The Corporation Code (Batas Pambansa 68)

I. DEFINITIONS & THEORIES

A. Corporation defined
A corporation is an artificial being created by operation of law, having the rig
ht of succession and the powers, attributes and properties expressly authorized
by law or incident to its existence. (Sec 2)
A corporation is an artificial being invested by law with a personality separate
and distinct from those of the persons composing it, as well as from that of an
y other entity to which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business de
pends. It also has the advantage of non-dependence on the lives of those who co
mpose it even as it enjoys certain rights and conducts activities of natural per
sons. [Reynoso v. CA, 345 SCRA 355]
B. Four attributes of a corporation
1. It is an artificial being a juridical person capable of having rights and obl
igations with a personality separate and distinct from its members/stockholders
2. Created by operation of law - mere consent of the parties to form a corporati
on is not sufficient. State must give consent through (a) special law, (b) gene
ral enabling act
3. With right of succession - existence cannot be affected by change in members/
stockholders
4. Has the powers, attributes, and properties as expressly authorized by law or
incident to its existence
* A corporation being a creature of the law owes its life to the state, its birth
being purely dependent on its will, it is a creature without any existence until
it has received the imprimatur of the state acting according to law. A corporati
on will have no rights and privileges of a higher priority than that of its crea
tor and cannot legitimately refuse to yield obedience to acts of its state organ
s. [Tanyag v. Benguet Corporation]
C. Four basic advantages of corporate organizations
1) Strong separate juridical personality personality separate and distinct from
individual stockholders and members
2) Limited liability to investors stockholders are liable only to the extent of
their contribution
* General rule: Where a corporation buys all the shares of another corporation,
this will not operate to dissolve the other corporation and as the two corporati
ons still maintain their separate corporate entities, one will not answer for th
e debts of the other. [Nell v Pacific Farms]
* Exceptions:
o If there is an express assumption of liabilities;
o There is a consolidation or merger;
o If the purchase was in fraud of creditors;
o If the purchaser becomes a continuation of the seller.
3) Free transferability of units of ownership stockholders hold their shares as
personal property with rights to dispose, assign or encumber them as they may de
sire
4) Centralized Management all corporate powers are vested in the board of direct
ors
D. Doctrine of separate juridical personality
* A corporation has a personality separate and distinct from that of its stockho
lders and members and is not affected by the personal rights, obligations, and t
ransactions of the latter. Since corporate property is owned by the corporation
as a juridical person, the stockholders have no claim on it as owners, but have
merely an expectancy or inchoate right to the same should any of it remain upon
dissolution of the corporation after all corporate creditors have been paid. S
uch right is limited only to their equity interest
* General Rule: Separate personality is vested to a corporate entity when it is
issued the certificate of incorporation by the SEC. The exceptions are:
o de facto corporation
o corporation by estoppel
E. Piercing the veil of corporate fiction
1. Nature of the piercing doctrine
* Piercing the veil of corporate entity requires the court to see through the pr
otective shroud which exempts its stockholders from liabilities that ordinarily
they could be subject to, or distinguishes one corporation from a seemingly sepa
rate one, were it not for the existing corporate fiction. But to do this, the c
ourt must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud or crime was committed upon another, disregarding, their, his,
her or its rights. It is the protection of the interests of innocent third per
sons dealing with the corporate entity which the law seeks to protect by this do
ctrine. [Traders Royal Bank v. CA]
* Whether the existence of the corporation should be pierced depends on question
s of facts, appropriately pleaded. Mere allegation that a corporation is the al
ter ego of the individual stockholders is insufficient. The presumption is that
the stockholders or officers are distinct entities. The burden of proving othe
rwise is on the party seeking to have the court pierce the veil of corporate ent
ity. [Ramoso v. VA]
* Piercing the veil of corporate entity is merely an equitable remedy, and may b
e awarded only in cases when the corporate fiction is used to defeat public conv
enience, justify wrong, protect fraud or defend crime or where the corporation i
s a mere alter ego or business conduit of a person.
2. Extent of the legal effects of piercing
* The application of the piercing doctrine to a particular case does not deny th
e corporation of legal personality for any and all purposes, but only for the pa
rticular transaction or instance for which the doctrine was applied. [Koppel Ph
il. Inc. v. Yatco]
* Piercing is not allowed unless the remedy sought is to make the officer or ano
ther corporation pecuniarily liable for corporate debts
3. Illustrative Cases where piercing the veil is allowed
* If done to defraud the government of taxes due it
* If done to evade payment of civil liability
* If done by a corporation which is merely a conduit or alter ego of another cor
poration
* If done to evade compliance with contractual obligations
* If done to evade financial obligation to its employees
4. Parent-subsidiary relationship
* The mere fact that a corporation owns all or substantially all of the stocks o
f another corporation is not sufficient to justify their being treated as one en
tity. If used to perform legitimate functions, the subsidiary s separate existenc
e may be respected. However, to prevent abuses of the separate entity privilege
, the court will pierce the veil of corporate entity and regard the two corporat
ions as one.
* Circumstances which if present in the proper combination renders the subsidiar
y and instrumentality:
a) The parent corporation owns all or most of the subsidiary s capital stock
b) The parent and subsidiary corporations have common directors or officers
c) The parent corporation finances the subsidiary
d) The parent corporation subscribes to all the capital stock of the subsidiary
of otherwise causes its incorporation
e) the subsidiary has grossly inadequate capital
f) the parent corporation pays the salaries and other expenses or losses of the
subsidiary
g) the subsidiary has substantially no business except with parent corporation o
r no assets except those conveyed to or by the parent corporation
h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent corporati
on or its business or financial responsibility is referred to as the parent corp
oration s own
i) the parent corporation uses the property of the subsidiary as its own
j) the directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation in
the latter s interest
k) the formal ledger requirements of the subsidiary are not observed.
* The subsidiary cannot be considered a mere instrumentality of the parent corpo
ration just by the combination of the 11 signs listed above. For the veil of co
rporate entity of the subsidiary to be pierced so that it is considered just an
instrumentality, the act questioned must have an illegal or unfair purpose which
results to prejudice to third persons who may seek redress from the corporate e
ntity
F. Nationality of the corporation
1. The corporation is a national of the country under whose laws it is organized
or incorporated: the place of incorporation test.
* Domestic corporations organized and governed under and by Philippine laws
* Foreign corporations organized under laws other than those of the Philippines
an can operate only in the territory of the state under whose laws it was formed
. However, they may be licensed to do business here.
2. Nationality of the Corporation as determined by the Control Test
* Exploitation of Natural Resources - Section 2, Art. XII CONST. only Filipino Ci
tizens or Corporations whose capital stock are at least 60% owed by Filipinos ca
n qualify to exploit natural resources.
* Public Utilities- Sec. 11, Art XII, CONST. xxx no franchise, certificate or an
y other form of authorization for the operation of a public utility shall be gra
nted except to citizens of the Philippines or to corporations or associations or
ganized under the laws of the Philippines at least 60% of whose capital is owned
by such citizens.
* War-time Test - If the controlling stockholders are enemies, then the nationa
lity of the corporation will be base on the citizenship of the majority stockhol
ders in times of war.
* Investment Test - Sec. 3(a) and (b), Foreign Investments Act of 1991 (RA7042).
It considers for purpose of investment a Philippine National as a corporation or
ganized under the laws of the Philippines of which at least 60% of the capital s
tock outstanding and entitled to vote is owned and held by citizens of the Phili
ppines, or a trustee of the funds for pension or other employee retirement or se
paration benefits, where the trustee is a Philippine national and at least 60% o
f the fund will accrue to the benefit of Philippine nationals.
3. Grandfather rule
* Used to determine the nationality of a corporation by which the percentage of
Filipino equity in corporations engaged in nationalized and/or partly nationaliz
ed areas of activities, provided for under the constitution and other nationaliz
ation laws, is computed, in cases where corporate shareholders are present in th
e situation, by attributing the nationality of the second or even subsequent tie
r of ownership to determine the nationality of the corporate stockholder.
4. SEC formula:
* Shares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nation
ality, but if the percentage of Filipino ownership in the corporation or partner
ship is less than 60% only the number of shares corresponding to such percentage
shall be considered as of Philippine nationality.
G. Kinds of corporations
1. Stock corporation
* One which has a capital stock divided into shares and is authorized to distrib
ute to the holders of such shares dividends or allotments of the surplus profits
(i.e., retained earnings on the basis of the shares held (Sec. 3)
* It is organized for profit.
* The governing body of a stock corporation is usually the Board of Directors.
2. Non-stock corporation
* All other corporations are non-stock corporations (Sec 3)
* One where no part of the income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of the Code on dissolution. Pro
vided that any profit which a non-stock corporation may obtain as an incident to
its operation shall whenever necessary or proper be used for the furtherance of
the purpose or purposes for which the corporation was organized. (Sec 87)
* Not organized for profit.
* Its governing body is usually the Board of Trustees.
3. Corporation de jure - Organized in accordance with the requirements of law
4. De facto corporation - A corporation with some flaw in its incorporation.
Rule on de facto corporations:
* The due incorporation of any corporation claiming in good faith to be a corpor
ation, and its right to exercise corporate powers, shall not be inquired into co
llaterally in any private suit to which such corporation may be a party. Such i
nquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec 2
0)
5. Corporation by estoppel
* It is a status acquired by persons who assume to act as a corporation knowing
it to be without authority. Such persons shall be liable as general partners fo
r all debts, liabilities and damages incurred or arising as a result thereof (Se
c 21)
* When such ostensible corporation is sued on any transaction entered by it as a
corporation or any ort committed by it as such, it shall not be allowed to use
as a defense as lack of corporate personality. (Ibid)
* One who assumes an obligation to an ostensible corporation as such, cannot res
ist performance thereof on the ground that there was in fact no corporation (Ibi
d)
6. Public corporation - One formed or organized for the government or a particul
ar state. Its purpose is for the general good and welfare.
7. Private corporation - One formed for some private purpose, benefit, aim or en
d
8. Close corporation (Section 96)
* One whose Articles of Incorporation provide that:
a) all of the corporation s issued stock of all classes, exclusive of treasury sha
res, shall be held of record by not more that a specified number of persons, not
exceeding 20
b) all of the issued stock of all classes shall be subject to one or more specif
ied restrictions on transfer permitted by the Code
c) the corporation shall not list in any stock exchange or make any public offer
ing of any of its stock of any class
d) at least 2/3 of its voting stock must not be owned or controlled by another c
orporation which is not a close
e) must not be a mining or oil company, stock exchange, bank, insurance company,
public utility, educational institution or corporation vested with public inter
est (Sec 96)
9. Educational corporation (Section 106) - Those corporations which are organize
d for educational purposes. This type of corporation is governed by Section 106
of the Corporation Code
10. Religious sole and aggregate (Section 110, 111 (2), 123)
* A corporation sole is one formed for the purpose of administering and managing
, as trustee, the affairs, property and temporalities of any religious denominat
ion, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other p
residing elder of such religious denomination, sect or church. (Sec 110)
* The corporation sole is an exception to the general rule that at least five (5
) members are required for a corporation to exist. Here, there is only one (1)
incorporator. This is applicable to religious communities the regulations of wh
ich provide that the community s properties are to be placed in the name of the he
ad and administered by him. (Sec 111(2))
* A corporation aggregate is a religious corporation incorporated by more than o
ne person.
11. Eleemosynary corporation - One organized for a charitable purpose
12. Domestic corporation - A domestic corporation is one formed, organized, or e
xisting under the laws of the Philippines.
13. Foreign corporation - One formed, organized or existing under any laws other
than those of the Philippines and whose law allows Filipino citizens and corpor
ations to do business in its own country and state. (Sec 123)
14. Corporation created by special laws or charter (Section 4)
* Corporations which are governed primarily by the provisions of the special law
or charter creating them (Sec 4)
* Corporation Code is suppletory in so far as they are applicable (Ibid)
II. FORMATION AND ORGANIZATION OF CORPORATIONS
A. Promotional stage
1. Promoter
* person who brings together persons who become interested in the enterprise
* aids in procuring subscription and sets in motion the machinery which leads to
the formation of the corporation itself
* formulates the necessary initial business and financial plans
2. Contracts entered into by promoters
* these are prior to existence of corporation thus the corporation could not hav
e been a party to it.
* However, the corporation may make the contracts its own and may become bound o
n such contracts if after incorporation, it accepts or ratifies the same, or acc
epts its benefits with knowledge of the terms thereof.
* Ratification may be express by board resolution or implied by acts of the boar
d
3. Personal Liability of Promoter on Pre-incorporation contracts
a) may make a continuing offer on behalf of the corporation which if accepted wi
ll become a contract. The promoter does not assume any liability
b) make a contract at the time binding himself with the understanding that if th
e corporation, once formed, accepts or adopts the contract, he will be relieved
of all responsibilities
c) may bind himself personally and assume responsibility of looking to the propo
sed corporation when formed for reimbursement
o In the absence of any express or implied agreement to the contrary, a promoter
is personally liable for contracts made by him on behalf of the proposed corpor
ation and the fact that the corporation when formed has adopted or ratified the
contract does not release him from liability unless a novation was intended
4. Compensation: Gen rule the corporation is not liable to pay compensation beca
use this would be an imposition on innocent investors.
Exceptions:
* if after it is formed, corpo expressly promises to do so
* services done partly before and partly after incorporation and the corporation
 takes the benefits thereof
5. Securities Act authorizes a promotion fee if it is provided for in the regist
ration statement of the securities involved
6. Fiduciary relationship between corporation and promoters promoters are under
the duty to exercise good faith and fairness in all their acts and transactions
B. What should be contained in the Articles of Incorporation (Sec 14)
1. Corporate name
* No corporate name may be allowed by the SEC if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or c
ontrary to existing laws. (Sec 18)
* Change of corporate name shall require the approval of the SEC. SEC will issu
e amended certificate of incorporation under the amended name (Ibid)
* This is essential because through it, corporation can sue and be sued
* SEC may allow incorporators to reserve the name for a particular period
* To distinguish from partnerships and other business orgs, the law requires cor
porations to append the word Corporation or Inc to its chosen name
* A corporation should transact business only through its chosen name which it m
ay amend in accordance with requirements of the law and SEC
2. Primary and Secondary purpose or purposes
* Where a corporation has more than 1 purpose, the AI shall state which is the p
rimary purpose and which is secondary (Sec 14(2))
* A non-stock corporation may not include those which contradict or change its n
ature (Ibid)
* SEC can reject or disapprove the AI if the stated purpose is patently unconsti
tutional, illegal, immoral, contrary to government rules and regulations.(Sec 17
(2))
* Purpose clause confers as well as limits the powers which a corporation may ex
ercise
* A corporation only has such powers as are expressly granted to it by law and b
y its AI, those which may be incidental to such conferred powers, those reasonab
ly necessary to accomplish its purposes, and those which may be incident to its
existence.
* Reasons for purpose clause:
o so that a stockholder contemplating an investment will know what lines of busi
ness his money is to be risked
o so that management will know what lines of business it is authorized to act
o so that anyone who transacts with the corporation may ascertain whether a tran
saction he is entering is one with the general authority of the management
* Under Sec 14(2) corporation can have as many purposes as it wants provided:
o AI specify the corporation s primary and secondary purposes which need not be re
lated to each other
o Corporation for which special provisions are made can only have the purpose pe
culiar to them
o Purposes must be lawful
* If purpose is lawful, SEC is not authorize to inquire whether corporation has
hidden motives and mandamus will lie to compel it to issue certificate
* PD 902-A gives SEC, after consultation with BOI, NEDA, or other appropriate go
vernment agency, the power to refuse or deny the application for registration of
any corporation if its establishment, organization, operation will not be consi
stent with the declared national economic policies
3. Principal Office
* Must be within the Philippines (Sec 14 (3))
* AI must specify both province or city or town where it is located
* Important in (1) determining venue in an action by or against the corporation
(2) determining the province where a chattel mortgage of shares should be regist
ered
* The statement of the principal office establishes the residence of the corpora
tion
4. Number of directors or trustees
* Not less than 5 but not more than 15 (Sec 14 (6))
* Stock: not less than 5, not more than 15
* Non-stock: may be greater than 15 but not less than 5
* For educational corporations, trustees must be in multiples of 5
* For bank mergers, as many directors equivalent to total number of directors of
merging banks
* A director must own at least one share of stock and a trustee must be a member
* In areas of business and industry which are partly nationalized, aliens may be
directors of a corporation but only in such number as may be proportional to th
e allowable participation or shares in the capital of such entity
5. Names, nationalities and residence of the Incorporating Directors
* Persons who act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this Code (Sec 14 (7)
)
6. Corporate term (Section 11 and 14)
* When a corporation is organized, the maximum life that can be stipulated in th
e Articles of Incorporation is 50 years. But during the life of the corporatio
n, the life or term can be extended to another 50 years at any one instance (Sec
11)
* But such extension of the life a corporation cannot be made earlier than 5 yea
rs before the end of its original term. Exception: where there are justifiable
reasons for an earlier extension as may be determined by the SEC. (Ibid)
* Exception: Condominium corporations can be organized for a period of 200 years
7. Names, nationalities and residence of the Incorporators
* Corporators those who compose a corporation, whether stockholders or members (
Sec 5)
* Incorporators stockholders or members mentioned in the Articles of Incorporati
on as originally forming and composing the corporation and who are signatories t
hereof. (Ibid)
* Qualification: (Sec 10)
a) At least 5 not more than 15
b) Natural person
c) legal age
d) majority of whom are residents of the Philippines
e) incorporators of a stock corporation must own or subscribe to at least 1 shar
e of the capital stock of the corporation (qualifying share)
* There is no general requirement of Philippine citizenship except in some areas
:
a) public utilities (Consti XII, Sec 11)
b) retail trade (RA 1180)
c) banks (Sec 12 RA 337; RA 720; RA 4093)
d) investment houses ( Sec 5 PD 129)
e) savings and loan associations (RA 3779)
f) schools (Consti XIV, Sec 4 (2)
g) other areas of investment as Congress may by law provide (Consti XII Sec 10)
* Even though there are no legal restrictions as to alien ownership, where > 40%
of the outstanding capital stock will be owned and controlled by aliens, must g
et written authorization from BOI before it can register with SEC. (purpose is t
o enable BOI to determine whether such corporation wherein aliens own a substant
ial number of shares would contribute to the sound and balanced development of t
he national economy)
8. Capital
* Authorized capital stock
o State the authorized capital stock in lawful money of the Philippines, the num
ber of shares into which the ACS is divided, and the par value of each par value
shares (Sec 14)
o Stock corporations are not required to have any minimum authorized capital sto
ck except when special laws provide otherwise (Section 12)
o Amount fixed in the AI to be subscribed and paid in or secured to be paid in b
y the shareholders of a corporation at the organization of the corporation or af
terwards and upon which its is to conduct its operations. It sets the limit to
the total par or issued value of the shares which a corporation may issue.
a) Subscribed
o At least 25% of authorized capital stock must be subscribed (Section 13)
o Subscription mutual agreement of the subscribers to take and pay for the stock
of a corporation
o Pre-incorporation subscription amount which each incorporator or stockholder a
grees to contribute to a proposed corporation
b) Paid-up
o 25% of subscribed capital stock must be paid-up but in no case shall be less t
han P 5000 (Section 13)
o Portion of the authorized Capital which has been subscribed and paid Not all fun
ds or assets received by the corporation can be considered paid-up capital, for
this term has a technical signification in corporation law. Such must from part
of the authorized capital stock of the corporation, subscribed and then actuall
y paid-up. [MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commi
ssion]
o Must be in the form of (a) cash deposited in a bank or (b) property which may
be used or actually needed by the corporation in its operations
o Capital can t consist or be invested in money market placement
o Corporations with more stringent capital requirements:
* Insurance corporations must have paid-up capital stock of at least P 5 M
* Banks monetary board fixes minimum paid-up capital requirements for the differ
ent classes of banks.
c) Outstanding
o total shares of stock issued to subscribers or stockholders whether or not ful
ly or partially paid (as long as there is a binding subscription agreement) (Sec
137)
o Stockholder cannot get back its capital unless:
* Exercises appraisal right
* Dissolution
* Treasury shares
9. Treasurer-in-Trust
o The person elected by the subscribers as Treasurer of the corporation at the t
ime of the incorporation, who is named as such in the AOI and who has been autho
rized to receive for and in the name and for the benefit of the corporation, all
subscriptions, fees, contributions or donations paid or given by the subscriber
s or members
10. Treasurer s Affidavit
o The sworn statement of the Treasurer elected by the subscribers stating at lea
st 25% of the authorized capital stock of the corporation has been subscribed an
d that at least 25% of the total subscription has been fully paid to him in actu
al cash and/or property, the fair valuation of which is equal to at least 25% of
the said subscription, such paid-up capital being not less than 5,000.00 (Sec 1
4)
11. Classification of Shares (Section 6)
* Shares of stock of stock corporations may be divided classes or series of shar
es or both
* Each class or series of shares may have rights, privileges, restrictions, stat
ed in the AOI
* No share may be deprived of voting rights, except:
o Preferred or
o Redeemable shares,
* unless otherwise provided by the Code
* There shall always be a class/series of shares which have a COMPLETE VOTING RI
GHTS
* EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as othe
rwise provided in the AOI
a) Common
o A stockholder, owner of at least one common share, has the following rights:
* right to vote at meetings
* right to dividends
* right to examine corporate books
o Most commonly issued
o Entitles owner to equal pro-rata division of profits after preference
b) Preferred
o Stocks which are given preference by the issuing corporation in the distributi
on of assets of the corporation in case of liquidation and in the distribution o
f dividends, or such other preferences as may be stated in the articles of incor
poration which are not violative of the Corporation Code. (Sec 6)
o Limitations on preferred shares:
* Preferred shares can only be issued with par value
* Preferred shares must be:
(1) Stated in the Articles of Incorporation or
(2) May be fixed by the BOD where authorized by the Articles of Incorporation, p
rovided: such terms and conditions shall be effective upon filing of a certifica
te thereof with the SEC.
o Entitles holder to some preferences in dividends, distribution of assets upon
liquidation or both:
* preference as to dividends dividends are payable only when profits are earned
and as a general rule, even if there are existing profits, BOD has discretion to
declare dividends or not
(1) participating after getting their fixed dividend preference ahead of CS, the
y share with the CS the rest of the dividends
(2) unless expressly provided, they are non-participating
(3) cumulative dividends in arrears accrue, must be paid first before common sto
ck dividends are paid.
(4) Non cumulative contract makes dividends depend upon existence of profits for
the year
* as to voting rights usually does not have voting rights; but unless clearly wi
thheld, PS would have right to vote
* preference upon liquidation in the absence of provision, participate pro rata
with common stock
* not a creditor there s no assurance that you will get back investments but if th
e corporation profits, you participate in the profits
c) Par value
o These are shares with a stated value set out in the articles of incorporation.
their value is fixed in the Articles of Incorporation. This remains the same r
egardless of the profitability of the corporation. This gives rise to financial
stability and is the reason why banks, trust corporations, insurance companies
and building and loan associations must always be organized with par value share
s.
o One in the certificate of stock of which appears an amount in pesos as the nom
inal value of the shares
o AI must state par value
o Can t be issued at less than par value
o Par value is minimum issue price of such share in the AI which must be stated
in the certificate
d) No par value
o These are shares without a stated value. Their value, which shall not be less
than P5, will be set by the Corporation upon their issuance.
o Shall be deemed fully paid and non-assessable and the holders of such shares s
hall not be liable to the corporation or to its creditors in respect thereto (Se
c 6)
o Entire consideration received by the corporation for its no-par value shares s
hall be treated as capital and shall not be available for distribution as divide
nds (Ibid)
o Cannot be issued as Preferred Shares (Ibid)
o AI must state the fact that corp issues no-par shares and the number of shares
o Three ways of determining value of no par value shares (Sec 62):
* By majority vote of the outstanding shares (issued shares) in a meeting called
for the purpose
* By Board of Directors pursuant to authority conferred upon it by the Articles
of Incorporation
* By Amendment of the Articles of Incorporation.
o Corporations which cannot issue no par value shares:
* Banks
* Insurance Companies
* Trust Companies
* Building and Loan Associations
* Public utilities
e) Founder s
o Those shares, classified as such in the articles of incorporation, which are g
iven certain rights and privileges not enjoyed by the owners of other stocks. (S
ec 7)
o Where exclusive right to vote and be voted for in the election of directors is
granted, such right must be for a limited period not to exceed 5 years subject
to approval by SEC. 5 year period shall commence from date of approval by SEC. (
Ibid)
f) Redeemable
o Those shares, expressly so provided in the articles of incorporation, which ma
y be purchased or taken up by the corporation upon the expiration of a fixed per
iod regardless of the existence of unrestricted retained earnings in the books o
f the corporation and upon such terms and conditions stated in the AI and in the
certificate of stock (Sec 8)
g) Treasury
o These are shares of stock which have been issued and fully paid for but subseq
uently re-acquired 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 BOD. (Sec 9)
o May be sold at less than par, regarded as corporate property
o In this manner, stocks can be retired gradually, even those which aren t redeema
ble
o No limit as to how many shares can be retired
h) Convertible A type of preferred stock that the holder can exchange for a pred
etermined number of the corporation s common shares at a specified time
i) Participating A type of preferred stocks that, in addition to a fixed dividen
d, shares in dividends paid on the common stock
j) Non-voting shares (Section 6)
o Shares which have , generally, no voting rights; except in the following circu
mstances:
* Amendment of the AOI
* Adoption and amendment of by-laws
* Sale, lease, exchange, other disposition of all or substantially all of the co
rporate property
* Incurring, creating or increasing bonded indebtedness
* Increase or decrease of capital stock
* Merger and consolidation
* Investment of corporate funds in another corporation or business
* Dissolution of the corporation
C. What is the Form of Articles of Incorporation? (Section 15)
* Special provision for corporations engage in any business or activity reserved
for Filipino citizens: No transfer of stock or interest which will reduce the
ownership of Filipino citizens to less than the required percentage of the capit
al stock as provided by existing laws shall be allowed or permitted to be record
ed in the proper books of the corporation and this restriction shall be indicate
d in all the stocks certificates issued by the corporation. (Sec 15)
D. Filing of Articles of incorporation
1. Failure to file AI will prevent due incorporation of the proposed corporation
and will not give rise to its juridical personality. It will not even be a de
facto corporation
2. Grounds for disapproving articles of incorporation (Section 17)
* The SEC may reject any AI thereto if the same is not in compliance with the re
quirements of this Code
* The SEC 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:
AI is not substantially with the form prescribed
a) Purpose is patently unconstitutional, illegal, immoral, contrary to governemn
t rules and regulations
b) Treasurer s Affidavit is false
c) Percentage requirement of ownership as required by the Constitution not compl
ied with.
* The AI s of the following institutions must be accompanied by a favorable recomm
endation of the appropriate government agency to the effect that such articles o
r amendment is in accordance with law
a) banks, banking and quasi-banking institutions,
b) building and loan associations,
c) trust companies and other financial intermediaries,
d) insurance companies,
e) public utilities,
f) educational institutions, and
g) other corporations governed by special laws
3. After consulting with BOI, NEDA, appropriate government agency, SEC may deny
registration of any corporation if its establishment will not be consistent with
declared national policies
* Certificate of authority required of the following:
a) Insurance Companies- Insurance Commission
b) Banks, Building and Loan Associations, Finance Companies- Monetary Board
c) Educational Institutions- Secretary of Education
d) Public Utilities- Board of Power, Board of Transportation, National Telecommu
nication Commission, etc..
* Remedy in case of rejection of AI: by petition for review in accordance with t
he Rules of Court
E. Issuance of Certificate of Incorporation
1. A private corporation formed or organized under this Code commences to have c
orporate existence and juridical personality and is deemed incorporated from the
date the Securities and Exchange Commission issues a certificate of incorporati
on under its official seal (Sec 19)
2. 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 e
xtended or the corporation is sooner dissolved in accordance with law. (Ibid)
3. If incorporators are found guilty of fraud in procuring Certificate of Incorp
oration, SEC may revoke the same after proper notice and hearing
F. How are the Articles of Incorporation amended?
1. Procedure for amendment of articles of incorporation (Sec 16)
a) For a legitimate purpose
b) By Majority Vote of the Board; and Vote (in a meeting) or mere written assent
(no meeting) of 2/3 of the outstanding stock, or in case of a non-stock corpo
ration, by the members of the corporation.
* Once the amendment is approved, dissenting stockholders may exercise their ri
ghts of appraisal if it involved diminishing of substantial rights previously gr
anted or creating a new set of shares with priority rights.
c) The original and amended articles together shall contain all provisions requi
red by law to be set out in the articles of incorporation. Such articles, as ame
nded shall be indicated by underscoring the change or changes made
d) A copy thereof duly certified under oath by the corporate secretary and a maj
ority of the directors or trustees stating the fact that said amendment or amend
ments have been duly approved by the required vote of the stockholders or member
s, shall be submitted to the Securities and Exchange Commission.
e) The amendment of the Articles of Incorporation will be effective only upon ap
proval of the SEC; but should no action be taken by the SEC within 6 months from
the date of filing, then automatically, the amendment is deemed effective, prov
ided that delay is not attributable to the corporation.
2. Grounds for disapproving amendment (Section 17)
* The SEC may disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code
* The SEC 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 disapproval:
a) Amendment is not substantially with the form prescribed
b) Purpose is patently unconstitutional, illegal, immoral, contrary to governmen
t rules and regulations
c) Treasurer s Affidavit is false
d) Percentage requirement of ownership as required by the Constitution not compl
ied with
G. By-laws
1. Definition of by-laws
* These are regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance. By laws define the rights
and obligations of various officers, persons or groups within the corporate stru
cture and provide rules for routine matters such as calling meetings.
* Every corporation under this code shall have the power and capacity: (5) to ad
opt by-laws not contrary to law, morals, or public policy, and to amend or repea
l the same in accordance with this code (Sec 36)
2. When to adopt by-laws (Section 46)
* Every corporation formed under this code must within 1 month after receipt of
official notice of the issuance of its certificate of incorporation by the SEC a
dopt a code of by-laws for its government not inconsistent with this code. (Sec
46)
* May be adopted and filed prior to incorporation, in such case, shall be approv
ed and signed by all incorporators submitted to SEC together with AI (Sec 46)
Loyola Grand Villas Homeowners Ass v. CA
* The Supreme Court held that although the Corporation Code requires the filing
of by-laws within one month after the issuance of the Certificate of Incorporati
on, it does not expressly provide for the consequences of non-filing within the
said period.
* It should be noted, however, that under Section 6 of PD 902-A, the SEC can rev
oke the certificate of registration of corporations for failure to file the by-l
aws within the required period but only after proper notice or hearing.
* There is no automatic dissolution for failure to file by-laws within the requi
red period.
3. How filed
* Must be approved by the affirmative vote of the Stockholders representing the
majority of the outstanding capital stock or majority of members (Sec 46)
* Must be signed by the stockholders or members voting for it (Sec 46)
* Must be filed with the SEC certified by the majority of directors/trustees and
countersigned by the secretary of the corporation which shall be attached to or
iginal AI (Sec 46)
4. Where kept
* Must be kept in the principal office of the corporation; subject to inspection
of stockholder or member during office hours (Sec 46)
5. Effectivity of by-laws
* Effective only from the issuance of SEC of certification that bylaw are not in
consistent with the Code (Sec 46)
* Cannot bind stockholders / corporation pending approval
* By laws, like AI are contracts of adhesion. They will bind the corporation an
d stockholders including those who vote against as well as those who became memb
ers after approval
* Contracts entered into without strict compliance with by-laws may be binding o
n the corporation due to long acquiescence and usage
* By laws are mere internal rules among stockholders and cannot affect or prejud
ice 3rd persons who deal with the corporation unless they have knowledge of the
same
6. Contents (Section 47)
* 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-l
aws for:
a) The time, place and manner of calling and conducting regular or special meeti
ngs of the directors or trustees;
b) The time and manner of calling and conducting regular or special meetings of
the stockholders or members;
c) The required quorum in meetings of stockholders or members and the manner of
voting therein;
d) The form for proxies of stockholders and members and the manner of voting the
m;
e) The qualifications, duties and compensation of directors or trustees, officer
s and employees;
f) The time for holding the annual election of directors of trustees and the mod
e or manner of giving notice thereof;
g) The manner of election or appointment and the term of office of all officers
other than directors or trustees;
h) The penalties for violation of the by-laws;
i) In the case of stock corporations, the manner of issuing stock certificates;
and
j) Such other matters as may be necessary for the proper or convenient transacti
on of its corporate business and affairs.
7. Procedure for amendment of by-laws (Section 48)
* Voting Requirement: board of directors or trustees by a majority vote and th
e owners of at least a majority of the outstanding capital stock, or majority of
the members of a non-stock corporation, at a regular or special meeting duly ca
lled for the purpose, may amend or repeal any by-laws or adopt new by-laws
* Delegation of power to amend to the BOD: The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock cor
poration may delegate to the board of directors or trustees the power to amend o
r repeal any by-laws or adopt new by-laws
* Revocation of the delegation of power to amend: Any power delegated to the boa
rd of directors or trustees to amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders owning or representing a ma
jority of the outstanding capital stock or a majority of the members in non-stoc
k corporations, shall so vote at a regular or special meeting
* Whenever any amendment or new by-laws are adopted, such amendment or new by-la
ws shall be attached to the original by-laws in the office of the corporation, a
nd a copy thereof, duly certified under oath by the corporate secretary and a ma
jority of the directors or trustees, shall be filed with the Securities and Exch
ange Commission the same to be attached to the original articles of incorporatio
n and original by-laws.
* The amended or new by-laws shall only be effective upon the issuance by the Se
curities and Exchange Commission of a certification that the same are not incons
istent with this Code.
H. Non-use of Charter / Continuous Inoperation
1. Non-user for 2 years (non-use of charter)- when the corporation does not form
ally organize and commence the transaction of its business or the construction o
f its works within 2 years from the date of its incorporation. Its corporate po
wers cease and the corporation shall be deemed dissolved (automatic)
* Formal organization may consist in the election of new board of directors or t
rustees and corporate officer
* Commencement of business may take the form of contracting for lease or sale of
properties to be used as business site of the corporation and other preparatory
acts geared towards fulfillment of the purpose for which the corporation was es
tablished
2. Non-user for 5 years (continuous inoperation)- when the corporation has comme
nced the transaction of its business but subsequently becomes continuously inope
rative for a period of at least 5 years. The same shall be a ground for the sus
pension or revocation of its corporate franchise or Certificate of Incorporation
(not automatic). Notice and hearing is required.
3. Exception: cause or non-use or operation was due to causes beyond the control
of the corporation as determined by SEC (ex. Mineral lands to be developed by t
he corporation as per its purpose are the object of court litigation and a court
injunction against the corporate activities has been issued)
I. Defective Attempts to Incorporate: De Facto Corporations
1. De jure - complied substantially with the mandatory legal requirements
2. De facto - no substantial compliance with mandatory legal requirements
3. Rule on de facto corporations: The due incorporation of any corporation claim
ing in good faith to be a corporation, and its right to exercise corporate power
s, shall not be inquired into collaterally in any private suit to which such cor
poration may be a party. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding. (Sec 20)
Requisites of a de facto corporation
a) Valid statute there is an apparently valid statue under which the corporation
 with its purposes may be formed. There can be no de facto corporation under a s
tatue subsequently declared unconstitutional
b) Good faith there has been colorable compliance with the legal requirements in
good faith
c) User of corporate powers there has been some user of corporate powers, the tr
ansaction of business in some way as if it were a corporation
* not necessary that dealings between the parties should have been on a corporat
e basis
* election of directors and officers would not be user of corporate powers since
these acts are just indicative of a mere association
* taking subscriptions to and issuing shares of stock, buying lot, constructing,
and leasing a building on it will constitute sufficient user of corporate power
s to constitute a de facto corporation
d) Colorable compliance - there has been colorable compliance with legal requir
ements
* while the corporation is still in the process of incorporation, it is quite cl
ear that there can be no substantial or colorable compliance and therefore it ca
nnot be at such a stage a de facto corporation
* Compliance with the above conditions would make the corporation de facto whose
incorporation cannot be attacked collaterally. It may only be attacked directl
y by the State in a quo warranto proceeding
* De facto doctrine grew out of the necessity to promote the security of busines
s transactions and to eliminate quibbling over irregularities.
* Where corporations are neither de jure or de facto, associates may be held lia
ble as partners unless estoppel applies
J. Corporation by Estoppel
* It is a status acquired by persons who assume to act as a corporation knowing
it to be without authority. Such persons shall be liable as general partners fo
r all debts, liabilities and damages incurred or arising as a result thereof. (S
ec 21)
* When such ostensible corporation is sued on any transaction entered by it as a
corporation or any act committed by it as such, it shall not be allowed to use
as a defense as lack of corporate personality (Sec 21)
* One who assumes an obligation to an ostensible corporation as such, cannot res
ist performance thereof on the ground that there was in fact no corporation (Sec
21)
Lozano v. de los Santos and Anda
* This case involved two incorporated drivers associations that decided to unite
and elect one set of officers to be given authority to collect the daily dues of
the drivers who are members of the consolidated association.
* Doctrine of estoppel applies when persons assume to form a corporation and exe
rcise corporate functions and enter into business relations with third persons.
* Where there is no third persons involved and the conflict arises only among th
ose assuming the form of a corporation, who therefore know that it has not been
registered there is no corporation by estoppel.
International Express Travel v. CA
* Petitioner International Express Travel secured airline tickets for the trips
of the athletes and officials of the respondent Philippine Football Federation (
PFF), through its managing director, Mr. Kahn.
* Petitioner sued respondent Federation and Khan for the unpaid balance.
* Issue is whether Khan may not be made liable as PPF is liable as corporation b
y estoppel.
* Doctrine misapplied. Estoppel applies to a third party only when he tries to e
scape liabilities on a contract from which he has benefited on the irrelevant gr
ound of defective incorporation. In the CAB, petitioner is not trying to escape
liability from the contract but rather is the one claiming from the contract.
* The doctrine of corporation by estoppel may apply to:
o a third party - a 3rd party who had dealt with an unincorporated association a
s a corporation may be precluded from denying its corporate existence on a suit
brought by the alleged corporation on the contract even if he did not know of th
e defective incorporation. 3rd party is considered to have admitted the existenc
e of a corporation by the fact that he dealt with it as a corporation
o the alleged corporation - when a third person has entered into a contract with
an association which represented itself to be a corporation, the association is
estopped from denying its corporate capacity in a suit against it by such 3rd p
erson. It cannot allege lack of personality to be sued to evade responsibility
on a contract it has entered into and by virtue of which it has received advanta
ges and benefits
o associates as partners - when business associates fraudulently misrepresents t
he existence of a corporation and the 3rd party contacts with the association as
a corporation without knowing the serious defects in its incorporation, such 3r
d party may sue associates as general partners. Where both the associates and th
e 3rd party were ignorant of the defective incoroporation, 3rd party cant hold t
he associates liable since they were in good faith. If 3rd party knew of defects
in incorporation and still dealt with the corporation, he must be deemed to hav
e chosen to deal with the corporation as such and should be limited in his recov
ery to the corporate assets.
III. POWERS OF CORPORATIONS
A. In general (Section 36)
1. To sue and be sued in its corporate name;
2. Succession by its corporate name for the period of time stated in the article
s 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 t
his 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 pr
ovisions of this Code; and to admit members to the corporation if it be a non-st
ock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortg
age and otherwise deal with such real and personal property, including securitie
s and bonds of other corporations, as the transaction of the lawful business of
the corporation may reasonably and necessarily require, subject to the limitatio
ns 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 h
ospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
That no corporation, domestic or foreign, shall give donations in aid of any po
litical party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its dir
ectors, 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. (in the pur
pose clause)
* Sources of power
o Section 36
o Purpose clause
* Sec 38 par 11 grants such power as are essential or necessary to carry out its
purpose or purposes as stated in the AI. A corporation is presumed to act with
in its powers and when a contract is not on its face necessarily beyond its auth
ority, it will in the absence of proof to the contrary presumed valid
* 2 general restrictions on the power of the corporation to acquire and hold pro
perties:
o that the property must be reasonably and necessarily required by the transacti
ons of its lawful business
o that the power shall be subject to the limitations prescribed by other special
laws and the constitution (corporation may not acquire more than 30% of voting
stocks of a bank; corporations are restricted from acquiring public lands except
by lease of not more than 1000 hectares)
B. Specific Powers
* Extend or shorten the corporate term
* Increase or decrease capital stock
* Incur, create or increase bonded indebtedness
* Deny preemptive right
* Sell or otherwise dispose of substantially all its assets
* Acquire its own shares
* Invest in another corporation or business
* Declare dividends
* Enter into management contracts
C. To extend or shorten corporate term (Section 37)
1. Approval and Voting and Notice Requirement:
a) Approved by a majority vote of the board of directors or trustees and
b) 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 memb
ers in case of non-stock corporations.
c) Written notice of the proposed action and of the time and place of the meetin
g 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.
2. Appraisal right In case of extension of corporate term, any dissenting stockh
older may exercise his appraisal right under the conditions provided in this cod
e.
D. To increase or decrease capital stock; To incur, create, increase, bonded in
debtedness (Section 38)
1. Approval and Voting and Notice Requirement:
a) Approved by a majority vote of the board of directors
b) 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 an
y bonded indebtedness in a meeting duly called for the purpose
c) 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 d
iminution of the capital stock or the incurring or increasing of any bonded inde
btedness 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 addr
essee in the post office with postage prepaid, or served personally
2. Certificate of Filing: A certificate in duplicate must be signed by a majori
ty of the directors of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:
a) That the requirements of this section have been complied with;
b) The amount of the increase or diminution of the capital stock;
c) 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 an
d residences of the persons subscribing, the amount of capital stock or number o
f no-par stock subscribed by each, and the amount paid by each on his subscripti
on 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;
d) Any bonded indebtedness to be incurred, created or increased;
e) The actual indebtedness of the corporation on the day of the meeting;
f) The amount of stock represented at the meeting; and
g) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
3. Approval of SEC: Any increase or decrease in the capital stock or the incurri
ng, creating or increasing of any bonded indebtedness shall require prior approv
al of the Securities and Exchange Commission.
* One of the duplicate certificates shall be kept on file in the office of the c
orporation and the other shall be filed with the Securities and Exchange Commiss
ion and attached to the original articles of incorporation.
4. Effectivity: From and after approval by the Securities and Exchange Commissi
on and the issuance by the Commission of its certificate of filing, the capital
stock shall stand increased or decreased and the incurring, creating or increasi
ng of any bonded indebtedness authorized, as the certificate of filing may decla
re
5. Treasurer Affidavit: Provided, That the Securities and Exchange Commission sh
all not accept for filing any certificate of increase of capital stock unless ac
companied by the sworn statement of the treasurer of the corporation lawfully ho
lding 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 a
nd that at least twenty-five (25%) percent of the amount subscribed has been pai
d 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%) p
ercent of the subscription
* Decrease of capital stock: No decrease of the capital stock shall be approved
by the Commission if its effect shall prejudice the rights of corporate creditor
s
* 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 a
t least two-thirds (2/3) of the members in a meeting duly called for the purpose
.
* Registration of bonds- Bonds issued by a corporation shall be registered with
the Securities and Exchange Commission, which shall have the authority to determ
ine the sufficiency of the terms thereof.
E. To deny pre-emptive rights (Section 39)
1. Definition of pre-emptive rights All stockholders of a stock corporation shal
l 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 i
s denied by the articles of incorporation or an amendment thereto
* This is to prevent dilution in shareholding
* If you increase common stock and some of the stockholders do not want to subsc
ribe, get from them a waiver of pre-emptive right
2. Limitation to exercise of pre-emptive right:
a) 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;
b) Not extend to shares to be issued in good faith with the approval of the stoc
kholders representing two-thirds (2/3) of the outstanding capital stock, in exch
ange for property needed for corporate purposes or in payment of a previously co
ntracted debt
c) Shall not take effect if denied in the Articles of Incorporation or an amendm
ent thereto.
* Preemptive right option privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corp before same can be
disposed of in favor of the others; includes all issues and disposition of sha
res of any class
* Includes not only new shares in pursuance of an increase of capital stock but
would cover the issue of previously unissued shares which form part of the exist
ing capital stock as well as treasury shares
* Where the shares are issued in exchange for property needed for corporate purp
oses or for debt previously granted, SH cannot demand his pre-emptive right for
right may prejudice corporate interest
* In joint ventures, you can expand pre-emptive rights even in instances under S
ec 39
3. Remedies in case of unwarranted denial:
a) Injunction
b) Mandamus
* in any case, the suit should be individual and not derivative because the wron
g done is to the stockholders individually
F. To sell or dispose of corporate assets (Section 40)
1. Restrictions: Subject to the provisions of existing laws on illegal combinati
ons and monopolies
2. Scope of power: To sell, lease, exchange, mortgage, pledge or otherwise dispo
se of all or substantially all of its property and assets, including its goodwil
l, 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
* Meaning of disposition of substantially all of the corporate property and asse
ts- if thereby the corporation would be rendered incapable of continuing the bus
iness or accomplishing the purpose for which it was incorporated.
3. Approval, voting and notice requirement:
a) Majority vote of its board of directors or trustees,
b) 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 t
he vote of at least to two-thirds (2/3) of the members, in a stockholder's or me
mber's meeting duly called for the purpose.
c) Written notice of the proposed action and of the time and place of the meetin
g 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
* When SH approval not necessary - If disposition is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the conduct o
f 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 author
ization for the corporation to enter into any transaction authorized by this sec
tion.
4. Appraisal right: That any dissenting stockholder may exercise his appraisal r
ight under the conditions provided in this Code
Abandonment of the sale, lease - After such authorization or approval by the stoc
kholders or members, the board of directors or trustees may, nevertheless, in it
s discretion, abandon such sale, lease, exchange, mortgage, pledge or other disp
osition of property and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval by the stockholde
rs or members.
G. To acquire own shares (Section 41)
* A stock corporation shall have the power to purchase or acquire its own shares
for a legitimate corporate purpose or purposes (treasury shares) provided, that
the corporation has unrestricted retained earnings in its books to cover the sh
ares to be purchased or acquired
* Trust Fund doctrine the requirement of unrestricted retained earnings is becau
se subscription to the capital of a corporation constitute a fund to which credi
tors have a right to look for the satisfaction of their claims
* Legitimate purpose includes:
a) To eliminate fractional shares arising out of stock dividends;
b) To collect or compromise an indebtedness to the corporation, arising out of u
npaid subscription, in a delinquency sale, and to purchase delinquent shares sol
d during said sale; and
c) To pay dissenting or withdrawing stockholders entitled to payment for their s
hares under the provisions of this Code.
* A corporation must have unrestricted retained earnings in acquiring own shares
except:
a) shares are acquired in the redemption of redeemable shares
b) shares are re-acquired to effect a decrease in capital stock approved by the
SEC
c) shares are reacquired by a close corporation pursuant to the order of the SEC
acting to arbitrate a deadlock
H. To invest corporate funds in another corporation or business (Section 42)
1. 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 pri
mary purpose for which it was organized
2. Approval, voting and notice requirement
a) Majority of the board of directors or trustees and
b) ratified by the stockholders representing at least two-thirds (2/3) of the ou
tstanding capital stock, or by at least two thirds (2/3) of the members in the c
ase of non-stock corporations, at a stockholder's or member's meeting duly calle
d for the purpose.
c) Written notice of the proposed investment and the time and place of the meeti
ng 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 pos
t office with postage prepaid, or served personally
3. Appraisal right - any dissenting stockholder shall have appraisal right as pr
ovided in this Code
4. When SH approval not necessary- where the investment by the corporation is re
asonably necessary to accomplish its primary purpose as stated in the articles o
f incorporation
* To avoid SH approval, include other business undertakings in the secondary pur
pose
5. Rules in case a corporation will invest its funds in another corporation
a) If it is the same purpose or incidental or related to its primary purpose, th
e board can invest the corporate fund without the consent of the stockholders.
What is required is only the vote of the majority of the BOD. No appraisal right
b) If the investment is in another corporation of different business or purpose,
the affirmative vote of majority of the board consented by 2/3 OS capital stock
is required
I. To declare dividends (Section 43)
* The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or
in stock to all stockholders on the basis of outstanding stock held by them.
* Any cash dividends due on delinquent stock shall first be applied to the unpai
d balance on the subscription plus costs and expenses, while stock dividends sha
ll be withheld from the delinquent stockholder until his unpaid subscription is
fully paid
* Approval & voting requirement:
a) Approval of BOD
b) In case of stock dividend: It shall be not be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capi
tal stock at a regular or special meeting duly called for the purpose.
* Limitation on retention of surplus profits- Stock corporations are prohibited
from retaining surplus profits in excess of one hundred (100%) percent of their
paid-in capital stock, except:
a) when justified by definite corporate expansion projects or programs approved
by the board of directors; or
b) when the corporation is prohibited under any loan agreement with any financia
l institution or creditor, whether local or foreign, from declaring dividends wi
thout its/his consent, and such consent has not yet been secured; or
c) when it can be clearly shown that such retention is necessary under special c
ircumstances obtaining in the corporation, such as when there is need for specia
l reserve for probable contingencies.
* Stock dividends: distribution to stockholders of company s own stock. Corporate
profits or earnings are transferred to capital stock and shares of stock represe
nting the increase in capitalization are distributed. May be issued out of premi
um surplus.
o Limitation on the issue of stock dividends:
* there must be unissued shares of the corporation
* there must be unrestricted retained earnings
* cannot be issued to non-stockholders even for services rendered
* Whether or not there should be a distribution of dividends in whatever form, s
uch matters are always subject to the business judgment of the BOD and the court
s will not interfere with the former s discretion except:
o when tainted with bad faith
o when tainted with fraud
o when tainted with gross negligence
o when profits accumulated are in excess of 100% of the corporations paid-in cap
ital stock unless exempted
* When right to Dividends Vests:
o General rule: as soon as the same have been lawfully declared by the BOD, beco
mes a debt owing to the SH. No revocation can be made
o Exceptions:
* not yet announced or communicated to the public, revocable before announcement
to shareholders
* when stock dividends are declared since these are not distributions but merely
represent changes in the capital structure, may be revoked prior to actual issu
ance
* Rights of transferee to dividends Right to dividends vests upon declaration so
whoever owns the stock at time or stockholders of record also owns the dividend
. Subsequent transfer of stock would not carry with it right to dividends
* Record date The date on which a stockholder must be registered on a corporatio
n s stock and transfer book in order to be entitled to a dividend or voting rights
.
J. To enter into management contract (Section 44)
* Approval and Voting Requirement:
o Approval by the board of directors, and
o Approval by stockholders owning at least the majority of the outstanding capit
al stock, or by at least a majority of the members of both the managing and the
managed corporation
o 2/3 vote required when:
a. where a stockholder or stockholders representing the same interest of both th
e 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 corpora
tion; or
b. where a majority of the members of the board of directors of the managing cor
poration also constitute a majority of the members of the board of directors of
the managed corporation
* Term of management contract: No management contract shall be entered into for
a period longer than five years for any one term.
* These provisions shall apply to any contract whereby a corporation undertakes
to manage or operate all or substantially all of the business of another corpora
tion, whether such contracts are called service contracts, operating agreements
or otherwise
* Service contracts or operating agreements which relate to the exploration, dev
elopment, exploitation or utilization of natural resources may be entered into f
or such periods as may be provided by the pertinent laws or regulations.
* Management contract any contract whereby a corporation undertake to manage or
operate all or substantially all of the business of another corporation
K. Ultravires acts (Section 45)
* Definition of ultravires acts These are acts which a corporation is not empowe
red to do or perform because they are not based on the powers conferred by its
AOI or by the Corporation Code on corporations in general, or because they are n
ot necessary or incidental to the exercise of the powers so conferred.
* Rule on Ultravires acts of corporations No Corporation under this Code shall p
ossess or exercise any corporate powers except those conferred by this Code or b
y its articles of incorporation and except such as are necessary or incidental t
o the exercise of the powers so conferred.
Atrium v. CA
* Atrium Management Corporation filed with RTC action for collection of the 4 po
stdated checks issued by the Hi-cement Corporation, though its signatories de Le
on, treasurer, and de las Alas, chairman of the corporation to a certain ET Henr
y and Co which the latter endorsed to Atrium for rediscounting.
* The act of issuing was well within the ambit of a valid corporate act, for it
was for securing a loan to finance the activities of the corporation, hence, not
an ultravires act.
* An ultravires act is distinguished from illegal act, the former being voidable
which may be enforced by performance, ratification, or estoppel, while the latt
er is void and cannot be validated. SC however, held de Leon negligent.
Republic of the Philippines vs. Acoje Mining Co.
* The company is estopped from denying liability on the ground that the board re
solution is ultravires. Assuming arguendo that the resolution is an ultra vires
act, the same is not void for it was approved not in contravention of law, cust
oms, public order and public policy.
* The term ultravires should be distinguished from an illegal act for the former
is merely voidable which may be enforced while the latter is void and cannot be
validated.
* General consequences of ultravires acts are as follows:
a) Corporation may be dissolved under a quo warranto proceeding but in most case
s, the court merely enjoins the corporation from commission of the ultra vires
acts
b) Certificate of Registration may be suspended or revoked by SEC
c) Parties to the ultravires contract if executory on both sides neither party c
an ask for specific performance. Will be left as they are if the contract has be
en fully executed on both sides. If one party has performed his part, the contra
ct will be enforced provided it is not illegal
d) Contract proceeding from an ultra-vires act is voidable
e) Any stockholder may bring either an individual or derivative suit to enjoin a
threatened ultravires act or contract. If act or contract has already been per
formed, a derivative suit for damages may be filed against the directors, but th
eir liability will depend on whether they acted in good faith and with reasonabl
e diligence in entering into contracts. When based on tort, cannot set-up the d
efense of ultravires against injured party who had no knowledge that such was ul
travires
f) May become binding by the ratification of all stockholders unless third parti
es are prejudice thereby or unless the acts is illegal
IV. SHARES OF STOCKS
* Stockholders: owners of shares in a corporation which has a capital stock
* Members: Corporators of a corporation which has no capital stock
* Stockholders or members have residual power over fundamental corporate changes
 like amendment of the articles of incorporation
A. Subscription to Shares
1. Subscription Contract
* Any contract for the acquisition of unissued stock in an existing or a corpora
tion still to be formed shall be deemed a subscription contract, notwithstanding
the fact that the parties may refer to it as a purchase or some other contract.
(sec 60)
* Transfer for consideration of treasury shares is a sale by the corporation (no
t subscription). A transfer of fully paid shares by a stockholder to a third pe
rson is a sale. But it seems that assignment by a subscriber of his unpaid subs
cription would require that the requisites for valid release from subscription m
ust be complied with
* Shareholders are not creditors of the corporation with respect to their shareh
oldings thereto and the principle of compensation or set-off has no application
* Not necessarily required to be in writing
2. Pre-incorporation subscription (Section 61)
* Pre-incorporation subscription is a subscription for shares of stock of a corp
oration still to be formed.
* It shall be irrevocable for a period of at least six (6) months from the date
of subscription.
* It can only be revoked, when:
o when all of the other subscribers consent to the revocation, or
o when the incorporation of the corporation fails to materialize within six (6)
months or within a longer period as my be stipulated in the contract of subscrip
tion.
* After the submission of the articles of incorporation to the SEC, no pre-incor
poration subscription may be revoked.
B. Consideration for stocks (Sec 62)
* Stocks shall not be issued for a consideration less than the par or issued pri
ce thereof.
* Consideration for the issuance of stock may be any or a combination of any two
or more of the following:
a) Actual cash paid to the corporation;
b) Property, tangible or intangible, actually received by the corporation and ne
cessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued
o Valuation of consideration other than actual cash, or consists of intangible p
roperty such as patents of copyrights- initially be determined by the incorpora
tors or the board of directors, subject to approval by the Securities and Exchan
ge Commission.
c) Labor performed for or services actually rendered to the corporation;
d) Previously incurred indebtedness of the corporation;
e) Amounts transferred from unrestricted retained earnings to stated capital; an
d
f) Outstanding shares exchanged for stocks in the event of reclassification or c
onversion.
* Fair valuation is appraisal made in good faith
* Prohibited consideration: Shares of stock shall not be issued in exchange for
promissory notes or future service
* Same consideration applies for the issuance of bonds by the corporation.
* Fixing of issued price of no-par value shares: The issued price of no-par val
ue shares may be fixed:
a) in the articles of incorporation or
b) by the board of directors pursuant to authority conferred upon it by the arti
cles 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.
* The value of the consideration received must be equal to the issue price of th
e shares of stocks which in no case shall be less than par
* Watered stock shares issued as fully paid-up when in fact the consideration ag
reed to and accepted by the directors of the corporation was something known to
be much less than the par value or issued value of the shares.
* Water in stock refers to the difference between the fair market value at the t
ime of the issuance and the par or issued value of said stock. Subsequent incre
ase in the value of the property used in paying the stock does not do away with
the water in the stock. The existence of such water is determined at the time o
f issuance of the stock.
C. Liability for watered stocks (Sec 65)
* Any director or officer of a corporation consenting to the issuance of stocks
o for a consideration less than its par or issued value or
o for a consideration in any form other than cash, valued in excess of its fair
value,
o 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 a
nd 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.
D. Certificate of Stock and transfer of shares
1. Issuance of stock certificates
* Definition Certificate of stock: It is the document issued to stockholders ev
idence of their ownership of such number of shares in the corporation that issue
d the certificate.
* No certificate of stock shall be issued to a subscriber until the full amount
of his subscription, together with the interest and expenses (in case of delinqu
ent shares) if any is due, has been paid. (Sec 64)
* How issued: The capital stock of stock corporations shall be divided into shar
es for which certificates signed by the president or vice president, countersign
ed by the secretary or assistant secretary, and sealed with the seal of the corp
oration shall be issued in accordance with the by-laws. (Sec 63)
* Shares are personal property Shares of stock so issued are personal property a
nd may be transferred (Sec 63)
2. Transfer of shares
* Shares of stock may be transferred as follows (Sec 63):
a) indorsed by the owner or his attorney-in-fact or other person legally authori
zed to make the transfer
b) delivery of the certificate or certificates
c) To be binding against third persons, transfer of shares should be recorded in
the books of the corporation showing therein the ff.:
* 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 (Sec 63).
* Transfer of shares not tainted with any irregularity shall be valid as between
the parties.
* Purpose of registration
a) enable the transferee to exercise all the rights of a stockholder
b) to inform the corporation of any change in share ownership so that it can asc
ertain the persons (a) entitled to the rights (b) subject to the liabilities of
a SH
c) until registration is accomplished, the transfer, though valid between the pa
rties, cannot be effective against the corporation
* Effect of lack of registration:
a) transferee cannot vote
b) transferee cannot be voted for
c) an outsider
d) cannot prevail over rights of a subsequent attaching creditor
e) not entitled to dividends
f) stockholder on record has the right to participate in meetings.
* Unauthorized transfers:
a) certificates indorsed in blank where the stockholder indorses his certificate
in blank in such a manner as to clothe whoever may be in possession of it with
apparent authority to deal with the shares as the latter s own, he will be estoppe
d from claiming the shares as against a bonafide purchaser. This is called the t
heory of quasi-negotiability
b) forged transfers if the corporation should issue a new certificate pursuant t
o a forged transfer, it incurs no liability to the person in whose favor it issu
ed it and may demand its return for cancellation. It is the duty of the purchas
er to determine that the indorsement was genuine. But with respect to a subseque
nt purchaser in good faith and for value, the corporation is estopped from denyi
ng the validity of the newly issued certificate because by issuing such, it has
represented that the person named therein is a stockholder of the corporation. E
xcept where recognition of the original and new subscriber will result to an ove
rissue of shares. The new SH would now have right to damages against the corpor
ation and the latter against those who made false representations.
* A capital gains tax return must be presented / doc stamps paid to corporate se
cretary before transfer is effected in the books of the corporation.
Bitong v. CA
* A certificate of stock cannot be considered issued in contemplation of law unl
ess signed by the president or vice president and countersigned by the secretary
or assistant secretary.
* The rule is that the endorsement of the certificate of the stock by the owner
or his attorney in fact or any other person legally authorized to make the trans
fer shall be sufficient to effect the transfer of shares only if the same is cou
pled with delivery. The delivery of the stock certificate duly endorsed by the o
wner is the operative act of transfer of shares from the lawful owner to the new
transferee. Thus, for a valid transfer of stocks, the requirements are as follo
ws:
a) There must be delivery of the stock certificate;
b) The certificate must be endorsed by the owner or his attorney-in-fact or othe
r person legally authorized to make the transfer; and
c) To be valid against third parties, the transfer must be recorded in the books
of the corporation.
Sunset View Condominium Corp v Campos
* Sunset View Condominium corporation filed suit against Aguilar-Bernares Realty
and Lim Siu Leng for collection of assessments levied on their respective condo
minium units which they bought on installments and had not yet fully paid
* Respondents not shareholders of condominium corporation because they are not y
et fully paid
a) Sec 5 Condominium Act shareholding in a condominium corporation will be conve
yed only in a proper case
b) Sec 4 of Condominium Act leaves to Master Deed the determination of when shar
eholding will be transferred to purchaser of a unit
c) Master Deed provides that only owner of unit is a shareholder and that owners
hip of unit is acquired by purchaser subject to conditions and terms of the inst
rument conveying the unit to such purchaser.
d) Deed of Conveyance provide that ownership is conveyed only upon full payment
of purchase price
e) Sec 10 Condominium Act Membership in Condominium corporation shall not be tra
nsferable separately from condominium unit of which it is an appurtenance
Rivera v Florendo
* Akasako, allegedly the real owner of the shares of stock in the name of Rivera
sold shares to Tsuchiya
* Other stockholders sold shares to them as well
* Thereafter, Rivera refused to make indorsement
* Corporation refused to register the stock certificates
* Action for mandamus to cause registration of stock certificates
* This is not intra-corporate, Tsuchiya is an outsider and not yet owner of shar
es unless and until registered
* Dispute cannot be the subject of mandamus. Corporate Secretary cannot be comp
elled to register the transfer
a) Shares of stock in question (Rivera shares) are not even indorsed by register
ed owner. Tsuchiya and Jureidini has no clear legal right.
b) Even the shares of stock purchased from other incorporators cannot be subject
of mandamus on the strength of mere indorsement of supposed owners without expr
ess instructions from them.
c) These issues will have to be threshed out in an ordinary action
Abejo v dela Cruz
* Teletronics purchased shares of Pocketbell from the Abejo spouses and Virginia
Braga, the latter being indorsed in blank
* Corporate secretary refused to register the transfer due to alleged failure to
respect pre-emtive rights
* Action for mandamus by Abejo and Teletronics to compel corporate secretary to
register the transfer
* This is an intra-corporate dispute
a) Issue on pre-emptive right is between stockholders, I.e., Braga s pre-emptive r
ight and Abejo s right to transfer
b) Virginia s street certificate is within special competence and jurisdiction of
the SEC dealing with free transferability of corporate shares
c) There is no requirement that stockholder must be registered in order that SEC
may take cognizance
d) Mandamus is proper
e) Registration of the valid transfer of shares of stock involves a ministerial
duty on the part of the corporate secretary
f) The issue is not the ownership of shares but the non-performance of the Corpo
rate Secretary of a ministerial duty
Tan v SEC
* Alfonso Tan is owner of 400 shares in Visayan Educational Supply Corp evidence
d by certificate No. 2
* Alfonso transferred 50 shares to Angel
* Certificate No. 2 was cancelled and Certificate No. 6 was issued to Angel and
Certificate No. 8 was issued to Alfonso. However, Alfonso did not make the prop
er endorsement and did not make delivery of cerificate no. 2
* Later on, Alfonso Tan elected to withdraw from the corporation. In exchange f
or his shares, he received stocks in trade
* Certificate No. 8 was later on cancelled due to above
* After several years, Alfonso Tan filed a case with Cebu SEC questioning the ca
ncellation of his stock certificates despite non-endorsement and lack of deliver
y
* Delivery and endorsement under S 63 of the corporation code is not mandatory b
ecause of the use of the word may
* Delivery is not essential where it appears that the persons sought to be held
as stockholders are officers of the corporation and have custody of the stock bo
ok as in this case
* To hold that cancellation of certificate of stock of Alfonso is null and void
because of lack of delivery and endorsement of mother certificate of stock no. 2
which was deliberately withheld is to prescribe restrictions on the transfer of
stock in violation of corporation law
Razon v IAC
* Chudian was issued 1,500 shares at E Razon Inc with the corresponding stock ce
rtificate no 3
* Said stock certificates was delivered to Enrique Razon allegedly because it wa
s the latter who paid for all the subscription on the shares of stock in defenda
nt corporation with the understanding that has was the owner of said shares of s
tock and was to have possession until such time as he was paid by other nominal
incorporators/stockholders
* Later on, parties delivered it for deposit with bank under the joint custody o
f the parties
* Administrator of the estate of Chudian filed a complaint against Enrique Razon
et al praying that the said stock certificates be delivered to estate of Chudi
an along with all cash and stock dividends and pre-emptive rights accruing there
to.
* Chudian is still owner
a) Shares of stock is transferred by delivery and endorsement of the stock certi
ficate
b) Such mode of transfer is not complied with in this case
c) In the books of the corporation, Chudian is still the owner of the stocks. H
e was even elected member of the board which proves that he is a stockholder
d) One who claims ownership should show that the same was trasferred to him in a
ccord with the valid mode of transfer. This petitioner failed to show
e) Endorsement is a mandatory requirement of law for an effective transfer
Rural Bank of Salinas v CA
* Guerrero, President of Rural Bank of Salinas and owner of shares in said corpo
ration executed a Special Power of Attorney to his wife Melania giving her full
power to sell or otherwise dispose of shares of stock of the Bank
* Before death of Clemente, Melania, pursuant to said SPA, executed deed of Assi
gnment of former s shares
* After death of Clemente, Melania presented to bank deed of assignment for regi
stration which the bank refused
* Mandamus filed by Melania to compel bank to register the transfer
* Transfer before death valid, stock not yet part of estate
* Shares of stock are personal property and may be transferred by delivery. Reg
istration in corporate books is not necessary
* The transfer effected in this case is valid
* The corporation may not impose any restriction on such transfer
* The right of transferee/assignee to have stocks transferred to his name is inh
erent right, duty of the corporation to register the transfer is ministerial
Batangas Laguna Tayabas Bus Co. v Bitanga
* Dolores, Max, Mercedelin Potenciano, Delfin Yoro and Maya industries entered i
nto Sale and Purchase Agreement of their shares at Batangas Laguna Tayabas Bus C
ompany with BMB Property Holdings represented by Bitanga.
* A month after, Bitanga and Lim were elected board of directors
* Stockholders meeting on Nov 28, 1997 elected Bitanga as Chairman of the Board
and Lim as CEO
* The next stockholder s meeting was set on May 19, 1998. Majority stockholders a
ttended hence meeting continued despite a postponement notice. The Potencianos
were re-elected
* The Bitangas, however, refused to relinquish management contending the stockho
lder s meeting was void because it was Michael Potenciano himself who requested po
stponement and there was no quorum because BMB Holdings representing 50.26% of B
LTB shares were not present
* Meeting and Election valid
* Transfer of shares is not valid unless recorded in the books of the corporatio
n
* The transfer of shares from the Potenciano group to the Bitanga group has not
yet been recorded in the books of the corporation
* It is the Potenciano group, in whose name the shares still stand were the ones
entitled to attend and vote at the stockholders meeting
* Until registration is accomplished, the transfer, though valid between the par
ties cannot be effective against the corporation.
* The unrecorded transferee cannot vote nor be voted for
Rural Bank of Lipa v CA
* Villanueva executed a Deed of Assignment of his shares in Rural Bank of Lipa i
n favor of stockholders of the Bank represented by its directors Bautista, custo
dio and Katigbak
* Sometime thereafter, he executed an Agreement recognizing indebtedness to said
Bank, assured the board that they will pay the debt otherwise Bank would be ent
itled to liquidate their shareholdings
* Villanueva failed to settle obligation. Bank converted their shares to treasu
ry stocks
* Stockholders of Bank met, Villanuevas were not notified
* Villanueva filed a petition for annulment of stockholder s meeting and election
of directors and officers
* Meeting Invalid
* Corporation Code specifically provides under Sec 63that to effect a valid tran
sfer, there should be delivery of stock certificate endorsed by the owner
a) Assignment of the shares in the case at bar was not coupled with delivery, th
is is a fatal defect
b) Title may be vested in the transferee only by delivery of duly endorsed certi
ficate of stock
c) There must be strict compliance with mode of transfer prescribed by law
d) Deed of Conveyance provide that ownership is conveyed only upon full payment
of purchase price
* Transfer could be valid between the parties but this does not necessarily make
transfer effective
* Petitioners as mere assignees cannot enjoy the status of stockholders
E. Pledge of shares of stock
Lim Tay v CA
* Sy Guiok and Sy Lim pledged their shares in Go Fay and Co to Lim Tay. They en
dorsed their respective share in blank and delivered the same to Lim Tay
* Sy Guiok and Sy Lim failed to pay hence Lim Tay went to the corporate secretar
y to ask the registration of the shares in his name.
* Corporate secretary refused
* Lim Tay instituted an action for mandamus at SEC to compel corporate secretary
to register
* Corporate s secretary cannot be compelled to record transfer
* The duty of a corporate secretary to record transfers of stocks is ministerial
o However, he cannot be compelled to do so when the transferees title to said sh
ares has no prima facie validity or is uncertain
* Mandamus will not issue to establish a right but only to enforce one already e
stablished. Lim Tay failed to establish a legal right to have the shares registe
red in his name.
o Lim Tay failed to establish a legal right. He is not owner of the shares with
out foreclosure and purchase at auction. He is merely a pledgee.
F. Attachment of shares
Garcia v Jomouad
* In a case for a collection of a sum of money, spouses Atinon obtained a judgem
ent against Dico.
* When judgement became final and executory, sheriff Jomouad proceeded with the
execution and attached shares of Dico in Cebu Country Club.
* Said shares was levied and public auction thereof scheduled
* Garcia filed action for injuction on the following grounds:
a) that Garcia is the actual owner of the shares and merely lent the shares to D
ico as manager of his auto supply to assist him in entertaining clients
b) when Dico resigned, he returned to Garcia the stock certificate.
c) Dico executed a deed of Transfer covering said stock certificate but this was
not recorded
d) Dico resigned as proprietary member of the club and such was accepted by the
BOD of the club
* The attachment prevails over the unrecorded transfer (from Dico to Garcia)
* Unrecorded transfers are valid only as between parties to such transfer.
* All transfer of shares not so entered are invalid as to attaching or execution
creditors of the assignors as well as to the corporation and to subsequent purc
hasers in good faith regardless of whether the attaching creditor had knowledge
of the transfer or not
G. Unpaid Subscriptions
1. Effects:
* Unpaid:
a) Holders of subscribed shares not fully paid which are not delinquent shall ha
ve all the rights of a stockholder. (Sec 72)
b) No certificate of stock shall be issued to a subscriber until the full amount
of his subscription, together with the interest and expenses (in case of delin
quent shares) if any is due, has been paid. (Sec 64)
c) No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation (Sec 63).
d) No registration/transfer of unpaid shares does not necessarily mean that ther
e is a previous call. As long as a portion of the subscription price remains un
paid, shares are not transferable on the books of the corporation
* Delinquent
a) Any cash dividends due on delinquent stock shall first be applied to the unpa
id balance on the subscription plus costs and expenses, while stock dividends sh
all be withheld from the delinquent stockholder until his unpaid subscription is
fully paid. (Sec 43)
b) No delinquent stock shall be:
o voted for or
o be entitled to vote or to
o representation at any stockholder's meeting, nor shall the holder thereof be e
ntitled
o to any of the rights of a stockholder
c) 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 intere
st, and the costs and expenses of advertisement, if any. (Sec 71)
d) Note that the provision on dividends pertain to delinquent stock hence a call
must have been made
e) Stock dividends on delinquent shares are not applied but are included in deli
nquency sale wherein it is liquidated
2. Interest on unpaid subscriptions
* Subscribers for stock shall pay to the corporation interest on all unpaid subs
criptions from the date of subscription, if so required by, and at the rate of i
nterest fixed in the by-laws. If no rate of interest is fixed in the by-laws, su
ch rate shall be deemed to be the legal rate. (Sec 66)
3. How to collect unpaid subscriptions (Section 67 and 70)
* When call is necessary: board of directors of any stock corporation may at any
time declare due and payable to the corporation unpaid subscriptions to the cap
ital stock and may collect the same or such percentage thereof, in either case w
ith accrued interest, if any, as it may deem necessary. (Sec 67)
* Court action to recover unpaid subscription: Nothing in this Code shall preven
t the corporation from collecting by action in a court of proper jurisdiction th
e amount due on any unpaid subscription, with accrued interest, costs and expens
es. (Sec 70)
4. How do shares become delinquent (Section 67)
* Payment of any unpaid subscription or any percentage thereof, together with t
he 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 an
d shall make the stockholder liable for interest at the legal rate on such balan
ce, unless a different rate of interest is provided in the by-laws, computed fro
m such date until full payment.
* If within thirty (30) days from the said date no payment is made, all stocks c
overed by said subscription shall thereupon become delinquent and shall be subje
ct to sale as hereinafter provided, unless the board of directors orders otherwi
se.
* Despite the fact that the subscription is partially paid, the entire subscript
ion becomes delinquent
5. Procedure for delinquency sale (Section 68)
a) The Board of Directors must make a call by resolution demanding the payment o
f the balance of the subscription. This is called the "notice of call."
b) The notice of call shall be served on each stockholder either personally or b
y registered mail. At this point, there is no need for publication.
c) If the stockholder does not pay the amount on the date designated in the noti
ce, the Board shall issue, by resolution, a "notice of delinquency."
d) Notice of delinquency shall be served on the non-paying subscriber either per
sonally or by registered mail, PLUS publication in a newspaper of general circul
ation in the province or city where the principal office of the corporation is l
ocated, once a week for two (2) consecutive weeks. The notice shall state the a
mount due on each subscription plus accrued interest, and the date, time and pla
ce of the sale which shall not be less than 30 days nor more than 60 days from t
he date the stocks become delinquent.
e) The amount due in the notice must include all expenses: publication, legal, e
tc.
o Note: the notices are jurisdictional.
f) In the public auction, the highest bidder is one who is willing to pay the ba
lance of the subscription for the least number of shares. The corporation will
give the highest bidder the certificate of stock in the number of his bid; the r
emaining number will be issued a certificate of stock in favor of the subscriber
as fully paid. If there are no bidders, the corporation must bid for the whole
number of shares regardless of how much the stockholder has paid. Such stocks
will pertain to the corporation as fully paid treasury stocks.
6. When sale may be questioned (Section 69)
* 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 deli
nquent stock, unless the party seeking to maintain such action first pays or ten
ders to the party holding the stock the sum for which the same was sold, with in
terest 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 c
omplaint within six (6) months from the date of sale.
* Issuance of Certificate Once full payment for the stocks have been tendered to
the corporation in any of the valid forms of consideration for the issuance of
stocks, the purchaser or the subscribers entitled to be issued the corresponding
certificate of stock which evidences their ownership of shares in a particular
corporation
Apocada v NLRC
* Apocada was employed in Intans Phil wherein he subscribed to 1500 shares
* He subsequently resigned and instituted a complaint with NLRC against corporat
ion for payment of unpaid wages, cola, balance of gasoline and representation ex
penses, bonus
* Corporation applied what is due to Apocada the balance of his unpaid subscript
ion
* Set-off is not proper
o unpaid subscriptions are not yet due and payable. They become due and payable
when a call is made by the corporation. There is no such call yet
o set-off against wages not valid under labor code

H. Lost or destroyed certificates (Section 73)

* PROCEDURE FOR RE-ISSUANCE IN CASE OF LOSS, STOLEN OR DESTROYED CERTIFICATES
1. The registered owner of certificates of stock or his legal representative sha
ll file with the corporation an affidavit setting forth, if possible:
a) the circumstances as to how the certificates were lost, stolen or destroyed;
b) the number of shares represented by each certificate, the serial numbers of t
he certificates;
c) the name of the corporation which issued the same;
d) such other information and evidence which he may deem necessary.
2. The corporation shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal office, once a we
ek for 3 consecutive weeks at the expense of the owner.
3. After the expiration of one (1) year from the date of the last publication an
d if no contest has been presented, the corporation cancel in its books the cert
ificate of stock and issue in lieu thereof new certificates of stock. The right
to make such contest shall be barred after the expiration of the one-year period
.
4. Even before the one year period expires, the new certificates may be issued i
f the registered owner files a bond or other security, running for a period of o
ne (1) year for a sum and in such form and with such sureties as may be satisfac
tory to the Board of Directors. Provided, that if there is a pending contest re
garding the ownership of said certificates, the issuance of new certificates sha
ll be suspended until the final decision of the court.
o Note: Except in cases of fraud, bad faith, or negligence on the part of the co
rporation and its officers, no action may be brought against the corporation whi
ch shall have issued certificates of stock in lieu of those lost, stolen or dest
royed pursuant to the above procedure.
V. STOCKHOLDERS
A. Fundamental Rights of a Stockholder in a Corporation
1. To have an evidence of ownership of stock issued to him
2. To vote at meetings of stockholders in a corporation
3. To receive profits (dividends) from the corporation
4. To participate in the distribution of corporate assets upon dissolution
5. In certain cases, appraisal right
6. To transfer his shares of stock
B. Matters requiring vote of Stockholders
1. 2/3 of Outstanding Stock along with majority of the board:
a) Amendment of AI
b) Extending and Shortening Corporate Term
c) Increasing / Decreasing capital stock / bonded indebtedness
d) Sale or disposition of all, substantially all of corporate assets
e) Investment of corporate funds in another corporation or for a purpose other t
han main purpose
f) Issuance of stock dividends
g) Corporate mergers or consolidation
h) Voluntary dissolution of the corporation whether or not creditors are prejudi
ced
2. 2/3 of outstanding stocks
a) Removal of directors
b) Ratification of contract with director or officer where first two requisites
of sec 32 are lacking
c) Where stockholders of managed corporation own more than 1/3 of outstanding ca
pital stock entitled to vote of the managing corporation are also the majority o
f the board of managed corporation, such 2/3 vote is required to approve managem
ent contract
d) Delegation to the board to amend, repeal by-laws or adopt new by-laws
3. Majority of Outstanding stocks with majority of the board
a) Approval of management contract
b) Amendment to by-laws, repeal of by-laws, adoption of new by-laws
4. Majority of outstanding stock
a) For quorum in electing members of the board by cumulative voting
b) Grant of compensation to members of the board
c) Adoption of original by-laws
d) Revocation of delegated authority to the board of directors to amend or repea
l or adopt new by-laws
5. The right to vote of non-voting stockholders may be limited or broadened to t
he extent specified in the AI or by-laws, however, they may still vote in instan
ces specified in the code.
C. Voting
* The right to vote is significant because it is the only way that a stockholde
r can have a voice in the management of corporate affairs
1. Pledgors, mortagors, executors, receivers and administrators (Section 55)
* In case of pledged or mortgaged shares in stock corporations, the pledgor or m
ortgagor shall have the right to attend and vote at meetings of stockholders
* UNLESS, the pledgee or mortgagee is expressly given by the pledgor or mortgago
r such right in writing which is recorded on the appropriate corporate books.
* Executors, administrators, receivers, and other legal representatives duly app
ointed by the court may attend and vote in behalf of the stockholders or members
without need of any written proxy.
2. Joint owner of stocks (Section 56)
* The consent of all the co-owners shall be necessary in order to vote, UNLESS t
here is a written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares PROVIDED, That when the s
hares are owned in an "and/or" capacity by the holders thereof, any one of the j
oint owners can vote said shares or appoint a proxy therefor.
3. Treasury shares (Section 9 and Section 57)
* These are shares of stock which have been issued and fully paid for but subseq
uently re-acquired 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 BOD.
* Treasury shares shall have no voting right as long as such shares remain in th
e Treasury.
4. Proxies (Section 58)
* Stockholders and members may vote in person or by proxy in all meetings of sto
ckholders or members.
* Requirements of proxies:
a) in writing (oral proxies are not valid)
b) signed by the stockholder or member
c) 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 lo
nger than five (5) years at any one time (continuing proxy).
* Meaning of proxy:
a) Person duly authorized by stockholder or member to vote in his behalf in a st
ockholders or members meeting. Proxy is an agent for a special purpose thus the
general rules of agency would normally apply to the relationship created by pro
xy
b) Formal authority given by the holder of the stock who has the right to vote i
t to another to exercise the voting rights of the former
c) Instrument or document which evidences the authority of the agent
* Failure to comply with requirements will render proxy void and ineffective.
* Proxy is revocable even when it is expressly provided to be irrevocable unless
it is coupled with an interest
* Revocation may be made orally, in writing or implied:
a) appearance of the stockholder at the meeting will terminate the proxy
b) death of the stockholder will also terminate the proxy
5. Voting trust (Section 59)
* Definition: An arrangement created by one or more stockholders for the purpose
of conferring upon a trustee or trustees the right to vote and other rights per
taining to the shares for a period not exceeding five (5) years at any time. Th
e arrangement is embodied in a document called a voting trust agreement (VTA)
* A voting trust which is specifically required as a condition in a loan agreeme
nt may be for a period exceeding five (5) years but shall automatically expire u
pon full payment of the loan.
* Requirements of a VTA:
a) in writing
b) notarized
c) shall specify the terms and conditions thereof
d) certified copy of such agreement shall be filed with the corporation and with
the SEC
o OTHERWISE, said agreement is ineffective and unenforceable
* Procedure:
a) The certificate or certificates of stock covered by the voting trust agreemen
t shall be cancelled and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said agreement.
b) In the books of the corporation, it shall be noted that the transfer in the n
ame of the trustee or trustees is made pursuant to said voting trust agreement.
c) The trustee or trustees shall execute and deliver to the transferors voting t
rust certificates, which shall be transferable in the same manner and with the s
ame effect as certificates of stock.
* Right to inspect VTA: The voting trust agreement filed with the corporation sh
all be subject to examination by any stockholder in the same manner as any other
corporate book or record. The transferor and the trustee or trustees may exerci
se the right of inspection of all corporate books and records in accordance with
the provisions of this Code.
* Any other stockholder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and thereupo
n shall be bound by all the provisions of said agreement.
* Restriction: No voting trust agreement shall be entered into for the purpose o
f circumventing the law against monopolies and illegal combinations in restraint
of trade or used for purposes of fraud.
* Automatic expiration of rights under the VTA: Unless expressly renewed, all ri
ghts granted in a voting trust agreement shall automatically expire at the end o
f the agreed period. The voting trust certificates as well as the certificates o
f stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors.
* The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
* Purpose to make possible a unified control of the affairs of the corporation a
nd consistent policy; to make possible for a majority group of shareholders to d
ispose of a beneficial interest in a large proportion of their shares and still
retain control of the corporation through the voting trustee
* Requirements for a valid voting trust agreement:
a) in writing and notarized
b) certified copy must be filed with the corporation as well as with SEC
c) must not be for a period longer than 5 years although may be renewed each tim
e for not more than 5 years
d) certificates of stock must be cancelled, new ones issued to trustee stating t
herein that they were issued pursuance of the voting trust agreement
e) entered on the corporate books with a similar statement
f) should not be for an illegal purpose
* Status of transferee and transferor:
a) voting trustee is only a share owner vested with apparent legal title for the
sole purpose of voting upon stocks that he does not own
b) transferring stockholder retains the right of inspection of corporate books w
hich he can exercise concurrently with the voting trustee
* Powers and rights of voting trustees:
a) right to vote and other rights pertaining to the shares in their names subjec
t to terms and conditions of and for the period specified in the agreement
b) vote in person or by proxy unless agreement provides otherwise
c) rights of inspection of corporate books and records
d) legal title holder qualified to be a director
* Limitations on voting trust agreements:
a) should not exceed 5 years except if a condition in a loan agreement, shall au
tomatically expire upon full payment of the loan
b) must not be for purposes of circumventing the law against monopolies and ille
gal combinations in restraint of trade
c) must not be used for purposes of fraud
d) must be in writing, notarized, specify the terms and conditions thereof
e) certified copy must be filed with corporation and SEC otherwise unenforceable
f) agreement is subject to examination by stockholder
g) shall automatically expire at the end of the agreed period
h) vote in person or by proxy unless agreement provides otherwise
i) rights of inspection of corporate books and records
* Distinction between proxy and voting trust
6.
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* Agreement between 2 or more stockholders to vote their shares in the same way
* Usually relate to election of directors
* Parties often provide for arbitration in case of disagreement
* Valid as long as they do not limit the discretion of the BOD in the management
of corporate affairs or work any fraud against stockholders not party to the co
ntract
* Does not involve a transfer of stocks but is merely a private agreement
* Agreements by stockholders (Sec 100):
o Agreements by and among stockholders executed before the formation and organiz
ation of a close corporation, signed by all stockholders, shall survive the inco
rporation 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 a
greements 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.
o 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 h
eld by them shall be voted as therein provided, or as they may agree, or as dete
rmined in accordance with a procedure agreed upon by them.
o 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.
o A written agreement among some or all of the stockholders in a close corporati
on shall not be invalidated on the ground that it so relates to the conduct of t
he 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 sh
all impose on the stockholders who are parties thereto the liabilities for manag
erial acts imposed by this Code on directors.
o 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 s
hall be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporat
ion has obtained reasonably adequate liability insurance.
7. Non-voting shares (Section 6 )
* No other shares may be deprived the right to vote except preferred or redeemab
le shares
* Sec usually requires preferred stocks to be given the right to vote if dividen
ds were not declared for 3 consecutive years
* Shares which has, generally, no voting rights; except in the following circums
tances:
a) Amendment of the AOI
b) Adoption and amendment of by-laws
c) Sale, lease, exchange, other disposition of all or substantially all of the c
orporate property
d) Incurring, creating or increasing bonded indebtedness
e) Increase or decrease of capital stock
f) Merger and consolidation
g) Investment of corporate funds in another corporation or business
h) Dissolution of the corporation
8. ITF shares in trust for
9. And/or shares (Section 56)
* 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.
D. Appraisal right
1. Definition (Section 81)
* This is a remedy available to a stockholder who dissented and voted against ce
rtain extraordinary matters to withdraw or get out of the corporation by demandi
ng payment of the value of his shares
2. Instances of appraisal right (Section 81)
a) In case any amendment to the articles of incorporation which has the effect o
f:
b) changing or restricting the rights of any stockholder or class of shares, or
c) authorizing preferences in any respect superior to those of outstanding share
s of any class, or
d) extending or shortening the term of corporate existence
e) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposi
tion of all or substantially all of the corporate property and assets as provide
d in the Code; and
f) In case of merger or consolidation
g) Extension or shortening of the term of the corporation (Section 37)
h) In case of investment of corporate funds in another corporation or business o
r for any other purpose (Section 42)
3. What are the requirements for the successful exercise of appraisal right? (S
ection 82 and 86)
* By making a written demand on the corporation within thirty (30) days after th
e date on which the vote was taken for payment of the fair value of his shares
o Failure to make the demand within such period shall be deemed a waiver of the
appraisal right.
* By surrendering the certificate or certificates of stock, the corporation shal
l pay the fair value thereof as of the day prior to the date on which the vote w
as taken, excluding any appreciation or depreciation in anticipation of such cor
porate action.
* If within a period of sixty (60) days from the date the corporate action was a
pproved by the stockholders, the withdrawing stockholder and the corporation can
not agree on the fair value of the shares, it shall be determined and appraised
by three (3) disinterested persons
o One of whom shall be named by the stockholder, another by the corporation, and
the third by the two thus chosen
* The findings of the majority of the appraisers shall be final
* The award shall be paid by the corporation within thirty (30) days after such
award is made
* No payment shall be made to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to cover such payment
* Upon payment by the corporation of the agreed or awarded price, the stockholde
r shall forthwith transfer his shares to the corporation.
4. Effect of demand and termination of right (Section 83)
* From the time of demand for payment of the fair value of a stockholder's share
s 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, inclu
ding voting and dividend rights, shall be suspended, EXCEPT the right of such st
ockholder to receive payment of the fair value thereof, PROVIDED, if the dissent
ing stockholder is not paid the value of his shares within 30 days after the awa
rd, his voting and dividend rights shall immediately be restored.
5. When right to payment ceases (Section 84)
* No demand for payment may be withdrawn unless the corporation consents thereto
.
* Instances when right to payment ceases:
a) If such demand for payment is withdrawn with the consent of the corporation
b) If the proposed corporate action is abandoned or rescinded by the corporation
c) If the proposed corporate action disapproved by the SEC where such approval i
s necessary,
d) If the SEC determines that such stockholder is not entitled to the appraisal
right
* In such instances, his status as a stockholder shall thereupon be restored, an
d all dividend distributions which would have accrued on his shares shall be pai
d to him.
6. Who bears costs of appraisal (Section 85)
* Generally, it shall be borne by the corporation
* Exception: by the stockholder, when the fair value ascertained by the appraise
rs is approximately the same as the price which the corporation may have offered
to pay the stockholder,
* In the case of an action to recover such fair value, all costs and expenses sh
all be assessed against the corporation, unless the refusal of the stockholder t
o receive payment was unjustified.
7. Notation on certificates; rights of transferee (Section 86)
* Within ten (10) days after demanding payment for his shares, a dissenting stoc
kholder shall submit the certificates of stock representing his shares to the co
rporation for notation thereon that such shares are dissenting shares.
* His failure to do so shall, at the option of the corporation, terminate his ri
ghts.
* Effect of transfer:
a) The rights of the transferor as a dissenting stockholder shall cease;
b) The transferee shall have all the rights of a regular stockholder; and
c) All dividend distributions which would have accrued on such shares shall be p
aid to the transferee.
E. Duty of controlling interest
* A majority stockholder is subject to the duty of good faith when he acts by vo
ting at a stockholders meeting with respect to a matter in which he has a persona
l interest
* Controlling stockholders may dispose of their shares at any time and at such p
rice as they choose provided they do not pervert these prerogatives by transferr
ing office to persons who are known as intending to raid the corporate treasury
or otherwise improperly benefit themselves.
* It is fraudulent for a stockholder to buy from another stockholder without dis
closing his identity
* Principal stockholders are likewise prohibited from using inside information i
n the purchase and sale of equity security
F. Derivative suits
* derivative suit suits of stockholders based on wrongful or fraudulent acts of
directors or other persons
* Nature and basis/distinguish from other suits:
a) individual suit if wrong done is personal to SH
b) class suit if wrong done is to a group of SH
c) derivative suit if wrong done is to the corporation itself
* In a derivative suit, the cause of action belongs to the corporation and not t
he stockholders but since the directors who are charged with mismanagement are t
he once who will decide who will sue then the corporation is left without redres
s hence SH is given the right to sue on behalf of the corporation
* Requirements:
a) The stockholder or member bringing the suit must have exhausted his remedies
within the corporation
b) The stockholder or member must have been one at the time the transaction or a
ct complained of took place, or in the case of a stockholder, the shares must ha
ve devolved upon him since by operation of law, unless such transaction or act c
ontinues and is injurious to the stockholder
c) Any benefit recovered by the stockholder or member as a result of bringing th
e suit, whether by final judgment, by judicial compromise or by extra-judicial s
ettlement, must be accounted for to the corporation, who is the real party in in
terest
d) If the suit is successful, the plaintiff is entitled to reimbursement from th
e corporation for the reasonable expenses of litigation, including attorney s fees
Evangelista v Santos
* The injury complained of is thus primarily to the corporation, so that the sui
t for the damages claimed should be by the corporation rather than by the stockh
olders
* But while it is to the corporation that the action should pertain in cases of
this nature, however, if the officers of the corporation, who are the ones calle
d upon to protect their rights, refuse to sue, or where a demand upon them to fi
le the necessary suit would be futile because they are the very ones to be sued
or because they hold the controlling interest in the corporation, then in that c
ase any of the stockholders is allowed to bring suit. But in that case, the cor
poration is the real party in interest.
Bitong v CA
* Bitong, allegedly for the benefit of Mr. & Ms. Co., Inc., filed a derivative s
uit to hold Eugenia and Jose Apostol liable for fraud, misrepresentation, disloy
alty, evident bad faith, conflict of interest, and mismanagement of the corporat
ion committed from 1983 to 1987
* Bitong alleged that she had been Treasurer and Member of Board of Directors, a
nd owner of 1000 shares of stock of the corporation, presenting the stock and tr
ansfer book reflecting that JAKA shares were transferred to her in 1983 and Cert
ificate No. 008 in her name
* Bitong cannot file derivative suit. She is not the owner of the shares of sto
ck during the time when the acts subject of the suit were committed (1983-1987)
because Certificate no 008, proof of said ownership, was signed by the president
only in 1989
a) Certificate of stock can be issued only upon compliance with certain requisit
es: (1) must be signed by president or vice, countersigned by secretary or assis
tant secretary, sealed with seal of corporation, (2) there must be delivery and
indorsement, (3) must be fully paid, (4) original certificate must be surrendere
d
b) A formal certificate of stock cannot be considered issued unless signed by pr
esident or vice-president and countersigned by secretary or assistant secretary
* The requirement under Sec 63 of the Corporation code must be mandatorily compl
ied with. Presumption of regularity cannot apply.
a) regularity and validity of transfer must be proved. There must be a valid del
ivery, endorsement, recording in the corporation s books.
b) Records are unclear on how Bitong acquired the shares of stock
c) Even the records on the stock and transfer book is highly doubtful, it being
in the possession of Bitong, the original being lost, and a possibility that eve
n the original was not registered at all with the SEC.
Gilda Lim v Patricia Lim-Yu
* The Board of LIMPAN approved a resolution making a partial payment to Gilda Li
m for the latter s legal services to be paid in shares of stock of the corporatio
n. Gilda ended up owning 62.5% of the corporation s shares of stock
* Patricia Lim-Yu filed an alleged derivative suit against the Board for the lat
ter s alleged violation of her pre-emptive right to the shares
* Gilda et al opposed on the ground of Patricia s lack of capacity to file a deriv
ative suit by reason of the ff:
a) a petition for guardianship filed by Gilda praying for the issuance of letter
s of guardianship over Patricia
b) in said action, a Temporary Restraining Order was issued by the court enjoini
ng Patricia from entering into actions, contracts or documents representing her
family or the corporation, particularly LIMPAN Investments
c) because of said TRO, Gilda contend that Patricia cant file a derivative suit
because a derivative suit is being filed in behalf of the corporation and such a
ction can t be done by Patricia
* Patricia may validly file derivative suit
* An action to enforce a pre-emptive right is being enforced on behalf and for t
he benefit of the shareholder and not the corporation hence is not a derivative
suit
a) Patricia was merely praying that she be allowed to subscribe to additional sh
ares of stock in proportion to her share holdings. She was therefore not acting
for the corporation but only in her own behalf out of the desire to protect and
preserve her preemptive right.
b) A TRO enjoining her to file any action for the corporation does not affect th
e present action which is only for and in her behalf
VI. BOARD OF DIRECTORS
A. Authority; Repository of corporate powers (Section 23)
* The board of directors or trustees are responsible for corporate policies and
general management of the business affairs of the corporation
* Unless otherwise provided in the Corporation Code, the Board of Directors cont
rol and exercise:
o the corporate powers of corporation
o all business conducted,
o all property of such corporation
* The board exercises almost all corporate powers, lays down all business polici
es and is responsible for the efficiency of management. The stockholders have n
o right to interfere with the board s exercise of its powers and functions except
where the law expressly gives them the final say, like in cases of removal of a
director, amendment of articles of incorporation, and other major changes. Thei
r resolutions on matters other than the exceptions are legally not effective nor
binding and may be treated as merely advisory or may be totally disregarded.
* Unless Otherwise Provided may pertain to instances where a management contract i
s entered hence corporate posers are exercised by the managing company and not t
he board
* The directors or trustees shall not act individually nor separately but as a
body in a lawful meeting. Contracts entered into without a formal board resolut
ion does not bind the corporation except when majority of the board has knowledg
e of the contract and the contract benefited the corporation.
* Directors owe their duties to corporation as a whole rather than to individual
shareholders of classes of shareholders
B. Requirements
* Qualifying share (Section 23)- Every director must own at least one (1) share
of the capital stock of the corporation of which he is a director, which share s
hall 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 corporatio
n of which he is a director shall thereby cease to be a director.
Lee v CA
* Summons was served upon Lee and Lacdao, president and vice president of ALFA
* The two, however contended that they are no longer corporate officers of the c
orporation because of the voting trust agreement executed to DBP hence not autho
rized to receive summons. Summons must be served upon DBP
* DBP however refused to receive the alias summons claiming it was not authorize
d because it has not yet taken over ALFA
* Motion for Declaration of proper service of summons filed by Sacoba
* Voting trust results from the separation of voting rights of a stockholder fro
m his other rights such as rights to receive dividends or inspect books of corpo
ration
* Criteria for a valid voting trust:
o Voting rights of the stock separate from other attributes of ownership
o Voting rights granted are intended to be irrevocable for a definite period of
time
o Principal purpose is to acquire voting control of the corporation
* Execution of a voting trust creates a dichotomy between equitable or beneficia
l ownership of the corporate shares of a stock holder and legal title thereto
* The change from the old code to the new code with respect to qualifying shares
of directors is the omission of the phrase in his own right pertaining to benefic
ial ownership of shares.
* In the new corpo code, persons may be directors if they are stockholders altho
ugh not in their own right hence includes trustees
* There is clear indication that to be a director, what is material is legal tit
le and not beneficial ownership
* With the execution of the voting trust agreement, Lee and Lacdao were divested
of their legal title to their shares hence can no longer be directors and are n
o longer corporate officers.
* Because of this, they are not authorized to receive summons
* Requirements/Disqualifications:
o Residence (Section 23) - a majority of the directors or trustees of all corpor
ations organized under this Code must be residents of the Philippines
o Nationality no requirement for citizenship of a director or trustee so even an
alien may be elected as such excepts in business activities totally closed to a
liens
o Disqualification of directors, trustees or officers (Section 27):
* Convicted by final judgment of an offense punishable by imprisonment for a per
iod exceeding six (6) years, or
* Violation of this Code committed within five (5) years prior to the date of hi
s election or appointment
* By laws may provide for additional qualifications/disqualifications as long as
such additional qualifications/disqualifications shall not modify requirements
as prescribed in the corporation code or be in conflict with such prescribed req
uirements
* Term:
o Directors shall hold office for 1 year. However, incumbent directors shall co
ntinue to be directors/trustees as long as their successors have not been electe
d and qualified (Section 23)
C. How elected (Section 24)
* Manner of election:
o There must be present in person or by representative majority of the outstandi
ng capital stock / member
o In any form; or must be by ballot when requested by any voting stock holder o
r member
o Voting may be in person or by proxy
* At all elections of directors or trustees, there must be present owners of a m
ajority of the outstanding capital stock, or if there be no capital stock, a maj
ority of the members entitled to vote.
* Every stockholder entitled to vote shall have the right to vote the number of
shares of stock standing, at the time fixed in the by-laws, in his own name on t
he stock books of the corporation, or where the by-laws are silent, at the time
of the election
* Time to determine voting right
o As per share standing in one s name at the time fixed by the By-Laws
o Where By-laws silent, at time of election
* Cumulative voting A system of voting designed to increase he voting power of m
inority stockholders in the election of corporate directors when more than one d
irector is to be elected.
o A stockholder shall have as many votes as he has number of shares times the nu
mber of directors up for election
o Cumulative voting is allowed for election of members of the Board in a stock c
orporation. Members of the Board in a Non-stock Corporation shall not be voted
cumulatively unless specifically provided for in the By-laws.
o The total number of votes cast by a stockholder 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
o Gives the minority an opportunity to elect a representative to the board of di
rectors. Cannot itself give the minority control of corporate affairs but may a
ffect and limit the extent of majority s control
o By-laws cannot provide against cumulative voting since this right is mandated
in Sec 24
o No delinquent stock shall be voted
* Non-stock corporation:
o 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 th
ere are trustees to be elected but may not cast more than one vote for one candi
date.
o Candidates receiving the highest number of votes shall be declared elected.
o 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 ma
jority of the member entitled to vote.
o Since the provision requires presence, meeting of stockholders is required
D. How removed (Section 28)
* Any director or trustee of a corporation may be removed from office by a vote
of the stockholders holding or representing 2/3 of the outstanding capital stock
, or if the corporation be a Non-stock Corporation, by a vote of 2/3 of the memb
ers entitled to vote (with or without cause).
* Note: Such removal shall take place either at a regular meeting or at a specia
l meeting call for the purpose of removal of Directors or Trustees, with previou
s notice of the time and place of such meeting, as well as the intention to prop
ose such removal. If the officers refuse to call a meeting to consider the remo
val of the Director, it may be called at the instance of any stockholder or memb
er, but with due notice.
* A director elected because of the vote of minority stockholders who united in
cumulative voting cannot be removed without cause
* The board cannot remove a director or trustee as member of the board
E. How vacancy filled (Section 29)
* Any vacancy occurring in the Board of Directors or Trustees other than by remo
val by the stockholders or members or by expiration of terms may be filled:
o If still constituting quorum, by the vote of at least a majority of the remain
ing directors or trustees
o Otherwise, said vacancies must be filled by the stockholders in a regular or s
pecial meeting called for that purpose. A director or trustee so elected to fil
l a vacancy shall be elected only for the unexpired term of his predecessor in o
ffice.
F. Report of election of directors, trustees, & officers (Section 26)
* Within 30 days after the election of the directors, trustees, and officers of
the corporation; the Secretary or any other officer of the corporation shall sub
mit to the SEC, the names, nationalities, and residences of the directors, trust
ees, and officers elected.
* 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 immedia
tely report such fact to the SEC.
G. How compensated (Section 30)
* In the absence of any provision in the By-laws fixing their compensation, the
directors shall not receive any compensation, except for reasonable per diems.
* Any such compensation (other than per diems) may be granted to the directors b
y the vote of the stockholders representing at least a majority of the outstandi
ng capital stock at a regular or special stockholder s meeting.
* Limit: In no case shall the total yearly compensation of directors, as such
directors, exceed 10% of the net income before income tax of the corporation du
ring the preceding year.
Western Institute of Technology v Salas
* In a meeting of the Board of Trustees of Western Institute of Technology, Reso
lution was passed granting monthly compensation to officers respondents who are
members of the Board valid?
* Respondents are entitled to compensation because they are not just directors b
ut officers as well. The prohibition under Sec 30 does not apply to them
H. Matters requiring Board of Directors action (vote by majority of the board)
1. Amendment of AI
2. Extending and Shortening Corporate Term
3. Increasing / Decreasing capital stock / bonded indebtedness
4. Sale or disposition of all, substantially all of corporate assets
5. Investment of corporate funds in another corporation or for a purpose other t
han main purpose
6. Issuance of stock dividends
7. Corporate mergers or consolidation
8. Voluntary dissolution of the corporation whether or not creditors are prejudi
ced
9. Approval of management contract
10. Amendment to by-laws, repeal of by-laws, adoption of new by-laws
11. Declare cash dividends
I. Liability of Board of Directors
1. In General (Section 31)
* Directors or trustees shall be liable solidarily for all damages resulting the
refrom suffered by the corporation, its stockholders, or members and other perso
ns when:
o They willfully and knowingly vote for or assent to patently unlawful acts of t
he corporation or who are guilty of gross negligence or bad faith in directing t
he affairs of the corporation.
o They acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees.
* Three fold duty of directors to the corporation:
o Diligence
o Loyalty
o Obedience
* What are required and expected of directors:
o To posses at least ordinary knowledge and skill to enable them to make sound b
usiness decision
o To attend directors meetings with reasonable regularity
o To exercise reasonable care in the management of the corporation
o To keep themselves sufficiently informed about the general condition of the bu
siness
* Causes of director s liability:
o Knowing authorization of wrongful acts
o Negligence
o Conflict of interest
* Extent of Liability: All damages resulting from knowing authorization of wrong
ful acts, negligence and conflict of interest suffered by the corporation, its s
tockholders, and other persons
* The degree of care and diligence required is usually that which men prompted b
y self-interest, generally exercise in their own affairs. In determining whethe
r reasonable diligence has been exercised, the particular circumstances of each
case must be considered. The nature of the business is an important factor.
2. Business judgment rule
* Board of Directors has authority to modify the proposed terms of the contracts
of the corporation for the purpose of making the terms more acceptable to the o
ther contracting parties The test to be applied is whether the act in question is
the direct and immediate furtherance of the corporation s business, fairly inciden
tal to the express powers and reasonably necessary to their exercise. If so, th
e corporation has the power to do it; otherwise not. [Montelibano v. Bacolod Mu
rcia Milling Co.]
3. Self-dealing director (Section 32)
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 followin
g conditions are present:
o That the presence of such director or trustee in the board meeting in which th
e contract was approved was not necessary to constitute a quorum for such meetin
g;
o That the vote of such director or trustee was nor necessary for the approval o
f the contract;
o That the contract is fair and reasonable under the circumstances; and
o 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 membe
rs in a meeting called for the purpose
* Full disclosure of the adverse interest of the directors or trustees involved
must be made at such meeting
* The contract is voidable whether the corporation suffered damages or not
* The burden of proving fairness is on the director
4. Contracts between the corporations with interlocking directors (Section 33)
* A contract between two or more corporations having interlocking directors shal
l not be invalidated on that ground alone, except cases of fraud.
* The contract is fair and reasonable under the circumstances.
* 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 latt
er corporation or corporations are concerned.
* Stockholdings exceeding twenty (20%) percent of the outstanding capital stock
shall be considered substantial for purposes of interlocking directors.
* Requisites of a valid contract between the corporation and one or more of its
directors, trustees or officers:
o That the presence of such director or trustee in the Board meeting in which th
e contract was approved was not necessary to constitute a quorum for such meetin
g
o That the vote of such director or trustee was not necessary for the approval o
f the contract
o That the contract is fair and reasonable under the circumstances
o That in case of an officer, the contract with the officer has been previously
authorized by the Board of Directors
5. Disloyalty (Section 34)
* Where a director, by virtue of his office, acquires for himself a business opp
ortunity which should belong to the corporation, thereby obtaining profits to th
e prejudice of such corporation, he must account to the latter for all such prof
its by refunding the same
* UNLESS his act has been ratified by a vote of the stockholders owning or repre
senting 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.
* Doctrine of corporate opportunity - When a director, trustee or officer attemp
ts 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 confidenc
e, as to which equity imposes a liability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profi
ts which otherwise would have accrued to the corporation.
* The last paragraph of Section 31 and Section 34 contain the doctrine of corpor
ate opportunity. In case of such conflict of interests, and the director acts a
gainst the good of the corporation, he shall be accountable for the profits he o
btained, even if he had risked his own funds.
6. Use of inside information
* The fiduciary position of insiders, directors, and officers prohibits them fro
m using confidential information relating to the business of the corporation to
benefit themselves or any competitor corporation in which they may have a mere s
ubstantial interest.
* The liability of a director or officer guilty of using inside information is t
o the corporation and not to any individual stockholder
* Since loss and prejudice to the corporation is not a requirement for liability
, the corporation has a cause of action as long as there is unfair use of inside
information
* It is inside information if it is not generally available to others and is acq
uired because of the close relationship of the director or officer of the corpor
ation
* General rule: (Majority view) Directors owe no fiduciary duty to stockholders
but they may deal with them at arm s length. No duty to disclose facts known to t
he director or officer
* Special facts doctrine Conceding the absence of a fiduciary relationship in th
e ordinary case, courts nevertheless hold that where special circumstances or fa
cts are present which make it inequitable for the director to withhold informati
on from the stockholder, the duty to disclose arises and concealment is fraud.
7. Issuance of watered stock (Section 65)
* Liability of directors for watered stocks: Shall be solidarily liable with th
e 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.
8. Seizing corporate opportunity
* A director has a duty to refrain from usurping a business opportunity rightly
belonging to the corporation. In case of breach of this obligation, he has a du
ty to account to the corporation all profits received by him (Section 34)
* UNLESS, his act has been ratified by a vote of the stockholders owning or repr
esenting at least 2/3 of the outstanding capital stock
* Officers can be held liable under (Section 31)
J. Remedies in case of mismanagement
* Receivership
* Injunction if the act has not been done
* Dissolution if the abuse amounts to a ground for quo warranto but the Solicito
r General refuses to act
* Derivative suit a complaint filed with the SEC
Uichico, et al. vs. NLRC:
* The petitioners, who are officers and directors of Crispa, Inc., assailed the
decision of the NLRC holding them solidarily liable with Crispa for the payment
of separation pay and backwages to the private respondents. It was the contentio
n of the petitioners that the award of separation pay and backwages is a corpora
te obligation and must therefore be assumed by Crispa alone.
* While the general rule is that obligations incurred by a corporation, acting t
hrough its directors, officers and employees, are its sole liabilities, there ar
e times when solidary liabilities may be incurred such as in this case where it
is undisputed that petitioners had a direct hand in the illegal dismissal of res
pondent employees. They were the ones, who as high-ranking officers and director
s of Crispa, signed he Board resolution retrenching the private respondents on t
he feigned ground of serious business losses that had no basis apart from an uns
igned and unaudited profit and loss statement which had no evidentiary value wha
tsoever. This is indicative of bad faith on the part of petitioners for which th
ey can be held jointly and severally liable with Crispa for all the money claims
of the illegally terminated respondent employees.
Tramat Mercantile, Inc. vs. CA:
* Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only wh
en:
* He assents (a) to a patently unlawful act of the corporation, or (b) for bad f
aith or gross negligence in directing its affairs, or (c) for conflict of intere
st, resulting in damages to the corporation, its stockholders or other persons;
* He consents to the issuance of watered stocks or who, having knowledge thereo
f, does not forthwith file with the corporate secretary his written objection th
ereto;
* He agrees to hold himself personally and soidarily liable with the corporation
; or
* He is made, by a specific provision of law, to personally answer for his corpo
rate action.
K. Executive committee (Section 35)
* The by-laws of a corporation may create an executive committee, composed of no
t 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:
o approval of any action for which shareholders' approval is also required;
o the filing of vacancies in the board;
o the amendment or repeal of by-laws or the adoption of new by-laws;
o the amendment or repeal of any resolution of the board which by its express te
rms is not so amendable or repealable; and
o a distribution of cash dividends to the shareholders.
* Cannot go as far as to render the bond powerless and free from all responsibil
ities imposed on it by law
* Must be provided in the by laws, composed of not less than 3 members of the bo
ard
* Essential the executive committee acts by majority vote of all the members
VII. OFFICERS
A. Corporate officers
* The officers execute the polices laid down by the board but in practice have w
ide latitude in determining the course of business operations
1. Minimum set of officers and Qualification (Section 25)
* Immediately after their election, the directors of a corporation must formally
organize the election of:
a. A president, who shall be a director
b. A treasurer who may or may not be a director
c. A secretary who shall be a resident and citizen of the Philippines, and
d. 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, exc
ept that no one shall act as president and secretary or as president and treasur
er at the same time.
2. Disqualifications (Section 27)
* 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 wit
hin five (5) years prior to the date of his election or appointment, shall quali
fy as a director, trustee or officer of any corporation.
3. Liability in general (Section 31)
* When a director, trustee or officer attempts to acquire or acquires, in violat
ion of his duty, any interest adverse to the corporation in respect of any matte
r which has been reposed in him in confidence, as to which equity imposes a disa
bility upon him to deal in his own behalf, he shall be liable as a trustee for t
he corporation and must account for the profits which otherwise would have accru
ed to the corporation.
4. Dealings with corporation (Section 32)
* 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 followi
ng conditions are present:
o That the presence of such director or trustee in the board meeting in which th
e contract was approved was not necessary to constitute a quorum for such meetin
g;
o That the vote of such director or trustee was nor necessary for the approval o
f the contract;
o That the contract is fair and reasonable under the circumstances; and
o 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 membe
rs in a meeting called for the purpose
* Provided, That full disclosure of the adverse interest of the directors or tru
stees involved is made at such meeting: Provided, however, That the contract is
fair and reasonable under the circumstances.
B. Coverage of corporate officer
* Ongkingco v. NLRC - where the By-laws of the condominium corporation specifical
ly includes the position of Superintendent/Administrator in a roster of corporate
officers, then such position is clearly a corporate officer position and issues
of reinstatement would be within the jurisdiction of the SEC and not the NLRC.
* Tabaug v. NLRC - When the By-laws of the corporation provide that one of the po
wers of the BoTrustees is to appoint a Medical Director, Comptroller/Administrati
on, Chief of Services, and such other officers as it may deem necessary and pres
cribe their powers and duties then such specifically designated positions should
be considered corporate officers positions .
C. Authority of corporate officers
* The authority of corporate officers to bind the corporation is usually not con
sidered inherent in their office but is derived from law, the corporate by-laws
or by delegation from the board either expressly or impliedly by habit, custom,
or acquiescence in the general course of business
* Gen rule: A person dealing with a corporate officer is put on inquiry as to th
e scope of the latter s authority but an innocent person cannot be prejudiced if h
e had the right to presume under the circumstances the authority of the acting o
fficers.
* President no inherent powers by virtue of his office but acts done in the ordi
nary course of business is presumably within the scope of his authority unless t
he contrary is proven. In many instances, he is impliedly vested with corporate
powers through long acquiescence. His acts may be subsequently ratified and th
e corporation may be bound. He cannot be secretary and treasurer at the same ti
me
* Vice President no inherent power. Takes over when the president is absent
* Secretary duties are ministerial. Cannot bind the corporation unless authorize
d or named manager
* Treasurer entrusted with authority to receive and keep funds and to disburse t
hem as he may be authorized. Powers are limited; cannot bind the corporation un
less authorized.
* General manager takes care of the day to day affairs of the corporation. Powe
rs are limited to implementing the policies laid down by the board and perform
such acts and enter into such contracts which are within the usual course of bus
iness unless the board has given a broader authority. Even if act is not within
the usual course of business, if the board hd acquiesced in the past to similar
acts, his subsequent acts must be deemed within his implied authority. A third
person has the right to presume that GM had authority to perform acts in ordina
ry course of business
* Other agent the corporation may employ such other persons as may be necessary
to carry on the business
People s Aircargo vs. CA
* Corporate President Punsalan solicited a proposal from respondent Sano for the
preparation of a feasibility study. This was accepted
* Sano prepared feasibility study and was paid for it
* Another proposal for the preparation of operations manual was solicited from
Sano and was accepted by Punsalan
* Manual was prepared and approved by Commissioner of Bureau of Customs, seminar
-workshops conducted but payment was not made
o Corporation liable to Sano for services rendered
o General rule is that absent the authority from the Board of Directors, no pers
on, not even its officers, can bind the corporation
o However, acts of person in behalf of the corporation may be ratified.
o When corporation previously allowed First Contract, it gave president apparent
authority to execute in its behalf the other contract, and is estopped from den
ying such authority
* Corporation accepted operations manual and the seminars and have already benef
ited from the contract. This ratifies the act of the president and makes it bin
ding upon the corporation
* President is presumed to have authority to act within the domain of the genera
l objectives of the corporation
Rural Bank of Milaor v Ocfemia
* 5 parcels of land were sold to the parents of Marife Nino by Rural Bank of Mil
aor. This was evidenced by a deed of sale.
* Title to said parcels of land had not been transferred to the name of the pare
nts of Nino because the Deed of Sales is not registered with the Registry of Dee
ds.
* The Registry of deeds required that the Bank pass a board resolution authorizi
ng the sale.
* Nino went to Bank to ask for a Board Resolution so that title to lands can be
transferred to them so she can mortgage said land
* Bank refused to issue such Board Resolution contending among others that Tena,
the bank manager who signed the Deed of Sale is not authorized
* Nino filed Petition for Mandamus
* Bank acknowledged the authority of Fe Tena to enter into binding contracts
* When the Deed of Sale was executed, Nino, et al lived on said parcels of land.
If Bank believed it has title to property, it should have prevented Nino et al
from living there.
o When acts have been approved by directors as a matter of general practice, cus
tom, and policy, the general manager may bind the company without formal authori
zation of the board of directors
o Bank is estopped from questioning authority of Bank manager. It has authorize
d Tena to enter into the Deed of Sale
Baguio vs. CA, 226 SCRA 366 (1993)
* The Corporation Code does not require that one elected or appointed as vice-pr
esident of a corporation should be the owner of shares of stock of the corporat
ion.
VIII. MEETINGS OF STOCKHOLDERS AND DIRECTORS
A. Kinds (Section 49)
* Meetings of directors, trustees, stockholders, or members may be
o regular
o special
B. When and where held? (Sections 50, 51, and 53)
* Meetings of Stockholders (Section 50)
o Stockholders action is needed in major changes in the corporation which would
affect their contract with the corporation and although such action is usually i
nitiated by the board, it is not sufficient to give them effect. Stockholders o
r members approval expressed in a meeting duly called and held for the purpose i
s still necessary. Exceptions:
* Sec 16 any corporation may amend its AI by majority vote of BOD or written ass
ent of 2/3 of the stockholders
* Corporations may be bound by unanimous agreement of its stockholders although
expressed elsewhere than at a meeting
o Regular meetings of stockholders or members shall be held annually on a date f
ixed in the by-laws, or if not so fixed, on any date in April of every year as d
etermined by the board of directors or trustees
o When there is no person authorized to call a meeting, the Secretaries and Exch
ange Commission, upon petition of a stockholder or member on a showing of good c
ause therefor, may issue an order to the petitioning stockholder or member direc
ting him to call a meeting of the corporation by giving proper notice required b
y this Code or by the by-laws.
o The petitioning stockholder or member shall preside thereat until at least a m
ajority of the stockholders or members present have been chosen one of their num
ber as presiding officer.
o Place and time of meetings of stockholders of members - Stockholder's or membe
r's meetings, whether regular or special, shall be held in the city or municipal
ity where the principal office of the corporation is located, and if practicable
in the principal office of the corporation: Provided, That Metro Manila shall,
for purposes of this section, be considered a city or municipality.
o Members of non-stock corporations may provide in by-laws that meetings may be
held any place even outside the place where the principal office is located prov
ided proper notice is sent and that it is within the Philippines
o All proceedings had and any business transacted at any meeting of the stockhol
ders or members, if within the powers or authority of the corporation, shall be
valid even if the meeting be improperly held or called, provided all the stockho
lders or members of the corporation are present or duly represented at the meeti
ng. (Sec 51)
* Meetings of Directors or trustees (Section 51)
o Regular meetings of directors or trustees shall be held monthly, unless the b
y-laws provide otherwise.
o Special meetings of the board of directors or trustees may be held at any time
upon the call of the president or as provided in the by-laws.
o Meetings of directors or trustees of corporations may be held anywhere in or o
utside of the Philippines, unless the by-laws provide otherwise.
o Requisites of board meetings
* Meeting of the Board duly assembled
* Existence of quorum (majority of the board members) and
* Decision of the majority of the quorum duly assembled
o Note: Directors in Board meetings cannot be represented or voted by proxies.
C. Noticed required (Section 50 and 53)
* Meetings of Stockholders/Members
o Written notice of regular meetings shall be sent to all stockholders or member
s of record at least two (2) weeks prior to the meeting, unless a different peri
od is required by the by-laws
o Written notice of special meetings shall be sent at least one (1) week prior
to the meeting, unless otherwise provided in the by-laws.
o Notice of any meeting may be waived, expressly or impliedly, by any stockholde
r or member
o Failure to give notice would render a meeting voidable.
o Attendance to a meeting despite want of notice will be deemed implied waiver
* Meetings of Directors or trustees (Section 51)
o Notice of regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least one (1) day prior to
the scheduled meeting, unless otherwise provided by the by-laws.
o A director or trustee may waive this requirement, either expressly or impliedl
y
D. Quorum required (Section 25 and 52)
* Meeting of directors or trustees and officers (Section 25)
o Unless the articles of incorporation or the by-laws provide for a greater majo
rity, 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 bus
iness, and every decision of at least a majority of the directors or trustees pr
esent at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority
of all the members of the board.
* Meeting of stockholders (Section 52)
o Unless otherwise provided for in this Code or in the by-laws, a quorum shall c
onsist of the stockholders representing a majority of the outstanding capital st
ock or a majority of the members in the case of non-stock corporations.
o Bylaws may provide for a greater or lesser quorum
o Where quorum is present at the start of a lawful meeting, stockholders present
cannot without justifiable cause break the quorum by walking out from said meet
ing so as to defeat the validity of any act proposed and approved by the majorit
y
E. Who presides (Section 54)
* The president shall preside at all meetings of the directors or trustee as wel
l as of the stockholders or members, unless the by-laws provide otherwise.
* When there is no person authorized to call a meeting, the Secretaries and Exch
ange Commission, upon petition of a stockholder or member on a showing of good c
ause therefor, may issue an order to the petitioning stockholder or member direc
ting him to call a meeting of the corporation by giving proper notice required b
y this Code or by the by-laws.
* The petitioning stockholder or member shall preside thereat until at least a m
ajority of the stockholders or members present have been chosen one of their num
ber as presiding officer.
F. Who could attend and vote? (Section 25 and 58)
* Stockholder in person
* Proxies:
o Stockholders and members may vote in person or by proxy in all meetings of sto
ckholders or members.
o Proxies shall in writing, signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary. Unless otherwise provided i
n 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 a
ny one time.
o Directors or trustees cannot attend or vote by proxy at board meetings.
G. Required attendance at meeting for election
* Stock corporation - majority of outstanding capital stock
* Non-stock corporation - majority of members entitled to vote
IX. BOOKS AND RECORDS
A. What books and records must a corporation keep? (Section 74)
* Every corporation shall keep and carefully preserve at its principal office:
o Record of all business transactions
o Minutes of all meetings of stockholders or members, or of the board of directo
rs or trustees which state the:
* Time and place of holding the meeting
* How authorized
* Notice given
* Whether the meeting was regular or special, if special its object,
* Those present and absent
* Every act done or ordered done at the meeting
* Time when any director, trustee, stockholder or member entered or left the mee
ting must be noted in the minutes;
* Yeas and nays must be taken on any motion or proposition
* Protest of any director, trustee, stockholder or member on any action or propo
sed action must be recorded in full on his demand
o Stock and transfer book
* Names of the stockholders alphabetically arranged
* Installments paid and unpaid on all stock for which subscription has been made
* Date of payment of any installment
* Statement of every alienation, sale or transfer of stock made, the date thereo
f, and by and to whom made
* Such other entries as the by-laws may prescribe
o Record of all business transactions include:
* book of inventories
* journal
* ledger
* book for copies of letters and telegrams
* fianancial statements
* ITR s
* vouchers & receipts
* contracts
* VTAs
B. Custody of Books and records
Torres et al v CA
* Judge Torres, majority stockholder of Tomil, assigned one share each to Tobias
, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the
nature of qualifying shares so the latter would be eligible to be directors of t
he Corporation
* At the back of the stock certificates, it is stated that; the present certifica
te, conformably to the purpose and intention of the deed of assignment is not he
ld by me under any claim of ownership and I acknowledge that I hold the same as
mere Trustee of Judge Torres and for the sole purpose of qualifying me as direct
or
* The five were elected directors of the corporation
* Respondents complained with SEC praying that election of 5 petitioners be annu
lled because they are not legitimate owners of shares of stock and transfer to t
hem violated minority stockholders right of pre-emption and it was not registere
d by the corporate secretary
* Petitioners claim that transfer is valid because Judge Torres himself recorde
d such in the stock and transfer book of the corporation
* Recording in stock and transfer book not valid
* Corporate Secretary is the custodian of corporate records, keeps the stock and
transfer book and make entries therein.
* Stock and transfer book of Tormil, however, was not kept by Corporate Secretar
y but by respondent Judge Torres
* Stock Transfer book was not kept at principal office but at the residence of J
udge Torres in contravention with provisions
* Because of the above, entries made by Judge Torres are not valid. Pabalan and
Co. cannot be considered stockholders
C. Right of Inspection (Section 74)
* 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
o At reasonable hours on business days
o He may demand, writing, for a copy of excerpts from said records or minutes, a
t his expense
* The stock and transfer book shall be kept in the principal office of the corpo
ration or in the office of its stock transfer agent and shall be open for inspec
tion by any director or stockholder of the corporation at reasonable hours on bu
siness days.
* 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 excerpt
s from its records or minutes, in accordance with the provisions of this Code, s
hall 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 Sect
ion 144 of this Code (Penalties for violation of the Code).
* If such refusal is made pursuant to a resolution or order of the board of dire
ctors or trustees, the liability under this section for such action shall be imp
osed upon the directors or trustees who voted for such refusal
* It shall be a defense to any action that the person demanding to examine and c
opy has improperly used any information secured through any prior examination of
the records, or is not acting in good faith or for a legitimate purpose in maki
ng his demand
* Inspection should be made in a manner so as not to impede the efficient operat
ions of a corporation. SH cannot demand that he be allowed to take corporate bo
oks out of the corporation s principal office of inspection.
* Stockholder s purpose for inspecting the books is material:
o His purpose is presumed to be a proper one
o The burden of proving that the purpose is improper or illegal is thus on the c
orporation and its officers
o A legitimate purpose is described as one which is germane to the in interests
of the stockholder as such and is not contrary to the interests of the corporati
on
o Purpose must not be inimical to corporation s interest and the info is desired f
or the purpose of crippling the corporation for the benefit of a business rival,
must be denied
* Remedies:
o Mandamus
o Injunction
o Action for damages
o File an action to impose a penal offense by fine and/or imprisonment
* The right to inspection is preventive as well as remedial:
o Preventive because it may to a limited extent serve as deterrent to an ill-int
entioned management
o Remedial because a dissatisfied stockholder may resort to right of inspection
as a preliminary step to seeking more direct remedies against abuses committed b
y management
D. Who is a stock transfer agent (Section 74)
* No stock transfer agent or one engaged principally in the business of register
ing transfers of stocks in behalf of a stock corporation shall be allowed to ope
rate in the Philippines unless he secures a license from the SEC and pays a fee
as may be fixed by the Commission, which shall be renewable annually
* Provided, That a stock corporation is not precluded from performing or making
transfer of its own stocks, in which case all the rules and regulations imposed
on stock transfer agents, except the payment of a license fee herein provided, s
hall be applicable.
E. Right to financial statements
* Within ten (10) days from receipt of a written request of any stockholder or m
ember, 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 i
ts assets and liabilities and the result of its operations
* At the regular meeting of stockholders or members, the board of directors or t
rustees shall present to such stockholders or members a financial report of the
operations of the corporation for the preceding year, which shall include financ
ial statements, duly signed and certified by an independent certified public acc
ountant. 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 an
y responsible officer of the corporation.
F. Who may exercise right?
* Director, trustee, stockholder, member, personally or through an agent
* Stockholders of a parent corporation with respect to subsidiary:
o If two are legally separate and independent entity, no right of inspection
o If they are practically one and the same in so far as management and control a
nd inspection is demanded because of gross management of subsidiary by the paren
t s directors who are also directors of subsidiary, there can be inspection
X. MERGERS AND CONSOLIDATION
A. What is a constituent corporation ? A consolidated corporation ? (Section 76)
* Two or more corporations may merge into a single corporation which shall be on
e of the constituent corporations or may consolidate into a new single corporati
on which shall be the consolidated corporation.
B. What is a merger / consolidation?
* Merger
o One of the constituent corporations remains as an existing juridical person, w
hereas the other corporation shall cease to exist. Merger is the disappearance
of one of the corporations with the other corporation acquiring all the assets,
rights of action, and assuming all the liabilities of the disappearing corporati
on.
o Of course, there is an arrangement as to the shares of stocks that will be iss
ued to the former stockholders of the two (2) corporations which were merged. S
aid stockholders are now stockholders of the corporation which survives. The pr
oportion between the two (2) corporations will be the basis of the shares of sto
cks that will be issued to the stockholders under the surviving corporation.
* Consolidation
o If there is consolidation, there will be disappearance of both the constituent
corporations with the emergence of a new corporate entity which shall obtain al
l the assets of the disappearing corporations, and likewise shall assume all the
ir liabilities.
o Also, the number of shares that will be issued to each of the stockholders und
er the new corporation is determined by the ration between the assets of the two
(2) corporations.
C. What corporate approvals are required? (Sec. 77)
1. Approval by majority vote of each of the board of directors or trustees of th
e constituent corporations of the plan of merger or consolidation.
2. Approval by the stockholders or members of each of such corporations. The af
firmative vote of stockholders representing at least two-thirds (2/3) of the out
standing 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 s
hall be necessary for the approval of such plan
3. 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 o
f the meeting and shall include a copy or a summary of the plan of merger or con
solidation.
4. Any dissenting stockholder in stock corporations may exercise his appraisal r
ight in accordance with the Code. Provided, that if after the approval by the st
ockholders of such plan, the board of directors decides to abandon the plan, the
appraisal right shall be extinguished.
5. Amendment to the plan of merger or consolidation may be made by approved of t
he majority vote of the respective boards of directors or trustees of all the co
nstituent corporations and ratified by the affirmative vote of stockholders repr
esenting at least two-thirds (2/3) of the outstanding capital stock or of two-th
irds (2/3) of the members of each of the constituent corporations. Such plan, to
gether with any amendment, shall be considered as the agreement of merger or con
solidation.
D. What is a plan of merger or consolidation? (Sec. 76).
* 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 th
e 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 in
to effect;
3. A statement of the changes, if any, in the articles of incorporation of the s
urviving corporation in case of merger; and, with respect to the consolidated co
rporation 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.
E. What are articles of merger or consolidation? (Sec. 78)
* After the approval by the stockholders or members, articles of merger or artic
les of consolidation shall be executed by each of the constituent corporations:
1. to be signed by the president or vice-president and
2. certified by the secretary or assistant secretary of each corporation
* The articles of merger or consolidation shall set forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and agains
t such plan, respectively.
F. When is the effectivity of merger or consolidation?
* Effectivity: Upon issuance by the SEC of the certificate of merger and consoli
dation
* The articles of merger or of consolidation shall be submitted to the Securitie
s and Exchange Commission in quadruplicate for its approval.
* In the case of merger or consolidation of banks or banking institutions, build
ing and loan associations, trust companies, insurance companies, public utilitie
s, educational institutions and other special corporations governed by special l
aws, the favorable recommendation of the appropriate government agency shall fir
st be obtained.
* If the Commission is satisfied that the merger or consolidation of the corpora
tions concerned is not inconsistent with the provisions of this Code and existin
g laws, it shall issue a certificate of merger or of consolidation, at which tim
e the merger or consolidation shall be effective.
* If, upon investigation, the Securities and Exchange Commission has reason to b
elieve 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 giv
e 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 a
t least two (2) weeks before said hearing. The Commission shall thereafter proce
ed as provided in this Code.
G. What are the effects of a merger or consolidation? (Sec. 80)
1. The constituent corporations shall become a single corporation which:
* In case of merger, shall be the surviving corporation designated in the plan o
f 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 th
at of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, p
rivileges, immunities and powers and shall be subject to all the duties and liab
ilities 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 constitue
nt corporations; and
* all property, real or personal, and all receivables due on whatever account, i
ncluding subscriptions to shares and other choses in action, and all and every o
ther interest of, or belonging to, or due to each constituent corporation
* these shall be deemed transferred to and vested in such surviving or consolida
ted 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 t
he constituent corporations in the same manner as if such surviving or consolida
ted corporation had itself incurred such liabilities or obligations; and
* any pending claim, action or proceeding brought by or against any of such cons
tituent corporations may be prosecuted by or against the surviving or consolidat
ed corporation.
* The rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or consolidation
H. Procedure for Merger or Consolidation
1. Board of each corporation shall draw up a plan of merger or consolidation, se
tting forth:
* names of corporations involved (constituent corporations)
* terms and mode of carrying it out
* statement of changes, if any, in the present articles of surviving corporation
; or the articles of the new corporation to be formed in case of consolidation.
2. Plan for merger or consolidation shall be approved by majority vote of each b
oard of the concerned corporations at separate meetings.
3. The same shall be submitted for approval by the stockholders or members of ea
ch such corporation at separate corporate meetings duly called for the purpose.
Notice should be given to all stockholders or members at least two (2) weeks pr
ior to date of meeting, either personally or by registered mail.
4. Affirmative vote of 2/3 of the outstanding capital stock in case of stock cor
porations, or 2/3 of the members of a non-stock corporation shall be required.
5. Dissenting stockholders may exercise the right of appraisal. But if Board ab
andons the plan to merge or consolidate, such right is extinguished.
6. Any amendment to the plan must be approved by the same votes of the board mem
bers of trustees and stockholders or members required for the original plan.
7. After such approval, Articles of Merger or Articles of Consolidation shall be
executed by each of the constituent corporations, signed by president or VP and
certified by secretary or assistant secretary, setting forth:
* plan of merger or consolidation
* in stock corporation, the number of shares outstanding; in non-stock, the numb
er of members
* as to each corporation, number of shares or members voting for and against suc
h plan, respectively
8. Four copies of the Articles of Merger or Consolidation shall be submitted to
the SEC for approval. Special corporations like banks, insurance companies, bui
lding and loan associations, etc., need the prior approval of the respective gov
ernment agency concerned.
9. If SEC is satisfied that the merger or consolidation is legal, it shall issue
the Certificate of Merger or the Certificate of Incorporation, as the case may
be.
10. If the SEC is not satisfied, it shall set a hearing, giving due notice to al
l the corporations concerned. [Secs. 76-79, Corporation Code]
I. Limitation on the right to merge / consolidate
1. Should not create monopolies
2. Should not eliminate free and healhty competition
3. Act 3518 Sec 20 inhibits illegal combinations
XI. NON-STOCK CORPORATIONS
A. Distinguish non-stock corporations from stock corporations
NON-STOCK
STOCK CORPORATIONS
CORPORATIONS
1. Definition
* 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 t
his Code on dissolution.

2. Purposes (Sec. 88)

* Non-stock corporations may be formed or organized for charitable, religious, e
ducational, professional, cultural, fraternal, literary, scientific, social, civ
ic service, or similar purposes, like trade, industry, agricultural and like cha
mbers, or any combination thereof, subject to the special provisions of this Tit
le governing particular classes of non-stock corporations.
3. Distribution of income (Sec. 87)
* Any profit shall be used for the furtherance of the purpose or purposes for wh
ich the corporation was organized
4. Scope of right to vote (Sec. 89)
* Each member regardless of class shall be entitled to ONE vote unless limited,
broadened, or denied to the extent specified in the articles of incorporation or
the by-laws.

5. Voting by proxy (Sec. 89)

* A member may vote by proxy in accordance with the provisions of this Code unle
ss otherwise provided in the Articles of Incorporation or By-laws

6. Voting by mail (Sec. 89)

* Voting by mail or other similar means 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 SEC

7. Transferability of interest or membership (Sec. 90)

* Membership in a non-stock corporation and all rights arising therefrom are per
sonal and non-transferable, unless the articles of incorporation or the by-laws
otherwise provide.
8. Termination of membership
* Membership shall be terminated in the manner and for the causes provided in th
e 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 th
e articles of incorporation or the by-laws.

9. Governing board (Sec. 92)

* Board of Trustees

(i) number
* Unless otherwise provided in the AOI or the by-laws, the BOT may be more than
fifteen (15) in number as may be fixed in their articles of incorporation or by-
laws
(ii) term
* 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 th
ree (3) years.
* Trustees thereafter elected to fill vacancies occurring before the expiration
of a particular term shall hold office only for the unexpired period.

10. election of officers (Sec. 92)

* 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, off
icers of a non-stock corporation may be directly elected by the members.
* Officers elected by members

11. place of meetings (Sec. 93)

* The by-laws may provide that the members of a non-stock corporation may hold t
heir regular or special meetings at any place even outside the place where the p
rincipal office of the corporation is located
* That the place of meeting shall be within the Philippines

* One which has a capital stock divided into shares and is authorized to distrib
ute to the holders of such shares dividends or allotments of the surplus profits
 (i.e., retained earnings on the basis of the shares held (Sec. 3). It is organ
ized for profit.

* Formation of corporation must be for LAWFUL purpose

* Must not include those which contradict or change its nature

* Profits are distributed as dividends to the stockholders in proportion to thei

r shareholdings

* No share may be deprived of voting rights, except: Preferred or Redeemable sha

res, unless otherwise provided by the Code PROVIDED, there shall always be a cla
ss/series of shares which have a COMPLETE VOTING RIGHTS
* Each share of stock has one vote

* Stockholders and members may vote in person or by proxy in all meetings of sto
ckholders or members provided the requisites are complied with (in writing, sign
ed, etc.)
* This right cannot be denied

* No such provision for stock corporations, cannot be allowed

* Transferable
* Shares of stock may be transferred by:
1. Endorsement by the owner or his attorney-in-fact or other person legally auth
orized to make the transfer
2. Delivery of the certificate or certificates
3. To be binding against third persons, transfer of shares should be recorded in
the books of the corporation.

* Transfer of shares
* Exercise of appraisal right
* Board of Directors

* Not less than 5 but not more than 15

* Board of Directors or Trustees are elected from among the holders of stocks, o
r where there is no stock, from among the members of the corporation who shall h
old office for 1 year and until their successors are elected and qualified.

* Immediately after their election, the directors of a corporation must formally

organize 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 o
f the Philippines, and such other officers as may be provided for in the By-laws
* Officers elected by board

* Meetings of directors or trustees of corporations may be held anywhere in or o

utside of the Philippines, unless the by-laws provide otherwise.
* Meetings of stockholders shall be held at the city or municipality where the p
rincipal office of the corporation is located, and if practicable in the princip
al office of the corporation
B. Distribution of assets in case of dissolution (Sec. 94)
* All debts of the corporation must be paid, or adequately provided for.
* All assets held under condition of being returned in case of dissolution shoul
d be returned.
* All assets held subject to specific use (e.g., for charitable, charitable, edu
cational, scientific, etc.) must be transferred to other corporations, societies
, or organizations having the same purpose as the corporation dissolved.
* All other assets not included in the above, if any, shall be distributed to th
e members in accordance with the stipulations in the articles of incorporation
or the by-laws.
* Any other remaining assets may then be distributed to such persons, societies,
organizations or corporation, profit or non-profit, as may be specified in the
plan of distribution.
C. Plan of distribution of assets (Section 95)
* A plan providing for the distribution of assets, not inconsistent with the pro
visions of this Title, may be adopted by a non-stock corporation in the process
of dissolution in the following manner:
o 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 regu
lar or special meeting of members having voting rights.
o Written notice setting forth the proposed plan of distribution or a summary th
ereof 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 t
he giving of notice of meetings to members.
o Such plan of distribution shall be adopted upon approval of at least two-third
s (2/3) of the members having voting rights present or represented by proxy at s
uch meeting.
XII. CLOSE CORPORATIONS
A. What are the requirements for the formation of the close corporations? (Sec.
96)
* A close corporation is one whose articles of incorporation provide that:
o All the corporation's issued stock of all classes, exclusive of treasury share
s, shall be held of record by not more than a specified number of persons, not e
xceeding twenty (20);
o All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and
o The corporation shall not list in any stock exchange or make any public offeri
ng of any of its stock of any class.
* 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 co
rporation which is not a close corporation.
* The provisions of this Code shall apply except insofar as this Title otherwise
provides.
San Juan Structural and Steel Fabricatiors vs. CA
* Motorich entered into agreement with San Juan for the transfer of a parcel of
Land to latter.
* San Juan already paid downpayment
* When San Juan was ready to pay the balance, Motorich refused to sell
* Motorich contend that Nenita Gruenberg s, treasurer of Motorich, signature is no
t sufficient to bind Motorich, and that the signature of Reynaldo Gruenberg, pr
esident of Motorich is required
* Nenita Gruenberg is the spouse of Reynaldo Gruenberg and both owns 99.866% of
the shares of stock of the corporation
* Motorich is not a close corporation
o The mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient gr
ound for disregarding their separate personalities
o A narrow distribution of ownership does not of itself make a close corporation
o There are exceptional cases where an action by a director who is singly is the
controlling stockholder may be considered as a binding corporate act and a boar
d action is a mere formality. However, Nenita is not the sole controlling stock
holder.
B. What entities may not be organized as closed corporations? (Sec. 96)
* Any corporation may be incorporated as a close corporation, except:
o Mining
o Oil companies
o Stock exchanges
o Banks
o Insurance companies
o Public utilities
o Educational institutions
o Corporations declared to be vested with public interest in accordance with th
e provisions of this Code.
C. Distinguish close corporations from regular corporations
CLOSE CORPORATIONS
STOCK
1. Management / Board Authority
* There can be classification of directors into one or more classes, each of who
m may be voted for and elected solely by a particular class of stock; and
* The articles of incorporation of a close corporation may provide that the busi
ness 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 effe
ct:
1. No meeting of stockholders need be called to elect directors
2. Unless the context clearly requires otherwise, the stockholders of the corpor
ation shall be deemed to be directors for the purpose of applying the provisions
of this Code
3. The stockholders of the corporation shall be subject to all liabilities of di
rectors.
* The articles of incorporation may likewise provide that all officers or employ
ees or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
2. Meetings
* Unless the by-laws provide otherwise, any action by the directors of a close c
orporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by al
l 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 impl
ied 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.
3. Voting / Quorum
* The AOI may provide for a classification of directors into one or more classes
, each of which may be voted for and elected solely by a particular class of sto
ck.

* The AOI may provide for a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.

4. Pre-emptive Right
* The pre-emptive right of stockholders in close corporations shall extend to al
l stock to be issued, including reissuance of treasury shares, whether for money
, property or personal services, or in payment of corporate debts, unless the ar
ticles of incorporation provide otherwise.

5. Buy-back of Shares
* Restrictions on transfer of shares shall not be more onerous than granting the
existing stockholders or the corporation the option to purchase the shares of t
he transferring stockholder with such reasonable terms, conditions or period sta
ted therein. If upon the expiration of said period, the existing stockholders o
r the corporation fails to exercise this option to purchase, the transferring st
ockholder may sell his shares to any person
6. Transferability
* Restrictions on the right to transfer shares must appear in the AI and in the
by-laws as well as in the certificate of stock otherwise the same shall not be b
inding on any purchaser thereof in good faith

7. Withdrawal Right
* Any stockholder of a close corporation may, for any reason, compel the said co
rporation to purchase his shares at their fair value, which shall not be less th
an their par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock
* Any stockholder of a close corporation may, by written petition to the SEC, co
mpel the dissolution of such corporation whenever:
1. Any of acts of the directors, officers or those in control of the corporation
is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial
to the corporation or any stockholder, or
2. Corporate assets are being misapplied or wasted.

* There are no classification of board of directors

* Corporate Powers devolved upon board of directors whose powers are executed by
officers. Cannot provide that it be managed by stockholders

* Board of directors must be elected in a stockholders meeting

* Stockholders of a corporation are separate and distinct from directors

* Officers must be elected by the Board of Directors

* The directors or trustees shall not act individually nor separately but as a
body in a lawful meeting. They will act only after discussion and deliberation
of matters before them. Contracts entered into without a formal board resolutio
n does not bind the corporation except when ratified or when majority of the boa
rd has knowledge of the contract and the contract benefited the corporation.
* Absence of a prompt objection in writing does not ratify acts done by director
s without a valid meeting. There must be express or implied ratification.
* Express ratification may consist of a Board Resolution to that effect
* Implied ratification may consist of acceptance of benefits from said unauthori
zed act while having knowledge of said act
* Failure to give notice would render a meeting voidable.
* Attendance to a meeting despite want of notice will be deemed implied waiver
* All proceedings had and any business transacted at any meeting of the stockhol
ders or members, if within the powers or authority of the corporation, shall be
valid even if the meeting be improperly held or called, provided all the stockho
lders or members of the corporation are present or duly represented at the meeti
ng. (Sec 51)

* No share may be deprived of voting rights, except Preferred or Redeemable sha

res, unless otherwise provided by the Code
* There shall always be a class/series of shares which have a COMPLETE VOTING RI
GHTS
* EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as othe
rwise provided in the AOI
* For Board of directors, the by-laws or AOI can provide for a greater majority
in quorum
* For stockholders, the AOI can provide for a different percentage in quorum

* Limitations on the exercise of pre-emptive right:

a. 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;
b. Not extend to shares to be issued in good faith with the approval of the stoc
kholders representing two-thirds (2/3) of the outstanding capital stock, in exch
ange for property needed for corporate purposes or in payment of a previously co
ntracted debt
c. Shall not take effect if denied in the Articles of Incorporation or an amende
ment thereto.

* Stockholders may require the corporation to buy-back their shares under the fo
llowing circumstances only (Appraisal right):
a. In case any amendment to the articles of incorporation which has the effect o
f:
* changing or restricting the rights of any stockholder or class of shares, or
* authorizing preferences in any respect superior to those of outstanding shares
of any class, or
* extending or shortening the term of corporate existence
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposi
tion of all or substantially all of the corporate property and assets as provide
d in the Code; and
c. In case of merger or consolidation
d. Extension or shortening of the term of the corporation (Section 37)
e. Diversion of funds of corporation from primary purpose to secondary purpose (
Section 41) Note: this is not in Sec. 81.
* The corporation may buy-back shares of stockholders subject to the following l
imitations (Treasury shares):
a. There must be unrestricted retained earnings
b. Must be for a legitimate purpose

* Restrictions on the right to transfer not allowed

* Stockholders may require the corporation to buy-back their shares at fair valu
e when the Corporation has unrestricted Retained Earnings:
a. In case any amendment to the articles of incorporation which has the effect o
f:
* changing or restricting the rights of any stockholder or class of shares, or
* authorizing preferences in any respect superior to those of outstanding shares
of any class, or
* extending or shortening the term of corporate existence
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposi
tion of all or substantially all of the corporate property and assets as provide
d in the Code; and
c. In case of merger or consolidation
d. Extension or shortening of the term of the corporation (Section 37)
e. Diversion of funds of corporation from primary purpose to secondary purpose (
Section 41) Note: this is not in Sec. 81.
D. Deadlocks
1. Deadlocks, Defined:
* The directors or stockholders are so divided respecting the management of the
corporation's business and affairs
* The votes required for any corporate action cannot be obtained
* The consequence is that the business and affairs of the corporation can no lon
ger be conducted to the advantage of the stockholders generally
2. Resolution of deadlocks
* The SEC, upon written petition by any stockholder, shall have the power to arb
itrate the dispute.
* In the exercise of such power, the Commission shall have authority to make suc
h order as it deems appropriate, including an order:
o Cancelling or altering any provision contained in the articles of incorporatio
n, by-laws, or any stockholder's agreement;
o Cancelling, altering or enjoining any resolution or act of the corporation or
its board of directors, stockholders, or officers;
o Directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons part to the action;
o Requiring the purchase at their fair value of shares of any stockholder, eithe
r by the corporation regardless of the availability of unrestricted retained ear
nings in its books, or by the other stockholders;
o Appointing a provisional director;
o Dissolving the corporation; or
o Granting such other relief as the circumstances may warrant.
3. Provisional Director
* An impartial person who is neither a stockholder nor a creditor of the corpora
tion or of any subsidiary or affiliate of the corporation, and whose further qua
lifications, if any, may be determined by the Commission.
* A provisional director is not a receiver of the corporation and does not have
the title and powers of a custodian or receiver.
* A provisional director shall have all the rights and powers of a duly elected
director of the corporation, including the right to notice of and to vote at mee
tings of directors, until such time as he shall be removed by order of the Commi
ssion or by all the stockholders.
* His compensation shall be determined by agreement between him and the corporat
ion 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 di
rector and the corporation.
E. Validity of restrictions on transfer of shares (Section 98)
* Restrictions on the right to transfer shares must appear in the:
o Articles of incorporation
o By-laws
o Certificate of stock
* OTHERWISE, the same shall not be binding on any purchaser in good faith.
* Said restrictions shall not be more onerous than granting the existing stockho
lders or the corporation the option to purchase the shares of the transferring s
tockholder with such reasonable terms, conditions or period stated therein.
* If upon the expiration of said period, the existing stockholders or the corpor
ation fails to exercise the option to purchase, the transferring stockholder may
 sell his shares to any third person.
F. Effects of issuance or transfer of stock in breach of qualifying conditions (
Section 99)
* A person is conclusively presumed to have notice of the fact of ineligibility
to be a stockholder:
o 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
o If the certificate for such stock conspicuously shows the qualifications of th
e persons entitled to be holders of record thereof
* A person to whom stock is issued or transferred is conclusively presumed to ha
ve notice of these facts:
o If the articles of incorporation of a close corporation states the number of p
ersons, not exceeding twenty (20), who are entitled to be holders of record of i
ts stock, and
o If the certificate for such stock conspicuously states such number, and
o If the issuance or transfer of stock to any person would cause the stock to be
held by more than such number of persons.
* If a stock certificate of any close corporation conspicuously shows a restrict
ion on transfer of stock of the corporation, the transferee of the stock is conc
lusively presumed to have notice of the fact that he has acquired stock in viola
tion of the restriction, if such acquisition violates the restriction.
* Whenever any person to whom stock of a close corporation has been issued or tr
ansferred has, or is conclusively presumed under this section to have, notice ei
ther
o That he is a person not eligible to be a holder of stock of the corporation, o
r
o That transfer of stock to him would cause the stock of the corporation to be h
eld by more than the number of persons permitted by its articles of incorporatio
n to hold stock of the corporation, or
o That the transfer of stock is in violation of a restriction on transfer of sto
ck, the corporation may, at its option, refuse to register the transfer of stock
in the name of the transferee.
* The provisions of subsection (4) shall not be applicable if the transfer of st
ock, though contrary to subsections (1), (2) or (3), has been consented to by al
l the stockholders of the close corporation, or if the close corporation has ame
nded its articles of incorporation in accordance with this Title.
* The term "transfer", as used in this section, is not limited to a transfer for
value.
* 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, e
xpress or implied.
G. Agreements by stockholders (Section 100)
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 v
alid 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 i
ncorporation, irrespective of where the provisions of such agreements are contai
ned, except those required by this Title to be embodied in said articles of inco
rporation.
2. An agreement between two or more stockholders, if in writing and signed by th
e 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 det
ermined 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 corporat
ion 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. Sai
d stockholders shall be personally liable for corporate torts unless the corpora
tion has obtained reasonably adequate liability insurance.
H. Amendment of articles of incorporation (Section 103)
* 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 incorpo
ration or to reduce a quorum or voting requirement stated in said articles of in
corporation shall not be valid or effective unless approved by the affirmative v
ote of at least two-thirds (2/3) of the outstanding capital stock, whether with
or without voting rights, or of such greater proportion of shares as may be spec
ifically provided in the articles of incorporation for amending, deleting or rem
oving any of the aforesaid provisions, at a meeting duly called for the purpose.

XIII. DISSOLUTION
A. What are the various methods of dissolving corporations? (Section 117)
1. Voluntary
* Requirements where no creditors are affected (Sec. 118)
o Dissolution may be effected by majority vote of the board of directors or trus
tees, and by a resolution duly adopted by the affirmative vote of the stockholde
rs owning at least two-thirds (2/3) of the outstanding capital stock or of at le
ast two-thirds (2/3) of the members.
o Meeting to be held upon call of the directors or trustees after publication of
the notice of time, place and object of the meeting for three (3) consecutive w
eeks in a newspaper published in the place where the principal office of said co
rporation is located; and if no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines, after sending such notice t
o each stockholder or member either by registered mail or by personal delivery a
t least thirty (30) days prior to said meeting.
o A copy of the resolution authorizing the dissolution shall be certified by a m
ajority of the board of directors or trustees and countersigned by the secretary
of the corporation. The Securities and Exchange Commission shall thereupon issu
e the certificate of dissolution.
* Requirements where Creditors are affected (Sec. 119)
o Petition for dissolution shall be filed with the Securities and Exchange Commi
ssion.
o The petition shall be signed by a majority of its board of directors or truste
es or other officers having the management of its affairs, verified by its presi
dent or secretary or one of its directors or trustees, and shall set forth all c
laims and demands against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds (2/3) of t
he outstanding capital stock or by at least two-thirds (2/3) of the members at a
meeting of its stockholders or members called for that purpose.
o 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 obj
ections thereto may be filed by any person, which date shall not be less than th
irty (30) days nor more than sixty (60) days after the entry of the order. Befor
e such date, a copy of the order shall be published at least once a week for thr
ee (3) consecutive weeks in a newspaper of general circulation published in the
municipality or city where the principal office of the corporation is situated,
or if there be no such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3) consecutive we
eks in three (3) public places in such municipality or city.
o Upon five (5) day's notice, given after the date on which the right to file ob
jections 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 obj
ection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition
of its assets as justice requires, and may appoint a receiver to collect such as
sets and pay the debts of the corporation
2. Involuntary
* Sec. 2 PD 902-A
o Fraud in procuring its certificate of registration
o Serious misrepresentation as to what the corporation can or is doing to the gr
eat prejudice of or damage to the general public
o Refusal to comply or defiance of any lawful order of the Commission restrainin
g commission of acts which would amount to a grave violation of its franchise
o Continuous inoperation for a period of at least five years
o Failure to file by-laws within the required period
o Failure to file required reports in appropriate forms as determined by the Com
mission within the prescribed period
* Sec. 144 BP 168
o Violation by the corporation of any provision of the Corporation Code
* Sec. 104 BP 168
o In case of a deadlock in a close corporation, and the SEC deems it proper to o
rder the dissolution of the corporation as the only practical solution to the di
spute
* Quo warranto proceedings, Sec. 2, Rule 66 ROC
o When it has offended against a provision of an Act for its creation and renewa
l
o When it has forfeited its privileges and franchises by nonuser
o When it has committed or omitted an act which amounts to a surrender of its co
rporate rights, privileges or franchise
o When it has misused a right, privilege, or franchise conferred upon it by law
or when it has exercised a right, privilege or franchise in contravention of law
3. Failure to organize and commence business within two years from incorporation
* Failure to formally organize and commence the transaction of its business or c
onstruction of its works within two years
o Transacting business implies a continuity of acts or dealings in the accomplis
hment of the purpose for which the corporation was formed
o Formally organize includes not only the adoption of the by-laws but also the e
stablishment of the body which will administer the affairs of the corporation an
d exercise its powers
* Commenced transaction of its business but subsequently becomes continuously in
operative for a period of at least fie years
4. Expiration of the term
* Shorten corporate term - by vote of 2/3 of the outstanding shares or 2/3 of th
e members, the articles may be amended to shorten the term of the corporation
B. Liquidation (Sec. 122)
* The winding up and turning assets of corporation into cash for distribution
* A liquidation proceeding is a proceeding in rem so that all other interested p
ersons whether known to the parties or not may be bound by such proceedings
* For how long may the liquidation of a corporation be undertaken?
o Every corporation whose charter expires by its own limitation or is annulled b
y forfeiture or otherwise, or whose corporate existence for other purposes is te
rminated in any other manner, shall nevertheless be continued as a body corporat
e for three (3) years after the time when it would have been so dissolved
o However, in case the corporate assets are conveyed to a trustee or a receiver
appointed by the SEC, the three year limitation will not apply
o Although the three year period may have expired, it does not necessarily follo
w that a creditor who was unable to collect his claim before three years would l
ose is rights. It is still possible for him to sue the trustee, if there be one
, or if the circumstances so warrant, to follow the assets in the hands of the s
tockholders who nay have received the same as liquidating dividends
* What could and should be done during the period of liquidation?
o For the purpose of prosecuting and defending suits by or against it and enabli
ng 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 fo
r which it was established.
o 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 di
ssolution and after payment of all its debts and liabilities.
* What happens if an asset cannot be distributed to the person entitled to it?
o Upon the winding up of the corporate affairs, any asset distributable to any c
reditor or stockholder or member who is unknown or cannot be found shall be esch
eated to the city or municipality where such assets are located.
* Who may undertake the liquidation of a corporate?
o At any time during said three (3) years, the corporation is authorized and emp
owered 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 con
veyance by the corporation of its property in trust for the benefit of its stock
holders, members, creditors and others in interest, all interest which the corpo
ration had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other pe
rsons in interest.
C. Methods of liquidation:
* by the corpo itself through the board of directors the board of directors serv
e as trustees
* conveyance of all corporate assets to trustees who will take charge of the liq
uidation
* liquidation by a receiver who may have been appointed by the SEC upon its decr
eeing the dissolution of the corporation. 3-year period does not apply because
the corporation is substituted by the receiver. However, the mere appointment o
f a receiver, without anything more does not result in the dissolution of the co
rporation nor bar it from the existence of its corporate rights
D. Effects of Dissolution, winding up and liquidation:
* loss of juridical personality
o corporation loses its juridical personality and can no longer lawfully continu
e its business except for the purpose of winding up
o cannot even be a de facto corporation, hence subject to collateral attack
o cannot enter into new contracts which would have the effect of continuing the
business
* executory contracts
o No right or remedy in favor of or against any corporation, its stockholders, m
embers, 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. (Sec
145)
o The prevailing view is that executory contracts are not extinguished. However
, some authorities make an exception of contracts for personal services such as
employment contracts of officers and employees where the dissolution is involunt
ary or the result of merger or consolidation in which case the contracts are dee
med terminated.
* distribution of assets after payment of debts
o A corporation cannot distribute any of its assets or property except upon lawf
ul dissolution and only after payment of all its debts and liabilities, after wh
ich the remaining assets must be distributed to the stockholders in proportion t
o their interest in the corporation.
o Exceptions:
* decrease in c/s resulting in a surplus which can then be distributed to stockh
olders provided no creditors are prejudiced
* as otherwise allowed by the code:
* Appraisal right
* Deadlock in a close corporation
* SH of a close corporation may compel corporation to buy his shares at fair val
ue
* Corporation repurchases shares for any legitimate corporate purpose
* Corporation validly distributes dividend
* Liquidating dividends share of SH in assets upon liquidation
Clemente vs. CA
* Plaintiffs sought to be declared owners of a parcel of land owned by Sociedad
Popular Calambena, a Sociedad Anonima. Plaintiffs are stockholders of the latte
r corporation
* However, there was no proof that taxes were paid by the Sociedad and neither w
ere there efforts exerted by the latter to consolidate title over the property.
No explanation was offered as to how and when the property came into the posses
sion of the defendants
* Plaintiffs were not able to come up with any evidence to substantiate their cl
aim of ownership of the assets.
* If Sociedad has long been defunct, plaintiffs should have taken appropriate me
asures in a proper forum for a peremptory settlement of its affairs
* The termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the right and liabilities of such entity nor those
of its owners and creditors.
* If the three year extended life has expired without a trustee or receiver havi
ng been expressly designated by he corporation itself within that period, the bo
ard of directors or trustees itself may be permitted to so continue as Trustees by
legal implication to compete the corporate liquidation.
* Still in the absence of a board of directors or trustees, those having any pec
uniary interest in the assets, including not only the shareholders but likewise
the creditors of the corporation, acting for and in its behalf, might make prope
r representations with the SEC, which has primary and sufficiently broad jurisdi
ction in matters of this nature, for working out a final settlement of the corpo
rate concerns.
Reburiano v CA and Pepsi cola Bottling Company
* Reburiano was ordered to pay Pepsi a sum of money
* Pursuant to said judgment, a writ of execution was issued by Trial Court
* Prior to the promulgation of the decision, Pepsi amended its Articles of Incor
poration shortening the term of its existence
* When the trial was conducted, decision rendered, and writ of execution issued,
Pepsi was no longer in existence
* A dissolved and non-existing corporation could still be represented by a lawye
r
o S 122 Corpo code Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence for othe
r purposes is terminated in any other manner shall nevertheless be continued as
a body corporate for 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 enabli
ng it to settle and close its affairs, to dispose of and convey its property, an
d to distribute its assets, but not for the purpose of continuing the business f
or which it was established.
o At any time during the 3 years, corpo is empowered to convey its properties to
trustees
o Trustees may commence a suit which can proceed to final judgment even beyond t
he three-year period. No reason can be conceived why a suit already commenced b
y the corporation itself during its existence, not by a mere trustee who, by fic
tion, merely continues the legal personality of the dissolved corporation should
not be accorded similar treatment allowed to proceed to final judgment and exec
ution thereof

XIV. FOREIGN CORPORATION

A. Foreign corporation (Section 123)
* Foreign corporation is one formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and corpora
tions to do business in its own country or state.
B. Necessity of obtaining a license to do business:
* The reason for the license is to subject the foreign corporation doing busines
s in the Philippines to the jurisdiction of the courts, otherwise a foreign corp
oration illegally doing business here may successfully though unfairly plead suc
h neglect or illegal act so as to avoid service and thereby impugn the jurisdict
ion of the local courts.
C. Doing business (Sec. 3(d) RA 7042)
* Soliciting orders
* Service contracts
* Opening offices, whether called liason offices or branches
* Appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totaling 180 d
ays or more
* Participating in the management, supervision or control of any domestic busine
ss, firm, entity or corporation in the Philippines
* Any other act or acts that imply a continuity of commercial dealings or arrang
ements, and contemplate to that extent, performance normally incident to , and i
n progressive prosecution of, commercial gain or of the purpose and object of th
e business organization
* It shall not include:
o Mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business and/or the exercise of such rights as such invest
or
o Having a nominee director or officer to represent its interests in such corpor
ations
o Appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account
D. Requirements for the issuance of a license
1. Documentary requirements (Sec. 125)
* A foreign corporation applying for a license to transact business in the Phili
ppines shall submit to the SEC:
o Copy of its articles of incorporation and by-laws, certified in accordance wit
h law
o Their translation to an official language of the Philippines, if necessary.
* The application shall be under oath and, unless already stated in its articles
of incorporation, shall specifically set forth the following:
o The date and term of incorporation;
o The address, including the street number, of the principal office of the corpo
ration in the country or state of incorporation;
o The name and address of its resident agent authorized to accept summons and pr
ocess in all legal proceedings and, pending the establishment of a local office,
all notices affecting the corporation;
o The place in the Philippines where the corporation intends to operate;
o The specific purpose or purposes which the corporation intends to pursue in th
e transaction of its business in the Philippines: Provided, That said purpose or
purposes are those specifically stated in the certificate of authority issued b
y the appropriate government agency;
o The names and addresses of the present directors and officers of the corporati
on;
o 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;
o A statement of its outstanding capital stock and the aggregate number of share
s which the corporation has issued, itemized by classes, par value of shares, sh
ares without par value, and series, if any;
o A statement of the amount actually paid in; and
o Such additional information as may be necessary or appropriate in order to ena
ble the Securities and Exchange Commission to determine whether such corporation
is entitled to a license to transact business in the Philippines, and to determ
ine and assess the fees payable.
* Attached to the application for license shall be a duly executed certificate u
nder oath by the authorized official or officials of the jurisdiction of its inc
orporation, attesting to the fact that:
o The laws of the country or state of the applicant allow Filipino citizens and
corporations to do business therein
o The applicant is an existing corporation in good standing.
* If such certificate is in a foreign language, a translation thereof in English
under oath of the translator shall be attached thereto.
* The application shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing to the sat
isfaction of the SEC and other governmental agency in the proper cases that the:
o Applicant is solvent and in sound financial condition, and
o Setting forth the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the application.
* Foreign banking, financial and insurance corporations shall, in addition to th
e 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 t
ransact business in the Philippines shall be accepted by the SEC without previou
s authority from the appropriate government agency, whenever required by law.
2. Deposit requirements (Sec. 126)
* Upon issuance of the license, such foreign corporation may commence to transac
t business in the Philippines and continue to do so for as long as it retains it
s authority to act as a corporation under the laws of the country or state of it
s incorporation, unless such license is sooner surrendered, revoked, suspended o
r annulled in accordance with this Code or other special laws.
* Within sixty (60) days after the issuance of the license to transact business
in the Philippines, the license, except foreign banking or insurance corporation
, shall deposit with the SEC for the benefit of present and future creditors of
the licensee in the Philippines, securities satisfactory to the SEC, consisting
of :
o Bonds or other evidence of indebtedness of the Government of the Philippines,
its political subdivisions and instrumentalities, or of government-owned or cont
rolled corporations and entities,
o Shares of stock in "registered enterprises" as this term is defined in Republi
c Act No. 5186,
o Shares of stock in domestic corporations registered in the stock exchange, or
o Shares of stock in domestic insurance companies and banks, or
o Any combination of these kinds of securities,
* With an actual market value of at least one hundred thousand (P100,000.) pesos
;
* Provided, however, That within six (6) months after each fiscal year of the li
censee, the SEC shall require the licensee to deposit additional securities equi
valent in actual market value to two (2%) percent of the amount by which the lic
ensee's gross income for that fiscal year exceeds five million (P5,000,000.00) p
esos.
* The SEC shall also require deposit of additional securities if the actual mark
et value of the securities on deposit has decreased by at least ten (10%) percen
t of their actual market value at the time they were deposited.
* The SEC may at its discretion release part of the additional securities deposi
ted with it if the gross income of the licensee has decreased, or if the actual
market value of the total securities on deposit has increased, by more than ten
(10%) percent of the actual market value of the securities at the time they were
deposited.
* The SEC may, from time to time, allow the licensee to substitute other securit
ies for those already on deposit as long as the licensee is solvent. Such licen
see shall be entitled to collect the interest or dividends on the securities dep
osited.
* In the event the licensee ceases to do business in the Philippines, the securi
ties deposited as aforesaid shall be returned, upon the licensee's application t
herefor and upon proof to the satisfaction of the SEC that the licensee has no l
iability to Philippine residents, including the Government of the Republic of th
e Philippines.

3. Appointment of resident agent (Sec. 128)

* A resident agent may be either an:
o Individual residing in the Philippines of good moral character and of sound fi
nancial standing
o Domestic corporation lawfully transacting business in the Philippines:
* The SEC shall require as a condition precedent to the issuance of the license
to transact business in the Philippines by any foreign corporation that such cor
poration file with the SEC a written power of attorney:
o 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 p
roceedings against such corporation, and
o Consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation
at its home office.
* Any such foreign corporation shall likewise execute and file with the SEC an a
greement or stipulation, executed by the proper authorities of said corporation,
in form and substance as follows:
o "The (name of foreign corporation) does hereby stipulate and agree, in conside
ration 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 sh
all cease to transact business in the Philippines, or shall be without any resid
ent 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 transac
tion which occurred in the Philippines, service of any summons or other legal pr
ocess may be made upon the SEC and that such service shall have the same force a
nd effect as if made upon the duly-authorized officers of the corporation at its
home office."
* Whenever such service of summons or other process shall be made upon the SEC,
the Commission shall, within ten (10) days thereafter, transmit by mail a copy o
f such summons or other legal process to the corporation at its home or principa
l office.
* The sending of such copy by the Commission shall be necessary part of and shal
l complete such service. All expenses incurred by the Commission for such servic
e shall be paid in advance by the party at whose instance the service is made.
* In case of a change of address of the resident agent, it shall be his or its d
uty to immediately notify in writing the SEC of the new address.
4. Summary: Requisites for the Issuance of License
* The SEC will issue a license to the foreign corporation to do business in the
Philippines, provided the following conditions are met:
o Appointment of a Resident Agent:
* Either a Filipino or domestic corporation; and
* Power of Attorney to SEC to receive process
o Must prove that the foreign corporation's country grants reciprocal rights to
Filipinos and Philippine corporation.
o Establish an office in the Philippines
o Bring in its assets
o Undertaking that Filipino creditors will be preferred in the event of insolven
cy
o Notice of six (6) months should there be desire to terminate operations
o Franchise and patents must remain in the Philippine, if this is possible
o Must file a bond of P100,000 which may be in the following form:
* surety bond
* government securities
* securities of political subdivisions
* shares of stock of registered enterprises with the SEC
* shares of stock of any corporation being sold at the stock exchange
o Provided, that within six (6) months after each fiscal year, the SEC shall req
uire the deposit of additional securities equivalent to 2% of the amount in exce
ss of P500,000 of the gross income. [Sec. 125, 126, Corporation Code]
E. What laws are applicable to foreign corporations licensed to transact busines
s in the Philippines? ( Sec. 129)
* Any foreign corporation lawfully doing business in the Philippines shall be bo
und by all laws, rules and regulations applicable to domestic corporations of th
e same class, EXCEPT such only as provide for the:
o Creation, formation, organization or dissolution of corporations
o Those which fix the relations, liabilities, responsibilities, or duties of sto
ckholders, members, or officers of corporations to each other or to the corporat
ion.
F. What are the consequence of doing business in the Philippines without a licen
se? (Sec. 133)
* No foreign corporation transacting business in the Philippines without a licen
se, 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 Phi
lippines;
* Such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippin
e laws.
* Shall not be permitted to maintain or intervene in any action, suit or proceed
ing in any court or administrative agency in the Philippines; but such corporati
on may be sued or proceeded against before Philippine courts or administrative t
ribunals.
* In addition, Sec. 134 makes it a ground for revocation of license when a forei
gn corporation transacts business in the Philippines as agent of or acting for a
nd in behalf of any foreign corporation or entity not duly licensed to do busine
ss in the Philippines.
* Status of Contracts entered into without the requisite license
o The failure to obtain a license by a foreign corporation doing business in the
Philippines does not affect the validity of contracts entered into by such fore
ign corporation, but merely removes its legal standing to sue in local tribunals
. However, the defect may be cured by subsequent registration by the foreign co
rporation to obtain the necessary license to do business in the Philippines. [H
ome Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983)]
o Although the law does not declare as void or invalid the contracts entered int
o by a foreign corporation with a local corporation without the former first sec
uring a license or certificate to do business in the Philippines, the parties in
 this case cannot obtain relief on the contracts entered into because they are c
harged with the knowledge of the existing law at the time they entered into such
contract and at the time it is to be operative. [Top-Weld Mfg. v. ECED, S.A.,
138 SCRA 118 (1985)]
o However, in the case of Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992)
, the SC held that although the foreign corporation has engaged in business in t
he Philippines without a license, the dismissal of the suit would not be proper
on the ground that if the local investors knew that the foreign corporation had
no license to do business, then they are estopped from using the lack of license
to avoid their obligations.
* Legal standing of foreign corporations to sue on their corporate names, trade
names, and trademarks
o A foreign corporation although not doing business in the Philippines has a per
sonality to sue to oppose the registration of a trademark when it is shown that
its products using such trademark are being imported and sold in the Philippines
, pursuant to the terms of RA 166. [General Garments v. Director of Patents, 41
SCRA 50 (1971)]
o A foreign corporation has a right to maintain an action in Philippine courts e
ven if it is not licensed to do business and is not actually doing business on i
ts own therein to protect its corporate and trade names, since it is a property
right in rem, which it may assert to protect against all the world, in any of th
e courts of the world--even in jurisdiction where it does not transact business-
-just the same as it may protect its tangible property, against trespass or conv
ersion.
o This is consonance with the Convention of the Union of Paris for the Protectio
n of Industrial Property to which the Phils. is a party. Article 8 thereof prov
ides, "A trade name shall be protected in all the countries of the Union without
the obligation of filing or registration, whether or not it forms part of the t
rademark." The mandate is contained in RA 166, or the Trademark Law. [Converse R
ubber Corp. v. Universal Rubber Products, 147 SCRA 154 (1987)]
G. Application to existing foreign corporations (Section 129)
* Every foreign corporation which on the date of the effectivity of this Code is
authorized to do business in the Philippines under a license issued to it, shal
l continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws.
H. Amendments to articles of incorporation or by-laws of foreign corporations (S
ection 130)
* Within sixty (60) days after the amendment becomes effective, file with the SE
C, and in the proper cases with the appropriate government agency, a duly authen
ticated copy of the articles of incorporation or by-laws, as amended, indicating
clearly in capital letters or by underscoring the change or changes made, duly
certified by the authorized official or officials of the country or state of inc
orporation.
* The filing thereof shall not of itself enlarge or alter the purpose or purpose
s for which such corporation is authorized to transact business in the Philippin
es.
I. Amended license (Section 131)
* A foreign corporation authorized to transact business in the Philippines shall
obtain an amended license in the event it :
o Changes its corporate name, or
o Desires to pursue in the Philippines other or additional purposes
* By submitting an application therefor to the SEC, favorably endorsed by the ap
propriate government agency in the proper cases.
J. Merger or consolidation involving a foreign corporation licensed in the Phili
ppines (Section 132)
* One or more foreign corporations authorized to transact business in the Philip
pines may merge or consolidate with any domestic corporation or corporations if
:
o Such is permitted under Philippine laws and by the law of its incorporation
o The requirements on merger or consolidation as provided in this Code are follo
wed
* Whenever a foreign corporation authorized to transact business in the Philippi
nes shall be a party to a merger or consolidation in its home country or state a
s permitted by the law of its incorporation, such foreign corporation shall, wit
hin sixty (60) days after such merger or consolidation becomes effective, file w
ith the SEC, and in proper cases with the appropriate government agency, a copy
of the articles of merger or consolidation duly authenticated by the proper offi
cial or officials of the country or state under the laws of which merger or cons
olidation was effected
* Provided, however, that if the absorbed corporation is the foreign corporation
doing business in the Philippines, the latter shall at the same time file a pet
ition for withdrawal of its license.
K. Revocation of license (Section 134)
* 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 su
spended by the SEC upon any of the following grounds:
o Failure to file its annual report or pay any fees as required by this Code;
o Failure to appoint and maintain a resident agent in the Philippines as require
d by this Title;
o Failure, after change of its resident agent or of his address, to submit to th
e Securities and Exchange Commission a statement of such change as required by t
his Title;
o Failure to submit to the Securities and Exchange Commission an authenticated c
opy of any amendment to its articles of incorporation or by-laws or of any artic
les of merger or consolidation within the time prescribed by this Title;
o A misrepresentation of any material matter in any application, report, affidav
it or other document submitted by such corporation pursuant to this Title;
o Failure to pay any and all taxes, imposts, assessments or penalties, if any, l
awfully due to the Philippine Government or any of its agencies or political sub
divisions;
o Transacting business in the Philippines outside of the purpose or purposes for
which such corporation is authorized under its license;
o Transacting business in the Philippines as agent of or acting for and in behal
f of any foreign corporation or entity not duly licensed to do business in the P
hilippines; or
o Any other ground as would render it unfit to transact business in the Philippi
nes. (n)
L. Issuance of certificate of revocation (Section 135)
* Upon the revocation of any such license to transact business in the Philippine
s, the Securities and Exchange Commission shall issue a corresponding certificat
e 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 i
ts registered office in the Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation.
M. Withdrawal by a foreign corporation (Section 136)
* If a foreign corporation duly licensed to do business desires to withdraw, it
must file a petition for withdrawal, and must meet the following requirements:
o All claims accrued in the Philippines must be settled
o All taxes must be paid
* Petition must be published once a week for three (3) consecutive weeks. [Sec.
136, Corporation Code]
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1
Reviewer in Corporation Law