pending claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation. The
41
rights of creditors or liens upon the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.
Q: What is merger?
2 or more corporations unite, where 1 corporation is dissolved and the other is
retained. In other words, there is an absorption of 1 corporation of the other
Surviving Corporation The corp which absorbs the other corp
Absorbed Corporation The corp which is dissolved
Q: What are the effects of merger?
The assets, rights, and privileges of the AC are transferred to the SC
The liabilities and responsibilities of the AC shall be assumed by the SC
The AC will be dissolved
The SC will be retained
o Ex: Landbank and DBP merged. LB is the SC. DBP is the AC
The SHs of the AC will become the SH of the SC
Q: What is consolidation?
2 or more corporations unite to give rise to a new corporation.
The dissolved corporations are called Constituent Corporations
The new corporation is called Consolidated Corporation
Q: What are the effects of consolidation?
The assets, rights, and privileges of the constituent corps shall be transferred to
the consolidated corp
The consolidated corp shall assume the liabilities and responsibilities of the
constituent corps
The constituent corps will be dissolved
A new corp shall be established
The SH of the constituent corps shall become the SH of the consolidated corp
Q: If you are a director of a corporation, which would you prefer? Why?
(not answered)
Merger one of the corporations has already an established name
Consolidation can start a new slate
Q: Explain the procedure in case of merger/consolidation.
ST
1 STEP: Board approval - The BOD/BOT of each corporation to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
o 1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
o 2. The terms of the merger or consolidation and the mode of carrying
the same into effect;
o 3. A statement of the changes, if any, in the AOI of the surviving
corporation in case of merger; and, with respect to the consolidated
Nudibranch
corporation in case of consolidation, all the statements required to be
set forth in the AOI for corporations organized under the corpo code;
and
o 4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable
nd
2 STEP: SHs approval the plan of merger shall then be submitted for approval
by the SHs or members of each corporation at separate corporate meetings duly
called for the purpose. Notice of such meetings shall be given to all SHs or
members of the respective corporations, at least 2 weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of
merger or consolidation. The affirmative vote of stockholders representing at
least 2/3 of the outstanding capital stock of each corporation in the case of stock
corporations or at least (2/3) of the members in the case of non-stock
corporations shall be necessary for the approval of such plan.
rd
3 STEP: Draft the Articles of Merger or Consolidation - articles of merger or
articles of consolidation shall be executed by each of the constituent corporations,
to be signed by the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth:
o 1. The plan of the merger or the plan of consolidation;
o 2. As to stock corporations, the number of shares outstanding, or in the
case of non-stock corporations, the number of members; and
o 3. As to each corporation, the number of shares or members voting for
and against such plan, respectively.
o (Sir: in short, the matter set forth in 78)
th
4 STEP: If the proposal is inconsistent with the Corpo Code, the SEC will hold a
hearing to give the parties a chance to be heard (due process) - If, upon
investigation, the Securities and Exchange Commission has reason to believe that
the proposed merger or consolidation is contrary to or inconsistent with the
provisions of this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard.
th
5 STEP: If a corporation is created by special law, a recommendation by the
appropriate government agency must first be obtained - That in the case of
merger or consolidation of banks or banking institutions, building and loan
associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be obtained
th
6 STEP: Issuance of Certificate of Merger/Consolidation by SEC. The articles of
merger or of consolidation, signed and certified as herein above required, shall be
submitted to the Securities and Exchange Commission in quadruplicate for its
approval. If the Commission is satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of consolidation, at which
time the merger or consolidation shall be effective.
ASSOCIATED BANK V. CA
42
 AB can enforce the promissory note because there was an effective merger. AB
already assumed the assets and liabilities. It now has the right to collect
Principle of unjust enrichment under Article 19 of the CC if AB will not be able to
collect, the defendant will be unjustly enriched.
MINDANAO SAVINGS V. CA
1. The merger did not take effect. If the steps/procedure under the Corpo Code
are not followed, there will be no issuance of Certificate of Merger by the SEC
which will give rise to creation of MSLAI.
Q: Why was MSLAI party to the case?
MSLAI did not yet assume the assets and liabilities of FSLAI. Due to incomplete
submission of documents, SEC did not yet issue the certification. Uy was correct in
suing FSLAI, since the latter still continued to exist and was not yet absorbed by
MSLAI
2. Other than the Corpo Code, another issue was on novation. The REQ for a valid
novation are:
o Previous valid obligation
o Consent of the creditor is obtained
In the case at bar, consent of the creditor Uy was not obtained
BAPST V. CA
1. BPI has standing to sue and is the real party in interest. There was a valid merger
between BPI and CBPC. Thus, BPI assumed the assets and liabilities of CBPC
2. BPI cannot run after ELISCON. DBP has already assumed the debts and liabilities
of ELISCON. One of the requisites of novation is consent of the creditor. There was
implied consent on the part of BPI when it did not object during the meeting. Thus,
there was a valid novation. The obligation of ELISCON is now extinguished and BPI
can only run after DBP
3. The obligation of Bapst and Chua are likewise extinguished. A surety agreement
is an accessory contract which cannot exist on its own without the principal
contract. A spring cannot jump higher than its source.
Assignment: 81-86
TITLE X
APPRAISAL RIGHT
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
Nudibranch
Q: Define the appraisal right of a SH.
Appraisal right the right of a SH to demand payment of the fair value of his
shares, after dissenting from a proposed corporate action involving fundamental
change in the corporation in the cases provided for by law.
REQ: (SDC)
1. You should be a SH of a corporation
o Thus, a treasurer or a secretary do not necessarily have appraisal right
since they are not required to be SH. Unless of course they happen to
be SH as well
2. The SH must dissent to a proposed corporate action involving fundamental
change in the corporation
3. Must exercise the right only in cases provided for by law
Q: What are the instances when the right may be exercised?
(ASMIC)
Under Sec. 81:
1. Amendment to the AOI that has the effect of:
o Changing or restricting the rights of any stockholder or class of shares,
or
o Of authorizing preferences superior to those of outstanding shares of
any class,
o Or of extending or shortening the term of corporate existence;
2. Sale, lease, exchange, transfer, mortgage, pledge or other of all or substantially
all of the corporate property and assets
3. Merger and consolidation
Under Sec. 42:
4. Investment of corporate funds in another corporation or in a purpose other
than the primary purpose
Under Sec. 105:
5. In a close corporation, a SH may, for any reason, compel the corporation to
purchase his shares when the corporation has sufficient assets in its books to cover
its debts and liabilities exclusive of capital stock
Sec. 82. How right is exercised. - The appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by making a written demand on the
corporation within thirty (30) days after the date on which the vote was taken for payment of
the fair value of his shares: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed corporate action is
implemented or affected, the corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair value thereof as of the day
prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value
of the shares, it shall be determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and the third by the
43
two thus chosen. The findings of the majority of the appraisers shall be final, and their award
shall be paid by the corporation within thirty (30) days after such award is made: Provided,
That no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.
Q: What is the procedure in exercising the right?
st
1 STEP: SH shall make Written Demand - The appraisal right may be exercised by
any stockholder who shall have voted against the proposed corporate action, by
making a written demand on the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair value of his shares
o Q: What is the effect is the SH does not make a demand?
Failure to make the demand within such period shall be
deemed a waiver of the appraisal right.
nd
2 STEP: Corpo shall pay the SH - If the proposed corporate action is implemented
or affected, the corporation shall pay to such stockholder
o Q: When shall the corpo pay?
Upon surrender of the certificate/s of stock representing the
SHs shares within 10 days after demanding payment if his
shares
o Q: What shall be the basis of the amount to be paid?
The fair value thereof as of the day PRIOR to the date on
which the vote was taken
Excluding: any appreciation or depreciation in
anticipation of such corporate action
Note: if the parties cannot agree to the fair value, an
appraisal committee shall be established. (To be discussed
later ons)
rd
3 STEP: SH shall transfer the shares - upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his shares to the
corporation.
Q: Who shall determine the Fair Value of the dissenting shares?
Initially BOTH
However, in case of disagreement as to the value of the shares, an Appraisal
Committee shall be constituted. It shall be composed of 3 disinterested persons:
o 1. One shall be named by the stockholder,
o 2. Another shall be named by the corporation, and
o 3. The third by the two thus chosen
rd
This means that a 3 appraiser shall be chosen by both
parties, namely the SH and the Corpo
The 3 appraisers will now determine and appraise the fair value of the shares. A
majority is sufficient to make an award deciding on the fair value. Majority means
2 appraisers against 1
Q: Is the award of the appraisers questionable or appealable?
o No. The findings of the majority of the appraisers shall be final
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Q: After the appraisers make an award, what happens next?
o The SH shall be paid by the corporation based on the award within
thirty (30) days after such award is made
Q: What are the limitations of the appraisal right?
1. Any of the instances under the law must be present
2. The dissenting SH must have voted against the proposed action
3. Demand for payment must be made within 30 days from the date the vote is
taken. Failure to demand shall be deemed a waiver
4. Price must be based on the fair value as of the day prior to the date on which
vote was taken
5. Submission by the SH of his shares to the corporation for notation of being
dissenting shares within 10 days from the written demand
6. Payment must be made only when the corporation has unrestricted retained
earnings (most important)
7. SH must transfer his shares to the corporation upon payment by the
corporation
TURNER V. LORENZO SHIPPING
Q: What is the reckoning period in determining when the corporation must have
URE: upon demand, when the case is filed, or even when it is still pending?
o At the time when the case is filed. Reason: civil cases must be based on
a cause of action at the time of the filing of the complaint. If there is no
URE at the time of filing, there is no COA.
o In the case at bar, the corporation only had URE during the pendency of
the case. When the case was filed, there was no URE and consequently
no COA. Thus, the case shall be dismissed.
Lesson learned: if you are the dissenting SH, check first for the existence of URE
before filing a complaint. Otherwise, wait for the corporation to have URE
Sec. 83. Effect of demand and termination of right. - From the time of demand for payment
of the fair value of a stockholder's shares until either the abandonment of the corporate
action involved or the purchase of the said shares by the corporation, all rights accruing to
such shares, including voting and dividend rights, shall be suspended in accordance with the
provisions of this Code, except the right of such stockholder to receive payment of the fair
value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.
Q: What is the effect of the exercise of the right?
All rights accruing to such shares, including voting and dividend rights, shall be
SUSPENDED
o EXCEPT the right of such stockholder to receive payment of the fair
value thereof:
Q: What happens if the dissenting SH is not paid?
o The SH shall be restored in all his rights and status as a SH
44
 If the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
Q: What happens if the dissenting SH is paid?
o He shall lose all his rights as a SH permanently
Q: What if the proposed corporate act is abandoned or not pushed through?
o The SH shall be restored in all his rights and status as a SH
Sec. 84. When right to payment ceases. - No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If, however, such demand for payment is
withdrawn with the consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the Securities and Exchange
Commission where such approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions which would have accrued on his shares
shall be paid to him.
Q: Can a SH withdraw his appraisal right?
GR: No
EXPN: When the corporation consents thereto
Q: When is the appraisal right extinguished?
1. When demand for payment is withdrawn with the consent of the corporation,
2. If the proposed corporate action is abandoned or rescinded by the corporation,
or
3. Disapproved by the SEC where such approval is necessary, or
4. If the SEC determines that such stockholder is not entitled to the appraisal right
Q: What is the effect of extinguishment?
The dissenting SHs status as a SH shall be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him
Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne
by the corporation, unless the fair value ascertained by the appraisers is approximately the
same as the price which the corporation may have offered to pay the stockholder, in which
case they shall be borne by the latter. In the case of an action to recover such fair value, all
costs and expenses shall be assessed against the corporation, unless the refusal of the
stockholder to receive payment was unjustified.
Q: Who shall bear the cost of appraisal?
It depends:
GR: The corporation shall bear costs in the ff instances:
o 1. Where the price which the corporation offered to pay the dissenting
SH is lower than the fair value determined by the appraisers
o 2. When an action is filed by the dissenting SH and his refusal to accept
payment is unjustified
Nudibranch
EXPN: The SH shall bear costs in the ff instances:
o 1. Where the price offered by the corporation is approximately the
same as the fair value determined by the appraisers
o 2. Where an action is filed by the dissenting SH and his refusal to accept
payment is unjustified
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation for notation thereon that such shares are
dissenting shares. His failure to do so shall, at the option of the corporation, terminate his
rights under this Title. If shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled, the rights of the transferor as a
dissenting stockholder under this Title shall cease and the transferee shall have all the rights
of a regular stockholder; and all dividend distributions which would have accrued on such
shares shall be paid to the transferee.
Q: After demanding payment, what must the SH do?
Within ten (10) days after demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock representing his shares to the
corporation
Q: What must the corporation do upon receipt of the stock certificate/s?
o The corporation shall make an annotation thereon that such shares are
dissenting shares
Q: What is the effect of failure by the SH to submit the stock certificate/s?
o His right to be paid shall be terminated
Q: What happens when the dissenting shares are transferred?
o If shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled:
1. The rights of the transferor as a dissenting stockholder
under this Title shall cease and
2. The transferee shall have all the rights of a regular
stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee.
o Q: Who will now have the right to receive the fair value of the
dissenting share?
No one. Since the dissenting SH (transferor) has already
been paid, he will not receive the fair value. When he
transferred his right to another (transferee), the latter is
entitled to all rights and status of a SH. He is not entitled to
the fair value of the share.
The essence of appraisal right of a SH is that you want to get
back your investment. You want to get out of the company
because you disagree with a proposed corporate action. You
will then be given the fair value of your share.
CUA V. OCAMPO
The ff are the REQ for a valid derivative suit:
45
 o 1. The petitioner was a SH/M at the time the acts or transactions
subject of the action took place and at the time the action is filed
o 2. He exerted all reasonable efforts and alleges the same with
particularity in the complaint, exhaust all remedies available under the
AOI, by-laws, laws, or rules governing the corporation to obtain relief
desired
o 3. No appraisal rights are available for the act/acts complained of
o 4. The is not a nuisance or harassment suit
th
In this case, the 4 requisite was not complied with
SC: the SH had appraisal rights but failed to exercise them. In this case, the
transaction falls under one of the instances wherein the appraisal right is available
under Sec. 81: sale of all or substantially all the property of the corporation
It was the SH themselves who caused the unavailability to exercise their appraisal
right by not voting against the proposed corporate action. Instead, they filed a
th
derivative suit which does not comply with the 4 requisite.
VILLAMOR V. UMALE
th
Same REQ as Cua v. Ocampo, but the SC added a 5 :
o Although not expressly enumerated as a requisite, it is implied that the
corpo should be impleaded because it is the RPI whereas the SH is only
a nominal party
o This was recognized in the Western Institute case
Q: Why did the SC rule that there is no derivative suit? --
The essence of a derivative suit is that the SH shall file a case on behalf of the
corporation in order to prosecute a corporate cause of action because the
directors did not do anything/lift a finger in filing a case. The SH take the cudgels in
filing the suit
o Ex: the directors did not do anything to collect receivables amounting
to 1 million which matured in 2016. SH can now file a derivative suit on
behalf of the corpo provided that the REQ are complied with, to wit:
Sue in the name and on behalf of the corporation; Implead the
corporation; and the 4 other REQ
Assign: Sec. 87-95
TITLE XI
NON-STOCK CORPORATIONS
Q: What is a non-stock corporation?
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That any profit which a non-stock corporation may obtain as an incident
to its operations shall, whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was organized, subject to the
provisions of this Title.
Nudibranch
The provisions governing stock corporation, when pertinent, shall be applicable to
non-stock corporations, except as may be covered by specific provisions of this
Title.
Q: What are the valid purposes of a non-stock corporation? (memorize)
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for:
o Charitable,
o Religious,
o Educational,
o Professional,
o Cultural,
o Fraternal,
o Literary,
o Scientific,
o Social,
o Civic service, or
o Similar purposes, like trade, industry, agricultural and like chambers, or
any combination thereof,
Subject to the special provisions of this Title governing particular classes of non-
stock corporations
Q: Is the enumeration exclusive?
o Yes. Thus, a corporation engaging in political purposes is not a valid
non-stock corporation
Q: What are the requisites for a non-stock corporation?
1. No part of its income is distributable as dividends
2. Must be for any of the purposes under Sec. 88
3. Must not own capital stock divided into shares
Q: Is a non-stock corporation absolutely not allowed to earn profit?
GR: a non-stock corporation is one where no part of its income is distributable as
dividends
EXPN: Any profit which a non-stock corporation may obtain as an INCIDENT TO ITS
OPERATIONS shall, whenever necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation was organized
Q: What is a good example of a purpose incident to its operation?
o With respect to a school, a canteen business. Reason: it earns money,
but it is operated to that the students and teachers have something to
eat
o With respect to a homeowners association, the collection of association
dues
In such instances, these are not the main business, but they
are merely incidental. Meaning, that they are reasonably
necessary to the operation of the main business
Q: Can a non-stock corporation invest its funds in another activity?
o Yes, as long as the profit is used for the purpose it is organized
Ex: used to pay salaries, defray operational expenses, etc
46
 Q: Can a non-stock corporation invest its funds in a business other than its
primary purpose?
o Yes, as long as the profit is used for the purpose it is organized
Q: For instance, a member of a non-stock corporation dissents from a proposed
corporate action. Can he exercise his appraisal right?
o No. An appraisal right is the right of a SH to demand the fair value of his
share if he dissents to a proposed corporate action. A member of a
non-stock corporation does NOT have an appraisal right because such
right involves shares which applies only to stock corporations
Q: Can a non-stock corporation be converted to a stock corporation by mere amendment of
the AOI?
No. Reason: because the assets will be converted into capital to be distributed to
its members who are now SHs. This is unfair because there are certain rules for
distribution with respect to non-stock corporation that must be complied with
(Sec. 94)
o Other reasons: it will change the nature of the corporation from non-
profit to profit; it will defraud persons who have already contributed or
donated to the non-stock corporation only to find out that it has been
converted to a stock corporation
The non-stock corporation must first be dissolved and a new stock corporation
may be set up
Chapter I - MEMBERS
Q: What are the rules on voting rights?
Sec. 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied, each
member, regardless of class, shall be entitled to one vote.
o GR: each member is entitled to 1 vote
o EXPN: unless it is limited, broadened, or denied
o Example for each:
o 1. BROADENED If by-laws provide that for every 5,000 pesos
contributed, a member shall be entitled to 1 vote. Thus, if he
contributes 10,000, he shall be entitled to 2 votes.
o 2. LIMITED If by-laws provide that regardless of contribution, each
member shall only be entitled to 4 votes
o 3. DENIAL members must maintain good standing to be entitled to
vote. He is not in good standing if he commits an infraction, does not
pay association dues, etc
Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code.
Voting by mail or other similar means by members of non-stock corporations may
be authorized by the by-laws of non-stock corporations with the approval of, and
under such conditions which may be prescribed by, the Securities and Exchange
Commission.
Nudibranch
Q: Can membership be transferred?
Sec. 90. Non-transferability of membership. - Membership in a non-stock
corporation and all rights arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide.
GR: No. Reason: it involves the personal element. A member is admitted to the
corporation because of his qualifications and personal attributes, and not by his
contributions
EXPN: Unless otherwise allowed under the AOI/BL
Q: What do you mean by the word Transfer? What does it cover?
o Transfer covers sale, donation, inheritance (transfer by descent)
Unlike in stock corporation where the heirs can own the
shares after proper proceedings
o EXPN: Unless otherwise provided under the AOI/BL
Q: What are the rules on termination?
Sec. 91. Termination of membership. - Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-
laws. Termination of membership shall have the effect of extinguishing all rights of
a member in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws.
o Must be terminated in accordance with the MANNER and for the
CAUSES provided for in the AOI/NBL
Q: What are the usual CAUSES to terminate membership?
o Non-payment of membership dues
o Acts of disloyalty
o Acts of dishonesty
o Acts involving moral turpitude
o Any act inimical to the interest of the corporation
When members dies, it is obvious that membership
terminates. What we are talking about are the usual causes
of termination as stated by the AOI/BL
LONG V. BASA
The by-laws must conform to existing laws including the Constitution. Petitioners
contend that they were deprived of their right to due process of law because they
were not given ample notice of their expulsion as members of the church
SC: Although every person is entitled to due process of law, petitioners were
continuously warned for 5 years. It is NOT the lack of prior notice which the law
abhors, but it is the total absence of opportunity to be heard
In the case at bar, the petitioners were continuously reminded and admonished.
This gave them the opportunity to reform their ways. But still, they did not
SC: there was implied waiver of the right to prior notice on the part of the
petitioners because when they joined the church, they knew the rules and
regulations including that the church had the right to expel any member by
resolution without the need of giving notice or the reasons for expulsion
47
 o By adhering to the by-laws, they became members of the corporation
voluntarily. They bound themselves through their consent
Assign: same (up to 95)
Chapter II - TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be
more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws,
shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of
their number shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a
term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-
stock corporation may be directly elected by the members
Q: Give an illustration of the term of office of trustees.
The term of trustees shall be in a staggered basis
The Board is composed of 15 trustees. The 15 shall be divided into 3. Assuming
that the elections is held on 2016, the term of the First 1/3 shall be 1 year, or on
2017. Upon expiration of their term, an election shall be held but this time the
First 1/3 shall serve for 3 years
o After one year, or on 2018, the term of the Second 1/3 shall expire. An
election shall be held and the Second 1/3 shall serve for 3 years
o After one year, or on 2019, the term of the Third 1/3 shall expire. An
election shall be held and the Third 1/3 shall serve for 3 years
Q: When do you apply the last sentence of Sec. 92 which states: trustees thereafter elected
to fill vacancies occurring before the expiration of a particular term shall hold office only for
the unexpired period.?
It is only applied when there is a vacancy in the middle of the term of the trustee.
A special election shall be held to fill such vacancy and the person elected shall
only serve for the unexpired term.
Q: How many trustees are allowed?
No maximum provided for by law
o However, according to an SEC opinion, the number of trustees should
not exceed the total number of membership of the corporation
The minimum number of trustees is 5. Reason: Sec. 87 provides: the provisions
governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. The law
is silent as to the minimum number of Trustees. Since the minimum number of
Nudibranch
directors in a stock corporation is 5, the minimum number of trustees in a non-
stock corporation is also 5
Q: May the term of office be reduced from 3 years to 2 years?
Yes. Sec. 92 provides: unless otherwise provided in the articles of incorporation or
the by-laws
Q: Who may elect the corporate officers?
In a Stock corporation, it is the Board of Directors
The law is silent as to who shall elect corporate officers in non-stock corporation
(Not sure ito:)
GR: Board of Trustees shall elect
o EXPN: Unless otherwise provided under the AOI/BL
Sec. 93. Place of meetings. - The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even outside the place
where the principal office of the corporation is located: Provided, That proper notice is sent
to all members indicating the date, time and place of the meeting: and Provided, further, That
the place of meeting shall be within the Philippines.
Q: Where shall meetings be held?
GR: Place where the principal office of the corporation is located
EXPN: The by-laws may proved that member may hold their meeting even outside
of the principal office, provided
o 1. Proper notice is sent to al member indicating date, time and place of
the meeting; and
o 2. The place of meeting shall be within the Philippines
Q: Can members conduct meetings thru teleconferencing?
To answer this, we must first answer the MT question: Can SH meeting be held
thru teleconferencing?
o Yes, as long as it is held in the city or municipality where the principal
office is located.
o GR: SH meeting must be held, if practicable, in the principal office of
the corporation
o EXPN: In the city or municipality where the principal office of the
corporation is located
o The answer is not as long as it complies with SEC circular 15 because
this only applies to board meetings
By analogy, a Members Meeting of a non-stock corporation may be held thru
teleconferencing as long as it complies with Sec. 93 insofar as prior notice is sent
+ it is done within the Philippines
Chapter III - DISTRIBUTION OF ASSETS IN
NON-STOCK CORPORATIONS
Q: What are the rules of distribution? (Memorize)
48
 Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation in
accordance with the provisions of this Code, its assets shall be applied and
distributed as follows:
o 1. All liabilities and obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made therefore;
o 2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;
o 3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one or more corporations, societies
or organizations engaged in activities in the Philippines substantially
similar to those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
Numbers 1-3 must first be settled before 4 and 5
o 4. Assets other than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions of the
articles of incorporation or the by-laws, to the extent that the articles
of incorporation or the by-laws, determine the distributive rights of
members, or any class or classes of members, or provide for
distribution; and
2 requirements:
1. Must be authenticated under the AOI
2. Must be specified under a Plan of Distribution
This is to determine whether members may be entitled to
distribution of assets
o 5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter.
Any person or entity may be entitled to distribution under a
plan of distribution
Q: What are the voting requirements for a plan of distribution of assets?
Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of
assets, not inconsistent with the provisions of this Title, may be adopted by a non-
stock corporation in the process of dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution recommending a
plan of distribution and directing the submission thereof to a vote at a regular or
special meeting of members having voting rights.
Written notice setting forth the proposed plan of distribution or a summary
thereof and the date, time and place of such meeting shall be given to each
member entitled to vote, within the time and in the manner provided in this Code
for the giving of notice of meetings to members.
Nudibranch
Such plan of distribution shall be adopted upon approval of at least two-thirds
(2/3) of the members having voting rights present or represented by proxy at such
meeting.
PADCOM V. ORTIGAS CENTER ASSOCIATION
Freedom of association was not violated. Automatic membership was provided for
under the terms and conditions of the agreement (deed of sale) and there was an
annotation to the title to that effect
Q: Assuming that PADCOM did not see the annotation, will it still be bound
thereby?
o Yes. Anything annotated in the title shall be constructive notice to the
whole world. This is a feature of the Torrens system. No one forced
PADCOM to but the land. They bough it voluntarily and agreed to all
the Terms and Conditions. Lesson: Always check a title for annotations.
STA. CLARA HOMES ASSOCIATION V. SPS. GASTON
Sps. Gaston cannot be compelled to become members of SCHA by the simple
expedient of including them in its AOI and BL without their express or implied
consent
As to Jurisdiction: SCHAs contention that RTC did not have jurisdiction since the
proper body which has jurisdiction is HIGC is erroneous. HIGC has exclusive
jurisdiction over intra-corporate disputes affecting homeowners association.
However, there is not intra-corporate dispute in the case at bar because Sps.
Gaston are NOT members of SCHA
o The new name of HIGC is Housing and Land Use Regulatory Board
(HLURB)
Q: What is the difference between the Padcom case and the SCHA case?
o In PADCOM, the title had an annotation providing automatic
membership in the homeowners association which is binding upon
PADCOM
o In SCHA, there is no such annotation
Q: Assuming that you are a non-member but you live in an association and benefit by their
activities and projects. Can you be charged by the association for association dues?
Yes. No one shall be unjustly enriched at the expense of another. There is a HLURB
circular which provides that a homeowner who has benefitted by the acts of the
homeowners association may be liable for association dues
o There is a jurisprudence implementing this. In a case, a non-member
was sued by the homeowners association before the HLURB. It
submitted as evidence photos of the non-members house showing that
there was a lamp post which stood in front of their house. This
indicates that the non-member benefitted thru the acts of the
association
o Since such dispute does not involve a member of the association, it is
not an intra-corporate dispute. The proper entity with which to file the
case is the RTC
49
TAN V. SYCIP
Quorum is determined by the actual number of trustees, NOT by the number
specified under the AOI. In the case at bar, there were 15 trustees indicated under
the AOI. But the actual number is only 11 because 4 had already died
Q: Since there was a quorum, was the election of the 4 who filled the vacancies
valid?
o No. The election was held in a members meeting when it should have
been held in a trustees meeting. This is wrong because in a members
meeting, members are allowed to vote by proxy, whereas in a Trustees
meeting, vote by proxy is not allowed. In the case at bar, the election
was held in a Members meeting where all the trustees voted thru
proxy
o Proxies cannot fill in the vacancies of trustees. Reason: Trustees were
elected by the SH/M to do their job. The proxies were not the ones
elected. The position of trustees involve trust and confidence
Assign: Sec. 95-105 + 2 cases
TITLE XII
CLOSE CORPORATIONS
Q: What is a close corporation?
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that:
o (1) All the corporation's issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20);
o (2) all the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and
o (3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation
within the meaning of this Code.
Q: Can all corporations be close corporations?
GR: Any corporation may be incorporated as a close corporation,
EXPN: except mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations declared to
be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
Q: Why is there a need for special rules with respect to close corporations?
Nudibranch
(Not answered)
A close corporation has been described as a corporation de jure and a partnership
de facto. A close corporation has special needs and problems different from an
ordinary corporation. It would not be fair to apply indiscriminately to the 2 types
of corporations the same rules. Hence, the need for special provisions to govern
close corporation
Q: What is the very objective of a close corporation?
To enjoy the advantages of the corporate organization, like the limitation of
personal liability, and at the same time to retain internally the partnership form of
doing business. Close corporations are usually small business corporations with
few stockholders who participate actively in the management of the business
In other words, to take advantage of the benefits of both a corporation and a
partnership; to enjoy the best of both worlds
A close corporation is also known as a de facto partnership
Q: What is the best benefit of a corporation or the partnership?
o Corporation Limited liability
o Partnership Participation in management affairs
Q: What is the difference between close corporation, closed corporation, and closely held
corporation? (pwede itanong sa finals)
Closed emphasizes a determination on the part of the participants in the
enterprise to keep outsiders from acquiring any interest in the business and may
indicate that they have taken steps to accomplish that objective by shareholders
agreement or provision in the AOI
Closely Held focuses more on the number of shareholders in the corporation at
that particular time, indicating that they are few in numbers. The shares of a
closely held corporation are owned by relatively limited number of stockholders)
Q: What are the permissible provisions which may be provided for in the AOI under Sec. 97?
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
o 1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as may
be stated therein, subject to the provisions of the following section;
o 2. For a classification of directors into one or more classes, each of
whom may be voted for and elected solely by a particular class of stock;
and
o 3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
Q: Is Section 97 in addition to Sec. 14 which provides for the general matters which must be
contained in the AOI? Or does Sec. 97 take the place of Sec. 14 with respect to close
corporation?
It is in addition to Sec. 14. A close corporation must both comply with Sec. 14 and
97
50
 (Feeling ko nagkamali lang si sir. Nakalagay sa memaid with respect to close
corporation: the AOI must contain the provisions required by Sec. 97 aside from
the general matters in Sec. 14. Failure to do so precludes a de jure close
corporation status. Dapat 96 yun. Kasi mandatory yung provision under 96
whereas merely permissible lang yung provisions sa 97. Feeling ko lang naman.)
Q: May a close be corporation be managed by the shareholders?
Yes.
The articles of incorporation of a close corporation may provide that the business
of the corporation shall be managed by the stockholders of the corporation rather
than by a board of directors. So long as this provision continues in effect:
Q: What are the effects if the shareholders act as directors?
o 1. No meeting of stockholders need be called to elect directors;
o 2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying
the provisions of this Code; and
o 3. The stockholders of the corporation shall be subject to all liabilities of
directors.
o 4. The stockholders shall be held to strict fiduciary duties to each other
and among themselves. (See Sec. 100)
This means that they have utmost trust and confidence in
the management of the corporation.
o 5. The stockholders shall be personally liable for corporate torts unless
the corporation has obtained reasonably adequate liability insurance.
(See Sec. 100)
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders, instead of
by the board of directors.
Q: When is a restriction on transfer of shares valid?
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of incorporation and in the by-laws as
well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms, conditions or
period stated therein.
Q: What is a good example of a restriction that is more onerous than the granting of the
pre-emptive right? (sir calls it pre-emptive right)
(Not answered)
Ex: a restriction fixing the purchase price far below the FMV of the shares = more
onerous because the term is unreasonable = invalid
Ex: a restriction providing that no shares may be transferred without the consent
of the BOD or SH = more onerous because the condition unreasonable = invalid
Nudibranch
Ex: a restriction which provides for a pre-emptive right which must be exercised
only within 24 hours = more onerous because the period to exercise the pre-
emptive right is unreasonable = invalid
Q: What is a good example of a restriction that is NOT more onerous than the granting of
the pre-emptive right?
Ex sa other class: a restriction which provides that only lawyers may be transferees
of shares = NOT more onerous because it does not violate the granting of a pre-
emptive right with reasonable terms, conditions, and period
Q: What is the effect of the existing shareholder or corporation fails to exercise the pre-
emptive right?
If upon the expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder may sell his
shares to any third person.
Q: What are the effects of a transfer of stock in breach of qualifying conditions?
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions.
1. If stock of a close corporation is issued or transferred to any person who is not
entitled under any provision of the articles of incorporation to be a holder of
record of its stock, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such person
is conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of its
stock, and if the certificate for such stock conspicuously states such number, and if
the issuance or transfer of stock to any person would cause the stock to be held by
more than such number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction
on transfer of stock of the corporation, the transferee of the stock is conclusively
presumed to have notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or
transferred has, or is conclusively presumed under this section to have, notice
either (a) that he is a person not eligible to be a holder of stock of the corporation,
or (b) that transfer of stock to him would cause the stock of the corporation to be
held by more than the number of persons permitted by its articles of incorporation
to hold stock of the corporation, or (c) that the transfer of stock is in violation of a
restriction on transfer of stock, the corporation may, at its option, refuse to
register the transfer of stock in the name of the transferee.
Q: Can the shareholder raise the defense of good faith?
o No. Good faith is not a defense because there is a conclusive
presumption of knowledge of the restriction
Q: Are there exceptions to the rules that the shareholder will have conclusive
presumption of notice?
51
 o 5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
to by all the stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance
with this Title.
Q: What does the term transfer cover?
o 6. The term "transfer", as used in this section, is not limited to a
transfer for value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty,
express or implied.
SAN JUAN V. CA
Sec. 96
Just because Spouses Gruenberg own 99.866% of the subscribed capital stock of
Motorich, it does not follow that the doctrine of piercing of the veil of corporation
rd
is applicable in the absence of fraud or illegality at the expense of 3 persons like
petitioner
Q: Enumerate the agreements by stockholders.
Sec. 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except
those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to
any phase of the corporate affairs, shall be invalidated as between the parties on
the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the conduct
of the business and affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: Provided, That such agreement
shall impose on the stockholders who are parties thereto the liabilities for
managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall
be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance.
Nudibranch
Q: When is a board meeting unnecessary or improperly held?
Sec. 101. When board meeting is unnecessary or improperly held. - Unless the by-
laws provide otherwise, any action by the directors of a close corporation without
a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action taken therein
within the corporate powers is deemed ratified by a director who failed to attend,
unless he promptly files his written objection with the secretary of the corporation
after having knowledge thereof.
Q: What if a meeting is required under the AOI, but there was no proper notice or call?
The corporate act cannot become valid. The provision says unless the by-laws
provide otherwise
DULAY V. CA
Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in
close corporations shall extend to all stock to be issued, including reissuance of treasury
shares, whether for money, property or personal services, or in payment of corporate debts,
unless the articles of incorporation provide otherwise.
Q: What is the difference between the pre-emptive right under Sec. 39 and Sec. 102
1. Sec. 39 applies only to newly issued shares; while Sec. 102 applies to all
shares
2. Sec. 39 subject to exceptions; Sec. 102 not subject to exceptions
o Q: What are the exceptions under Sec. 39?
o 1. Shares to be issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or
o 2. To shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
Q: How is the AOI of a close corporation amended?
Sec. 103. Amendment of articles of incorporation. - Any amendment to the articles
of incorporation which seeks to delete or remove any provision required by this
Title to be contained in the articles of incorporation or to reduce a quorum or
voting requirement stated in said articles of incorporation shall not be valid or
effective unless approved by the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or of such greater
52
 proportion of shares as may be specifically provided in the articles of incorporation
for amending, deleting or removing any of the aforesaid provisions, at a meeting
duly called for the purpose.
Q: When is there a deadlock?
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation, if
the directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action
cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders
generally, the Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
Q: What may the SEC do when there is a petition for the SEC to arbitrate filed by
a shareholder?
In the exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order:
o (1) canceling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
o 2) canceling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers;
o (3) directing or prohibiting any act of the corporation or its board of
directors, stockholders, officers, or other persons party to the action;
o (4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or by the other
stockholders;
o (5) appointing a provisional director;
o (6) dissolving the corporation; or
o (7) granting such other relief as the circumstances may warrant.
Q: What are the qualifications of a provisional director?
A provisional director shall be:
o 1. An impartial person
o 2. Who is neither a stockholder nor a creditor of the corporation or of
any subsidiary or affiliate of the corporation, and
o 3. whose further qualifications, if any, may be determined by the
Commission.
Q: What are the rights and powers of the provisional director?
o 1. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver.
o 2. A provisional director shall have all the rights and powers of a duly
elected director of the corporation,
Including the right to notice of and to vote at meetings of
directors, until such time as he shall be removed by order of
the Commission or by all the stockholders.
Nudibranch
o 3. His compensation shall be determined by agreement between him
and the corporation subject to approval of the Commission, which may
fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation.
Q: How long will the provisional director serve?
o Until such time as he shall be removed by:
1. Order of the Commission or
2. By all the stockholders
Q: What are the 2 remedies of the shareholder under 105?
Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition and
without prejudice to other rights and remedies available to a stockholder under
this Title, any stockholder of a close corporation may:
o 1. Appraisal Right - for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their
par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock:
o 2. File a Petition for dissolution with the SEC - Provided, That any
stockholder of a close corporation may, by written petition to the
Securities and Exchange Commission, compel the dissolution of such
corporation
o 2 Grounds:
1. Whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the
corporation, or
2. Any stockholder, or whenever corporate assets are being
misapplied or wasted.
Q: What is the difference between the appraisal right with respect to ordinary corporations
to close corporation?
1. With respect to ordinary corporations must be for any of the cases under Sec.
81; With respect to close corporations may be for any reason
o Q: What are the cases provided for under Sec. 81?
o 1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or
o 2. Of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence;
o 3. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and
o 4. In case of merger or consolidation
o There is also appraisal right under Sec. 42 investment in corporate
funds in another corporation or business or for any other purpose
53
 2. With respect to ordinary corporation no need sufficient assets to cover debts
and liabilities exclusive of capital. What is required is that the corporation has
Unrestricted Retained Earnings; With respect to close corporation corporation
needs sufficient assets to cover debts and liabilities exclusive of capital
Q: What is the difference between an ordinary corporation and a close corporation?
(See memaid for table)
Assign: amendment of AOI of close corp up to special corporations, dulay case, 2 cases on
special corporations
TITLE XIII
SPECIAL CORPORATIONS
Chapter I - Educational Corporations
Q: What is an educational corporation?
It is a stock or non-stock corporation organized to provide for facilities for teaching
or instruction
Q: What provisions govern educational corporations?
Sec. 106. Incorporation. - Educational corporations shall be governed by special
laws
o Ex of special law: RA 7798 amending the education act of 1982
and by the general provisions of this Code.
Q: Is there any pre-requisite before incorporation of an educational corporation?
Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture (Now Department of
Education), the Securities and Exchange Commission shall not accept or approve
the articles of incorporation and by-laws of any educational institution.
Q: What are the rules as to number of trustees and their terms?
With respect to Non-Stock:
o Sec. 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5) nor
more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
o Unless otherwise provided in the articles of incorporation on the by-
laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year.
o Q: Give an illustration of the staggering term of BOT.
o Q: When does the rule with respect to the serving of unexpired period
of the term apply?
Nudibranch
Only in case of vacancy (Such as when a trustee has died,
been removed, or even resigned)
Trustees thereafter elected to fill vacancies, occurring
before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to
fill vacancies caused by expiration of term shall hold office
for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
With respect to Stock:
o For institutions organized as stock corporations, the number and term
of directors shall be governed by the provisions on stock corporations.
Chapter II - RELIGIOUS CORPORATIONS
Q: What is a religious corporation?
A corporation composed entirely of spiritual persons and which is organized for
the furtherance of a religion or perpetuating the right of the church or for the
administration of church or religious works or property
Q: What are the classes of religious corporations?
Sec. 109. Classes of religious corporations. - Religious corporations may be
incorporated by one or more persons. Such corporations may be classified into:
o Corporations Sole, and (See Sec. 110)
o Religious societies or Corporation Aggregate (See Sec. 116)
Q: What is the difference between the 2?
o Corporation Sole 1 member/incorporator
o Religious Society 2 or more members/incorporators
Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable.
ROMAN CATHOLIC V. DAVAO
There was no violation of the constitutional requirement which provides that
agricultural lands must be 60% Filipino owned. The basis of ownership is not the
corporation sole. He is not the owner if such property. The true owner is the
Roman Catholic Faithful. The corporation sole is merely holding the property in
trust
IGLESIA EVANGELICA V. BISHOP LAZARO
There is no need to dissolve the corporation sole to convert it to a corporation
aggregate in order to increase membership. Mere amendment of the AOI is
sufficient by the one member of the corporation sole with the concurrence of 2/3
of the membership of the organization for whom he acts as trustee
Q: What is corporation sole?
Sec. 110. Corporation sole. - For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect
54
 or church, a corporation sole may be formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of such religious denomination, sect
or church.
Q: What must be contained in the AOI of a corporation sole?
Sec. 111. Articles of incorporation. - In order to become a corporation sole, the
chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and Exchange
Commission articles of incorporation setting forth the following:
o 1. That he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religious denomination, sect or church and that
he desires to become a corporation sole;
o 2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his becoming a
corporation sole and do not forbid it;
o 3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties
of his religious denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
o 4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required
to be filled, according to the rules, regulations or discipline of the
religious denomination, sect or church to which he belongs; and
o 5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
o The articles of incorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation.
Q: What is required to be filed when filing AOI?
Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be,
and accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or affirmation, and accompanied by
the documents mentioned in the preceding paragraph, such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall become a corporation sole
and all temporalities, estate and properties of the religious denomination, sect or
church theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole benefit of his religious
denomination, sect or church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
Nudibranch
Q: Can a corporation sole acquire property?
Yes.
Sec. 113. Acquisition and alienation of property. - Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such
purposes.
Q: Can a corporation sole sell or mortgage its property?
o Yes, provided that it has obtained a court order from the RTC of the
province where the property is situated. This done by filing a verified
petition. Such notice thru publication or any other manner under the
court order shall be made.
o Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Court of First Instance of
the province where the property is situated upon proof made to the
satisfaction of the court that notice of the application for leave to sell
or mortgage has been given by publication or otherwise in such manner
and for such time as said court may have directed, and that it is to the
interest of the corporation that leave to sell or mortgage should be
granted. The application for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop, bishop, priest, minister,
rabbi or presiding elder acting as corporation sole, and may be opposed
by any member of the religious denomination, sect or church
represented by the corporation sole:
Q: Is there any exception to the necessity of court intervention?
o Yes. When the rules, regulations of the religious denomination, sect, or
church, religious society, or order regulate the method or manner of
acquiring, holding, selling, or mortgaging the estate
o Provided, That in cases where the rules, regulations and discipline of
the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method
of acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary.
Q: How are vacancies filled in religious corporation?
Sec. 114. Filling of vacancies. - The successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become
the corporation sole on their accession to office and shall be permitted to transact
business as such on the filing with the Securities and Exchange Commission of a
copy of their commission, certificate of election, or letters of appointment, duly
certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi
or presiding elder of any religious denomination, sect or church incorporated as a
corporation sole, the person or persons authorized and empowered by the rules,
regulations or discipline of the religious denomination, sect or church represented
by the corporation sole to administer the temporalities and manage the affairs,
55
 estate and properties of the corporation sole during the vacancy shall exercise all
the powers and authority of the corporation sole during such vacancy.
Q: How are religious corporations dissolved?
Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs settled
voluntarily by submitting to the Securities and Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set forth:
o 1. The name of the corporation;
o 2. The reason for dissolution and winding up;
o 3. The authorization for the dissolution of the corporation by the
particular religious denomination, sect or church;
o 4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on its operations except for the
purpose of winding up its affairs
Q: What is a religious corporation?
Sec. 116. Religious societies. - Any religious society or religious order, or any
diocese, synod, or district organization of any religious denomination, sect or
church, unless forbidden by the constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part, or by competent
authority, may, upon written consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its affairs,
properties and estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder, secretary,
or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church,
setting forth the following:
o 1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
denomination, sect or church;
o 2. That at least two-thirds (2/3) of its membership have given their
written consent or have voted to incorporate, at a duly convened
meeting of the body;
o 3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
of which it forms a part;
o 4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
Nudibranch
o 5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines;
and
o 6. The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15).
TITLE XIV
DISSOLUTION
Q: What is dissolution?
The extinguishment of franchise to be a corporation and the termination of its
corporate existence
Q: What are the steps in corporate dissolution?
STEP 1: Termination of the corporation at least as far as the right to go on during
ordinary business is concerned
STEP 2: Winding up of its affairs
o This refers to the settlement of debts and liabilities to unpaid creditors.
Whatever is left of the corporations assets will be distributed to its
stockholders or members
STEP 3: Termination of the corporation for all purposes
Q: What are the methods of dissolution?
Sec. 117. Methods of dissolution. - A corporation formed or organized under the
provisions of this Code may be dissolved:
Voluntarily or
o 1. Dissolution where creditors are not affected
o 2. Dissolution where creditors are affected
o 3. Dissolution by shortening corporate term
o 4. With respect to Corporations Sole, submission of a verified
declaration of dissolution for SEC approval
Q: Who submits the verified declaration?
The sole incorporator of a corporation sole, or the chief
archbishop, bishop, priest, minister, rabbi or other presiding
elder of the religious denomination, sect or church.
Involuntarily.
o 1. Expiration of corporate term
o 2. Legislative enactment
Especially public utilities.
Reason: Congress have the inherent power to make laws
which carries with it the power to alter or repeal them
Q: What are the limitations to the exercise of this power?
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 1. Sec. 11, Art XII, 1987 Constition: xxx neither shall any
such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the COMMON GOOD so
requires
2. Sec. 145. Amendment or repeal: No right or remedy in
favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal of this Code or of
any part thereof
3. The dissolution must NOT impair existing obligations of
contracts or take away vested rights
Q: Can Congress dissolve by legislative enactment even
private entities, say San Beda?
Yes, provided that the limitations are complied with
o 3. Failure to formally organize and commence corporate business
within 2 years from the issuance of Certificate of Incorporation
Q: What do you mean by formally organize or
commence?
Election of corporate officers
o 4. Order of the SEC in cases provided for under existing law, rules and
regulations
Q: What are the grounds in which a petition for dissolution
may be filed with the SEC?
1. Violations by a corporation
2. Deadlocks in a close corporation
Upon petition, SEC may arbitrate a corporation
and order dissolution
3. Mismanagement of a close corporation
Grounds: 1. Illegal, dishonest, fraudulent,
oppressive or unfairly prejudicial to the
corporation/SH; 2. Corporate assets are being
misapplied/wasted
4. Suspension or revocation of Certificate of Registration of a
corporation
Q: What are the grounds to suspend/revoke
COR?
1. Fraud in procuring the COR
2. Serious misrepresentation as to what the
corporation can do/is doing (to the great
prejudice to the general public)
3. Refusal to comply/defiance of any lawful order
of the SEC of acts which would amount to grave
violation of its franchise
Nudibranch
4. Continuous inoperation for at least 5 years
5. Failure to file by-laws within the required
period
6. Failure to file required reports in appropriate
forms as determined by the SEC within the
prescribed period
Q: Explain the procedure with respect to dissolution where no creditors are affected.
Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution of
a corporation does not prejudice the rights of any creditor having a claim against
it, the dissolution may be effected
By majority vote of the board of directors or trustees, and
By a resolution duly adopted by the affirmative vote of the stockholders owning at
least 2/3 of the outstanding capital stock or of at least 2/3 of the members
Of a meeting to be held upon call of the directors or trustees
After PUBLICATION of the notice of time, place and object of the meeting
o For 3 consecutive weeks in a newspaper published in the place where
the principal office of said corporation is located; and
o If no newspaper is published in such place, then in a newspaper of
general circulation in the Philippines,
After sending such NOTICE to each stockholder or member either by registered
mail or by personal delivery at least 30 days prior to said meeting.
A copy of the resolution authorizing the dissolution shall be CERTIFIED (Certificate
which is signed ) by a majority of the board of directors or trustees and
o Q: What is the certification all about?
That the majority of the board is authorized by corporation
and the required vote is obtained
COUNTERSIGNED by the secretary of the corporation.
The Securities and Exchange Commission shall thereupon issue the CERTIFICATE
OF DISSOLUTION.
VESAGAS V. C.A.
Members of the corporation complained that they were stripped off their
membership without due process. The defense of Vesagas was the corporation no
longer existed
On the issue of WON the corporation was dissolved, the SC held in the negative
because the corporation failed to follow the required procedure under the
corporation code.
The corporation merely submitted the following documentary evidence: board
resolution and minutes of the meeting. These alone do not prove dissolution
The procedure in dissolution must be strictly followed
The 3 documents required to prove dissolution
o 1. Certificate of Dissolution issued by the SEC
o 2. Board Resolution
o 3. Certification countersigned by the majority of the board and signed
by the corporate secretary authorizing the dissolution
57
 The Certificate of Dissolution issued by the SEC is the best evidence of dissolution.
Thru this, the corporation is presumed to have complied with required procedure
under the Corporation Code
Q: Explain the procedure with respect to dissolution where creditors are affected.
Sec. 119. Voluntary dissolution where creditors are affected. - Where the
dissolution of a corporation may prejudice the rights of any creditor, the petition
for dissolution shall be filed with the Securities and Exchange Commission.
The petition shall be signed by
o A majority of its board of directors or trustees OR other officers having
the management of its affairs,
Verified by its
o President or
o Secretary or
o One of its directors or trustees, and
Shall set forth:
o All claims and demands against it, and
o That its dissolution was resolved upon by the affirmative vote of the
stockholders representing at least 2/3 of the outstanding capital stock
or by at least 2/3 of the members at a meeting of its stockholders or
members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an
ORDER reciting the purpose of the petition, fix a date on or before which
OBJECTIONS thereto may be filed by any person,
o Which date shall not be less than 30 days nor more than sixty 60 days
after the entry of the order.
o Timeframe: this means that the date of filing objections must be fixed
on a date NOT earlier than 30 days after the order and NOT later than
60 days after the order.
o Ex: if the date of entry of the order is April 4, then the date for filing
objections must be fixed not earlier than May 4 and not later June 5
Before such date, a copy of the order shall be published
o At least once a week for 3 consecutive weeks in a newspaper of
general circulation published in the municipality or city where the
principal office of the corporation is situated, or
o if there be no such newspaper, then in a newspaper of general
circulation in the Philippines, and
A similar copy shall be posted for 3 consecutive weeks in 3 public places in such
municipality or city.
Upon 5 day's notice, given after the date on which the right to file objections as
fixed in the order has expired, the Commission shall proceed to HEAR the petition
and try any issue made by the OBJECTIONS filed; and if no such objection is
sufficient, and the material allegations of the petition are true,
It shall render judgment dissolving the corporation and
o Directing such disposition of its assets as justice requires, and
o May appoint a receiver to collect such assets and pay the debts of the
corporation.
Nudibranch
The function of the receiver is to administer the liquidation,
manage the settlement of liabilities and debts
Q: Explain the procedure with respect to dissolution by shortening the corporate term of
existence.
Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution may
be effected by amending the articles of incorporation to shorten the corporate
term pursuant to the provisions of this Code.
A copy of the amended articles of incorporation shall be submitted to the
Securities and Exchange Commission in accordance with this Code.
Upon approval of the amended articles of incorporation of the expiration of the
shortened term, as the case may be, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of this Code on
liquidation.
Q: If the corporate term is shortened, do the shareholders still have appraisal right?
Yes.
Under Section 37, shortening of the corporate term is not one of the instances
wherein the appraisal right is available
Under Section 81, however, it is included.
Thus, appraisal right is available in both shortening and extending the corporate
term
Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint and after proper notice and hearing
on the grounds provided by existing laws, rules and regulations.
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in interest,
all interest which the corporation had in the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
58
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities.
Q: What is Liquidation?
It is the winding up of the affairs of the corporation by:
o 1. Reducing its assets in money
o 2. Settling with the creditors or debtors, and
o 3. Apportioning the amount of profit or loss
Q: What are the methods of corporate liquidation?
1. Liquidation by the corporation itself
2. Liquidation by a duly appointed receiver
3. Liquidation by a trustee to whom the corporation had conveyed the corporate
assets
Q: What is the difference between a receiver and trustee?
Receiver appointed by the corporation or SEC to collect the corporate assets and
pay the debts of the corporation (Sec. 119)
Trustee appointed by the corporation
Q: What is the priority of obligations of corporations?
1. When corporation becomes insolvent - Creditors
2. SH/members/directors/officers who are also creditors
3. Remaining assets to be distributed to the SH/members
4. If no SH/members, escheated (forfeited) in favor of the government, specifically
the municipality or city where the asset is located
SPS. GELANO V. CA
While the civil case against Sps. Gelano was pending, ISI amended its AOI to
shorten its corporate existence. The case was dismissed by the RTC on the ground
that it had no jurisdiction since the corporation is no longer in existence
WON RTC had jurisdiction? Yes.
Sec. 122: Every corporation shall nevertheless be continued as a body corporate
for 3 years after the time when it would have been so dissolved. xxx At any time
during said 3 years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest.
Even if the case continued beyond the 3 year period (in this case, 7 years had
already elapsed), as long as the case was filed when the corporation was still in
existence, the case will still SUBSISTS
Also, a lawyer who prosecuted and defended the interest of a corporation and
appeared on behalf of the corporation before and after dissolution, may be
considered as a trustee contemplated in Sec. 122. In the case at bar, there was a
substantial compliance of the appointment of a trustee when the lawyers
prosecuted the interest of the corporation when it was still in existence
Nudibranch
PHILIPPINE VETERANS BANK V. VEGA
The enactment of Republic Act No. 7169 has rendered the liquidation
court functus officio and respondent judge has been stripped of the authority to
issue orders involving acts of liquidation.
Liquidation connotes a winding up or settling with the creditors and debtors while
rehabilitation connotes a reopening or reorganization. Both are diametrically
opposed to each other, such that both cannot be undertaken at the same time. To
allow the liquidation proceedings to continue would seriously hinder the
rehabilitation of the subject bank.
Liquidation = termination; Rehabilitation = continuation
TAN TIONG BIO V. CIR
Q: What if a corporation has no more assets, can the creditors still collect?
o Yes, SH be liable. The creditors can follow the properties of the
corporation even beyond the 3 year period under Sec. 122 if the assets
of the corporation were distributed to the SH/members without first
settling the corporations debts and liabilities first
This is the principle enunciated in American jurisprudence
made applicable also in this case
If the government was not allowed to collect taxes which are rightfully due to it,
then that would set a dangerous precedent for the reason that the SH/members
could easily escape tax liability by the simple expedient of transferring to other
persons the property of the corporation. This is an indirect tax evasion.
REBOLLIDO V. CA AND PEPSICO
WON PEPSICO is a Real-Party-Interest? Yes.
Sec. 122: Every corporation shall nevertheless be continued as a body corporate
for 3 years after the time when it would have been so dissolved. xxx At any time
during said 3 years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest.
Assuming that a corporation is already dissolved but the action lasted beyond the
3 year period, the action may still be prosecuted as long as the corporation was
still in existence at the time of filing
In the case at bar, the case was filed within the 3 year period.
As long as the properties are identifiable to the corporation and transferred to
another person, the creditors may follow the property
Since the corporation is still subject to suit, it is incidentally subject to the court
processes such as summons
Assign: Up to foreign corporations
TITLE XV
FOREIGN CORPORATIONS
Q: What is a Foreign Corporation?
59
 Sec. 123. Definition and rights of foreign corporations. - For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws
other than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
Q: From the definition under the Corporation Code, what are the 2 elements of a
Foreign Corporation?
o 1. The FC is formed, organized or existing under any laws other than
those of the Philippines; and
o 2. The laws by which the FC is organized allows Filipino citizens and
corporations to do business in its own country or state.
This also known as the Right of Reciprocity
Q: What right is granted to foreign corporations?
o It shall have the right to transact business in the Philippines after it
shall have obtained:
1. A license to transact business in this country in
accordance with this Code and
2. A certificate of authority from the appropriate
government agency.
Q: How do you determine the nationality of a corporation? (3 tests)
1. Incorporation test the nationality of a corporation is that of the state of
incorporation regardless of the nationality of the shareholders
2. Control test the nationality of a corporation is depends upon the nationality of
the controlling stockholders
3. Grandfather rule the combined totals in the investing corporation and the
investee corporation must be traced (grandfathered) to determine the total
percentage of Filipino ownership
Q: In our jurisdiction, which test do we apply?
o According to a SEC circular, we apply the Control Test in determining
whether a corporation has complied with the constitutional provisions
requiring certain industries to be Filipino owned (i.e. 100% Filipino-
owned, 60%-40%)
Q: What happens when a foreign corporation was granted a license before the effectivity of
the Corporation Code?
Sec. 124. Application to existing foreign corporations. - Every foreign corporation
which on the date of the effectivity of this Code is authorized to do business in the
Philippines under a license therefore issued to it, shall continue to have such
authority under the terms and condition of its license, subject to the provisions of
this Code and other special laws.
o However, the corporation must still comply with the new requirements
of the Corporation Code (I.e. Rule of Reciprocity) within 2 years from
the effectivity of the Code
Q: What are the requirements for the issuance of a license?
The FC must file an application under oath
Nudibranch
Sec. 125. Application for a license. - A foreign corporation applying for a license to
transact business in the Philippines shall submit to the Securities and Exchange
Commission:
o A copy of its articles of incorporation and by-laws,
o Certified in accordance with law, and their
o Translation to an official language of the Philippines, if necessary.
o The application shall be under oath and,
Q: What must be contained in the application?
o Unless already stated in its articles of incorporation, shall specifically
set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal
office of the corporation in the country or state of
incorporation;
3. The name and address of its resident agent authorized to
accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are
those specifically stated in the certificate of authority issued
by the appropriate government agency;
6. The names and addresses of the present directors and
officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of shares,
shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or
appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is
entitled to a license to transact business in the Philippines,
and to determine and assess the fees payable.
Q: What are the necessary attachments to the application? (Conditions
Precedent)
o 1. Attached to the application for license shall be a duly executed
certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that:
60
 The laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and
That the applicant is an existing corporation in good
standing.
If such certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be
attached thereto.
o 2. The application for a license to transact business in the Philippines
shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing
to the satisfaction of the Securities and Exchange Commission and
other governmental agency in the proper cases that:
The applicant is solvent and
In sound financial condition, and
Setting forth the assets and liabilities of the corporation as
of the date not exceeding one (1) year immediately prior to
the filing of the application.
o 3. Foreign banking, financial and insurance corporations shall, in
addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange
Commission without previous authority from the appropriate
government agency, whenever required by law.
o 4. (Sec. 128) Written power of attorney designating some person who
must be a resident of the Philippines, on whom any summons and
other legal processes may be served in all actions or other legal
proceedings against such corporation
o 5. (Sec. 128) Any such foreign corporation shall likewise execute and
file with the Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in
form and substance with the SEC to the effect that if the FC shall cease
to transact business in the Philippines or that there is no resident agent,
then the SEC can receive summons and legal processes on behalf of the
FC
Q: What happens when all the requirements are complied with? (Conditions Subsequent)
Sec. 126. Issuance of a license. - If the Securities and Exchange Commission is
satisfied that the applicant has complied with all the requirements of this Code
and other special laws, rules and regulations, the Commission shall issue a license
to the applicant:
1. To transact business in the Philippines (only) for the purpose or purposes
specified in such license. Upon issuance of the license, such foreign corporation
may commence to transact business in the Philippines and continue to do so for as
long as it retains its authority to act as a corporation under the laws of the country
or state of its incorporation,
Nudibranch
o Unless such license is sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other special laws
2. Within sixty (60) days after the issuance of the license to transact business in the
Philippines, the license, except foreign banking or insurance corporation, shall
deposit with the Securities and Exchange Commission for the benefit of present
and future creditors of the licensee in the Philippines, securities satisfactory to the
Securities and Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and
entities, shares of stock in "registered enterprises" as this term is defined in
Republic Act No. 5186, shares of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic insurance companies and banks, or
any combination of these kinds of securities, with an actual market value of at
least one hundred thousand (P100,000.) pesos;
3. Provided, however, That within six (6) months after each fiscal year of the
licensee, the Securities and Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual market value to two (2%)
percent of the amount by which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos.
4. The Securities and Exchange Commission shall also require deposit of additional
securities if the actual market value of the securities on deposit has decreased by
at least ten (10%) percent of their actual market value at the time they were
deposited.
5. The Securities and Exchange Commission may at its discretion release part of
the additional securities deposited with it if the gross income of the licensee has
decreased, or if the actual market value of the total securities on deposit has
increased, by more than ten (10%) percent of the actual market value of the
securities at the time they were deposited.
Q: May the corporation allow the licensee to substitute the securities?
o Yes. The Securities and Exchange Commission may, from time to time,
allow the licensee to substitute other securities for those already on
deposit:
o 1. As long as the licensee is solvent.
o 2. And allowed by the SEC.
o Such licensee shall be entitled to collect the interest or dividends on the
securities deposited.
Q: What happens if a corporation ceased to conduct business?
o In the event the licensee ceases to do business in the Philippines, the
securities deposited as aforesaid shall be returned,
1. Upon the licensee's application therefor and
2. Upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to
Philippine residents, including the Government of the
Republic of the Philippines.
Q: Who may be designated as a resident agent?
Sec. 127. Who may be a resident agent. - A resident agent may be either:
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 1. An individual
o a. Residing in the Philippines or
o b. Of good moral character and
o c. Of sound financial standing
2. A domestic corporation
o lawfully transacting business in the Philippines:
(Provided, That in the case of an individual, he must be of good moral character
and of sound financial standing.)
Q: What is the function of the resident agent
Receive summons and other legal processes may be served in all actions or other
legal proceedings against such corporation
Sec. 128. Resident agent; service of process. - The Securities and Exchange
Commission shall require as a condition precedent to the issuance of the license to
transact business in the Philippines by any foreign corporation that such
corporation file with the Securities and Exchange Commission a written power of
attorney designating some person who must be a resident of the Philippines, on
whom any summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that service
upon such resident agent shall be admitted and held as valid as if served upon the
duly authorized officers of the foreign corporation at its home office.
Q: Aside from the resident agent, who else may receive summons or legal
processes?
o The SEC after the FC executed an agreement/stipulation (as a
precondition to the issuance of license) with the SEC to the effect that if
the FC shall cease to transact business in the Philippines or that there is
no resident agent, then the SEC can receive summons and legal
processes on behalf of the FC
Provided that: the SEC shall, within ten (10) days thereafter,
transmit by mail a copy of such summons or other legal
process to the corporation at its home or principal office.
All expenses incurred by the Commission for such service
shall be paid in advance by the party at whose instance the
service is made.
o Any such foreign corporation shall likewise execute and file with the
Securities and Exchange Commission an agreement or stipulation,
executed by the proper authorities of said corporation, in form and
substance as follows:
"The (name of foreign corporation) does hereby stipulate
and agree, in consideration of its being granted by the
Securities and Exchange Commission a license to transact
business in the Philippines, that if at any time said
corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in the
Philippines on whom any summons or other legal
processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred in
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the Philippines, service of any summons or other legal
process may be made upon the Securities and Exchange
Commission and that such service shall have the same force
and effect as if made upon the duly-authorized officers of
the corporation at its home office."
o Whenever such service of summons or other process shall be made
upon the Securities and Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or
principal office. The sending of such copy by the Commission shall be
necessary part of and shall complete such service. All expenses incurred
by the Commission for such service shall be paid in advance by the
party at whose instance the service is made.
o In case of a change of address of the resident agent, it shall be his or its
duty to immediately notify in writing the Securities and Exchange
Commission of the new address.
Q: What do you mean by transacting or doing business in the Philippines?
The Corporation Code itself does not define such terms
Under the Foreign Investments Act (RA 7042):
o The phrase doing business shall include: (SSOAP)
Soliciting orders, service contracts, opening offices,
whether called liaison offices or branches; appointing
representatives or distributors domiciled in the Philippines;
participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and
in progressive prosecution of, commercial gain or of the
purpose and object of the business organization
The Corporation Code does not define this phrase
Q: What if none of the circumstances are present, can the FC still be considered
to be doing business?
o Yes. Jurisprudence provides for the definition (See Eriks Pte v. CA)
Q: Is a license always pre-requisite before a corporation is considered to be
doing business? Such that if a corporation does not have license, it cannot be
considered to be doing business?
o No
ERIKS PTE LTD V. CA
WON Petitioner has the capacity to sue? No.
Petitioner, a non-resident foreign corporation, has no legal capacity to sue. License
is required only in transacting business in the Philippines and not required to grant
the FC legal capacity to sue
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 What is determinative as to whether a corporation is doing business or not is its
intent as well as the nature of the transaction
The rule is that if a FC does business without license, any agreement executed
thereto is void. Moreover, it shall not have access to PH courts
o Q: Is this incapacity curable? How?
o Yes. By obtaining the requisite license
However, a FC without license is not ipso facto incapacitated from bringing an
action. A license is necessary only if it is transacting or doing business in the
country.
That is why there is a need to define doing business
Q: How did the court define doing business?
o The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for
which it was organized or whether it has substantially retired from it
and turned it over to another.
o The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose and object of its
organization (Memorize this!)
In the case at bar, the grant of the 90-day credit term by FC to DC for every
purchase made shows an intention to continue transacting with the latter since in
the usual course of commercial transactions, credit is extended to members in
good standing or to those on whom there is an intent to maintain a long-term
relationship
Therefore, granting credit term = continuity of commercial dealing = doing
business = needs license. Without license, Eriks Pte has no legal capacity to sue.
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to domestic corporations of the
same class, except such only as provide for the creation, formation, organization or
dissolution of corporations or those which fix the relations, liabilities, responsibilities, or
duties of stockholders, members, or officers of corporations to each other or to the
corporation.
Q: If the AOI has been amended, what is the rule?
Sec. 130. Amendments to articles of incorporation or by-laws of foreign
corporations. - Whenever the articles of incorporation or by-laws of a foreign
corporation authorized to transact business in the Philippines are amended, such
foreign corporation shall, within sixty (60) days after the amendment becomes
effective, file with the Securities and Exchange Commission, and in the proper
cases with the appropriate government agency,
o 1. A duly authenticated copy of the articles of incorporation or by-
laws, as amended,
o Q: What do you mean by duly authenticated?
Certified by the appropriate government entity (In the
Philippines, we have NSO) in the country of origin
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o 2. Indicating clearly in capital letters or by underscoring the change or
changes made,
o 3. Duly certified by the authorized official or officials of the country or
state of incorporation.
Q: What is the effect if the license is amended?
o The filing thereof shall not of itself enlarge or alter the purpose or
purposes for which such corporation is authorized to transact business
in the Philippines.
Q: When is amended license necessary?
Sec. 131. Amended license. - A foreign corporation authorized to transact business
in the Philippines shall obtain an amended license in the event it:
o 1. Changes its corporate name, or
o 2. Desires to pursue in the Philippines other or additional purposes,
Q: How is amendment done?
o By submitting an application therefor to the Securities and Exchange
Commission,
o The application must be favorably endorsed by the appropriate
government agency in the proper cases.
Q: Is it possible that a FC conduct business other than the main purpose for which it is
authorized to transact?
GR: No. The FC may transact into business only for the purpose it is authorized
EXPN: If the FC undertakes merely an isolated transaction, or one which is not in
continuity with the commercial dealings of the corporation
Q: Give an example of an isolated transaction.
o Ex: (not sure) assignment of rights/obligation to a domestic corporation
Q: Can a Foreign Corporation merge with a Domestic Corporation?
FC can merge with DC only when their respective laws provide that they can merge
FC it depends if the country has a law allowing merger
DC there is no law in the Philippines which allow this kind of merger
Therefore, the answer is NO.
Sec. 132. Merger or consolidation involving a foreign corporation licensed in the
Philippines. - One or more foreign corporations authorized to transact business in
the Philippines may merge or consolidate with any domestic corporation or
corporations if such is permitted under Philippine laws and by the law of its
incorporation: Provided, That the requirements on merger or consolidation as
provided in this Code are followed.
Q: How about a FC with another FC, are they allowed to merge?
o Yes, provided that the Sec. 132 is complied with
o 1. Allowed by the state of incorporation
o 2. Petition for withdrawal
o Q: Why is there a need for withdrawal?
There is only a need for withdrawal in cases of ABSORBED
corporation doing business in the Philippines.
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 (Alternative answer: withdrawal is important so that the
corporation will not get pregnant)
Q: What is a logical explanation for this? -
o Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home
country or state as permitted by the law of its incorporation, such
foreign corporation shall, within sixty (60) days after such merger or
consolidation becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate government
agency, a copy of the articles of merger or consolidation duly
authenticated by the proper official or officials of the country or state
under the laws of which merger or consolidation was effected:
o Provided, however, That if the absorbed corporation is the foreign
corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of it license in accordance with
this Title.
o Q: What happens to the absorbed corporation after merger?
Its assets and liabilities will belong to the surviving
corporation; its debts and liabilities will be assumed by the
surviving corporation; and the absorbed corporation will
cease to exist
This is the reason behind withdrawal: because
the corporation ceases to exist
o Q: If the corporation is the surviving corporation, what is the rule?
Within sixty (60) days after such merger or consolidation
becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or
officials of the country or state under the laws of which
merger or consolidation was effected
Sec. 133. Doing business without a license. - No foreign corporation transacting business in
the Philippines without a license, or its successors or assigns, shall be permitted to maintain
or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under Philippine laws.
FMC V. DELA ROSA
WON the company was doing business? Yes.
Under the rules and regulations promulgated by the Board of Investments, the
phrase 'doing business' has been exemption with illustrations, among them being
as follows:
o (1) Soliciting orders, purchases (sales) or service contracts. Concrete
and specific solicitations by a foreign firm, not acting independently of
the foreign firm amounting to negotiation or fixing of the terms and
conditions of sales or service contracts, regardless of whether the
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contracts are actually reduced to writing, shall constitute doing
business even if the enterprise has no office or fixed place of business
in the Philippines. xxx
o (2) Appointing a representative or distributor who is domiciled in the
Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for its
own account, and not in the name or for the account of the principal.
o (4) Opening offices, whether called 'liaison' offices, agencies or
branches, unless proved otherwise.
o (10) Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions
normally incident to, or in the progressive prosecution of, commercial
gain or of the purpose and objective of the business organization
Q: What are the circumstances in this case which constitute doing business?
o The act by a non-resident foreign corporation of recruiting Filipino
workers for its own use abroad constitutes in the law doing business in
the Philippines.
Test of "doing business": Whether the foreign corporation is continuing the body
or substance of the business or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to another.
Q: What are the grounds for revocation?
Sec. 134. Revocation of license. - Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
o 1. Failure to file its annual report or pay any fees as required by this
Code;
o 2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;
o 3. Failure, after change of its resident agent or of his address, to submit
to the Securities and Exchange Commission a statement of such change
as required by this Title;
o 4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation within the time
prescribed by this Title;
o 5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
pursuant to this Title;
o 6. Failure to pay any and all taxes, imposts, assessments or penalties, if
any, lawfully due to the Philippine Government or any of its agencies or
political subdivisions;
o 7. Transacting business in the Philippines outside of the purpose or
purposes for which such corporation is authorized under its license;
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 o 8. Transacting business in the Philippines as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do
business in the Philippines; or
o 9. Any other ground as would render it unfit to transact business in the
Philippines.
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any such license to
transact business in the Philippines, the Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation accompanied by a copy of the certificate
of revocation.
Q: Can a FC withdraw its license? What are the requisites?
Yes.
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to transact business in the Philippines
may be allowed to withdraw from the Philippines by filing a petition for
withdrawal of license. No certificate of withdrawal shall be issued by the Securities
and Exchange Commission unless all the following requirements are met;
o 1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
o 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political
subdivisions have been paid; and
o 3. The petition for withdrawal of license has been published once a
week for three (3) consecutive weeks in a newspaper of general
circulation in the Philippines.
HUTCHINSON PORTS PHILS. V. SUBIC BAY METROPOLITAN AUTHORITY
WON Hutchinson is doing business in the Philippines? Yes.
Participating in the bidding process constitutes "doing business" because it shows
the foreign corporation's intention to engage in business here. The bidding for the
concession contract is but an exercise of the corporation's reason for creation or
existence.
Participation in bidding process = intent to engage in business here
HOME INSURANCE COMPANY V. EASTERN SHIPPING LINES
WON HIC has capacity to sue? No. A FC doing business without license has no
capacity to sue
A contract entered into by a foreign insurance company without license to do
business in the Philippines is not void. It is valid and enforceable
o The effect of this is that:
o 1. The FC has no access to the courts
o 2. The FC is subject to penalty under Sec. 144 of the Corpo Code (penal
sanction)
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o Thus, the officers or persons who executed the agreement can be liable
for criminal offense
MR HOLDINGS
It is not the absence of license but the doing of business without license which
prohibits FC from access to the courts
Same definition of doing business (continuity of commercial dealings
Isolated Transactions should not be defined so as to exclude every other
transaction. A transaction is isolated depending upon the circumstances
o Ex: assignment to a DC of certain right/obligation = no intent to do
business
WON MR Holdings and Marcopper are one and the same?
o No. If a corporation is owned by a subsidiary, it does not mean that the
2 corporations are one and the same
o The mere fact that a corporation owns majority of the stock of another
corporation is not sufficient in order to pierce the corporate veil of
fiction. There must be allegations of fraud or wrongdoing
CASES ON SRC
SUMNDAD V. HARRIGAN
The actions of BBCHI did not amount to fraud but only for the simple collection of
money which is cognizable by the regular courts. The mere use of in fraud of
creditors does not in itself throw the case within the SECs jurisdiction Harrigans
complaint does not sufficiently allege acts amounting to fraud or
misrepresentation
Q: How did the SC interpret the phrase in fraud of creditors
o Fraud embraces all multifarious means which human ingenuity can
devise and which are resorted to by one individual to secure and
advantage over another by false suggestions or by suppression of truth
and includes surprise, trick, cunning, dissembling and any unfair way by
which another is cheated
Q: Where there any such malicious acts done by the BOD?
o No. None that would amount to fraud or misrepresentation
Petitioners contention that the case is intra-corporate dispute within the domain
of the SEC. The jurisdiction over intra-corporate disputes was transferred from SEC
to RTC pursuant to R.A. 8799 (SRC)
OREDAIN V. BF HOMES
VELARDE V. LOPEZ
SC dismissed the case since Lopez is not RPI
No piercing of corporate veil. Mere control of corporate stocks do not amount to
the perpetration of fraud or wrongdoing
Under the SRC IRR, the dismissal of a director is an incorporate dispute which is
cognizable by SEC RTC
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 Sec. 5(c) of PD 902-A applies to a corporate officers dismissal. Remuneration
involving a person who is not a mere employee but a SH and officer of the
corporation is not a simple labor problem but a matter that comes within the area
of corporate affairs and is in fact an intra corporate dispute
TIMESHARE REALTY V. CA
Mere registration of Timeshare as a corporation does not authorize it to deal with
unregistered timeshares. Corporation registration is just one of several
requirements before it may deal with timeshares
A corporation must first comply with the requirement of registration of the
securities, otherwise, not authorized
B.P. 178 - Sec. 8. Procedure for registration. (a) All securities required to be
registered under subsection (a) of Section four of this Act shall be registered
through the filing by the issuer or by any dealer or underwriter interested in the
sale thereof, in the office of the Commission, of a sworn registration statement
with respect to such securities, containing or having attached thereto, the
following:
o (36) Unless previously filed and registered with the Commission and
brought up to date:
(a) A copy of its articles of incorporation with all
amendments thereof and its existing by-laws or
instruments corresponding thereto, whatever the name, if
the issuer be a corporation
Sec. 4. Requirement of registration of securities. (a) No securities, except of a
class exempt under any of the provisions of Section five hereof or unless sold in
any transaction exempt under any of the provisions of Section six hereof, shall
be sold or offered for sale or distribution to the public within the Philippine
unless such securities shall have been registered and permitted to be sold as
hereinafter provided.
Q: What is time sharing? How do you share time?
UNION BANK V. SEC
Petitioner is required to comply with IRR with respect to disclosure
Sec. 5 (a) (3) of the B.P.178 (Revised Securities Act) does not state or even imply
that petitioner as a listed corporation is exempt from complying with the reports
required by the RSA
Petitioner as a bank is primarily subject to the control of the BSP and as a
corporation trading securities in the stock market, it is under SEC supervision
There are certain securities exempted from the legislation provision. However, in
this case, there is none which would exempt from reporting. There is still a need to
comply with SEC rules
ONAPAL V. CA
Commodity Futures Contract not illegal but transaction between parties to
implement contract is in the nature of a gambling agreement
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After the CFC matures, the Trading Company shall make delivery of the
commodity. Delivery means the act of placing the subject in the actual or
constructive possession to the vendee.
Q: Is a CFC allowed?
o Yes. Just because no delivery was made it does not follow that there
the CFC is invalidated
TC only made a final settlement regarding purchase. There was no actual delivery.
TC only subtracted the loss incurred by the purchaser
Just like in the law of sales, there must be delivery
In this case, there was no delivery. There is only the intention to speculate on the
commodity
Thus, the written contract in question is not illegal but the transaction between
the parties to implement the contract is in the nature of a gambling agreement
under Art. 2018 of the Civil Code which entitles private respondent to refund from
petitioner what she has paid
CEMCO HOLDINGS V. NATIONAL LIFE INSURANCE
SEC is the regulatory agency with power of administration under Section 5.1(n) of
the SRC. It can exercise powers necessarily implied to its express powers or
incidental thereto. Thus, the SEC has the incidental power to conduct hearings
and render decisions fixing the rights and obligations of the parties
Tender Offer a publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public company
o Public company A corporation which is listed on an exchange, or a
corporation with assets exceeding 50M and with 200 or more SHs, at
least 200 of them holding not less than 100 shares of such company
Tender Offer Rule a tender offer is an offer by the acquiring person to SHs of a
public company for them to tender their shares therein as a corporation which is
listed on an exchange or a corporation with assets exceeding 50M and with 200 or
more SHs, at least 200 of them holding not less than 100 shares of such company
o When SH acquire at least 35% of a Public Corporation, it must first offer
to the minority SH the equivalent of their shares
o Nature: a public announcement that SH has the intention of acquiring a
certain number of shares. Must offer it to the minority
o Purpose: to regulate activities relating to acquisition of control of the
listed company and for the purpose of protecting the minority
stockholders of a listed company
o TOR is the remedy or exit to sell the shares at the same price as those
of the majority SH if the minority SH do not agree to the transaction
Rule 19(2) of the Amended Implementing Rules and Regulations of the SRC
provides for the ff. Mandatory tender offers:
o A. Any person or group of persons acting in concert, who intends to
acquire 35% or more of equity shares in a public company shall disclose
such intention and contemporaneously make a tender offer for the
percent sought to all holders of such class, subject to paragraph (9)(E)
of this Rule.
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 Shall disclose such intention and contemporaneously
make a tender offer for the percent sought to all holders of
such class, subject to paragraph (9)(E) of this Rule.
In the event that the tender offer is oversubscribed, the
aggregate amount of securities to be acquired at the close of
such tender offer shall be proportionately distributed across
both selling shareholder with whom the acquirer may have
been in private negotiations and minority shareholders.
o B. Any person or group of persons acting in concert, who intends to
acquire 35% or more of equity shares in a public company in one or
more transactions within a period of 12 months
Shall be required to make a tender offer to all holders of
such class for the number of shares so acquired within the
said period.
o C. If any acquisition of even less than 35% would result in ownership of
over 51% of the total outstanding equity securities of a public company,
The acquirer shall be required to make a tender offer
under this Rule for all the outstanding equity securities to all
remaining stockholders of the said company at a price
supported by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer in
such a tender offer shall be required to accept any and all
securities thus tendered
Doctrines:
1. Acquisition is construed to include direct or indirect transactions. Law does
not distinguish. Still subject to TOR
o An indirect acquisition by petitioner of 36% of UCC shares thru
acquistion of non-listed UCHC shares is covered by the mandatory
tender offer rule
2. Purpose of TOR
3. Nature of agency of SEC = can fix the rights and obligations of the parties
may prescribe as necessary to keep current information on the
operation of the business and financial condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:
o c) An issuer with assets of at least Fifty million pesos (P50,000,000.00)
or such other amount as the Commission shall prescribe, and having
Two hundred (200) or more holders each holding at least One hundred
(100) shares of a class of its equity securities: Provided, however, That
the obligation of such issuer to file reports shall be terminated ninety
(90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) shares is
reduced to less than One hundred (100).
PVB is a public corporation because Section 17.2 states that a Public Corporation
is one that owns at least 50M worth of assets + 200 SH, each holding at least 100
shares.
The reportorial requirements will be beneficial to the veterans-stockholders,
because it gives these SHs access to information on the banks financial status and
operations, resulting in greater transparency on the part of the Bank.
o For many SHs, these annual reports are the only means of keeping in
touch with the state of health of their investments.
Q: What constitute reportorial requirements?
o An annual report which shall include, among others, a balance sheet,
profit and loss statement and statement of cash flows, for such last
fiscal year, certified by an independent certified public accountant, and
a management discussion and analysis of results of operations;
SEC V. INTERPORT RESOURCES

ABACUS SECURITIES V. AMPIL

PHILIPPINE VETERANS BANK V. CALLANGAN

Reportorial Requirements Sec. 17. Periodic and Other Reports of Issuers.
17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall file
with the Commission:
o a) Within one hundred 135 days, after the end of the issuers fiscal
year, or such other time as the Commission may prescribe, an annual
report which shall include, among others, a balance sheet, profit and
loss statement and statement of cash flows, for such last fiscal year,
certified by an independent certified public accountant, and a
management discussion and analysis of results of operations; and
o b) Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission

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