CLOSE CORPORATIONS

Section 96. Definition and applicability of Title. - A close corporation,

within the meaning of this Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified number
of persons, not exceeding twenty (20); (2) all the issued stock of all classes
shall be subject to one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock exchange or make
any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of
this Code.
- Between and among themselves, they feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you cannot be a stockholder
- All the issued stocks of all classes is subject to restrictions
- Shall not be listed in the stock exchange not publicly offered
- 3 qualifying conditions must be contained in the articles of
incorporation, to be considered as a close corporation, if not, it will not be
considered as such and will be governed by the general provisions of the
code
- Even if 100 % is owned by one person it will not be considered a close
corporation without the 3 qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in management
- Combination of the corporation and partnership type of business
May any type of corporation, be organized as such close corporation?
- No, the 3 qualifying conditions must be present
What if 2/3 of the outstanding capital stock is owned by another
corporation which is also a close corporation, will it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the voting stocks of a
close corporation is also owned by a close corporation. It must be voting
stocks
- Even if another corporation owns or controls 2/3 of the voting stocks of
a close corporation, the latter may still be considered as such close
corporation if the corporation owning or controlling the shares is also a close
corporation.
Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation
within the meaning of this Code.
What kind of corporations cannot be a close corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
Section 97 is a permissive provision
Section 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom
may be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders
or directors than those provided in this Code.
After classification what then?
- After classification, qualification and then restriction as provided for
under the 3 qualifying conditions in section 96
Cumulative voting is restricted in close corporations if will be elected
solely by a particular class
In a close corporation, the articles of incorporation may provide for a
greater quorum and voting requirement in meetings of both stockholders or
directors to increase the veto power of minority stockholders, unlike in a
stock corporation wherein only directors meetings may provide for greater
quorum requirement and in stockholders meeting which may not be altered
or increased, as provide for in section 25, following the doctrine of limited
capacity
 The articles of a close corporation may likewise provide that the
business of the corporation shall be managed by the stockholders rather than
by the board of directors. However the same must contain the continuing
provisions required in paragraph 2 of section 97, that is:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors; and;
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
Liability of stockholders acting as directors in a close corporation are
more extensive since they are personally liable for corporate torts unless the
corporation has obtained a reasonable adequate liability insurance, unlike a
ordinary stock corporation, wherein directors thereof are only liable for
corporate torts only if they have been negligent or acted fraudulently in the
performance of their functions.
Restrictions
- In ordinary stock corporations, the restrictions must appear in the
articles of incorporation as well as the certificate of stocks
- In a close corporation, the restrictions must appear in the articles of
incorporation, the by-laws and the certificate of stocks. Otherwise, the same
shall not be binding on any purchaser thereof in good faith
What if the stockholders do not want to exercise their right or option to
purchase may it be sold to any person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on transfer of shares. - Restrictions on the
right to transfer shares must appear in the articles of incorporation and in the
by-laws as well as in the certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said restrictions shall not be
more onerous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the expiration
of said period, the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell his shares to
any third person.
o ordinary stock corporations are liable only if acted in Bad faith, fraud or
negligence in performance of duty
What if there are already 20 stockholders and they want to add 2
more, may it compel?
- In ordinary stock corporations, they may compel by mandamus
- In close corporations, may not be compelled to admit because it
breaches the qualifying conditions
Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or instead of consenting
they decide to amend their articles of incorporation
- Will have to amend the articles of incorporation to accommodate other
purchasers of share
- Will cease to be a close corporation if it amends and becomes in
excess of 20
o Unless all the stockholders consent they may
What if the other stockholders object to register? What will be the
remedy of the transferee?
- His remedy is rescission. The effect of rescission is mutual restitution
How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his shares at their
fair value for any reason, provided the corporation has sufficient assets in its
books to cover the debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing stockholder, unlike in an
ordinary stockholder where there is none, they may only do so in the exercise
of appraisal rights
Section 105. Withdrawal of stockholder or dissolution of corporation. - In
addition and without prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close corporation may, for
any reason, compel the said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued value, when the
corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities and Exchange
Commission, compel the dissolution of such corporation whenever any of acts
of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being
misapplied or wasted.
Agreements may also be entered in a close corporation <sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall be managed
Board resolution
- Ordinary stock corporations- sit and act as a body at a duly constituted
meeting, they may do so by virtue of the E-Commerce Act through
teleconference or video conference
Exception to the rule: other officers may be directly appointed and
hired by the stockholders
Close corporations may validly act even without a meeting provided
the conditions are obtained
Section 101. When board meeting is unnecessary or improperly held. - Unless
the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
Pre-emptive rights in a close corporation is absolute
Section 102. Pre-emptive right in close corporations. - The pre-emptive right
of stockholders in close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money, property or
personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
Why is it said to be absolute?
- Because there is no public offering in a close corporation, otherwise it
will not be considered as close
In a close corporation the pre-emptive rights is broadened to include all
issues without exception unless denied or limited by the articles of
incorporation
Section 39 is the governing provision concerning rights of the
stockholder in an ordinary stock corporation and it may be denied. If it is not
denied a stockholder can exercise his pre-emptive rights for all issues of
shares whether money, property or previously incurred indebtedness.
Section 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued
in good faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.
Are treasury shares covered in the exercise of pre-emptive rights in
ordinary stock corporations?
As regards amendments
Section 103. Amendment of articles of incorporation. - Any amendment to the
articles of incorporation which seeks to delete or remove any provision
required by this Title to be contained in the articles of incorporation or to
reduce a quorum or voting requirement stated in said articles of incorporation
shall not be valid or effective unless approved by the affirmative vote of at
least two-thirds (2/3) of the outstanding capital stock, whether with or
without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or
removing any of the aforesaid provisions, at a meeting duly called for the
purpose.
What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. - Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so divided respecting the
management of the corporation's business and affairs that the votes required
for any corporate action cannot be obtained, with the consequence that the
business and affairs of the corporation can no longer be conducted to the
advantage of the stockholders generally, the Securities and Exchange
Commission, upon written petition by any stockholder, shall have the power
to arbitrate the dispute. In the exercise of such power, the Commission shall
have authority to make such order as it deems appropriate, including an
order: (1) cancelling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement; (2) cancelling,
altering or enjoining any resolution or act of the corporation or its board of
directors, stockholders, or officers; (3) directing or prohibiting any act of the
corporation or its board of directors, stockholders, officers, or other persons
party to the action; (4) requiring the purchase at their fair value of shares of
any stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the corporation; or (7)
granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or affiliate of
the corporation, and whose further qualifications, if any, may be determined
by the Commission. A provisional director is not a receiver of the corporation
and does not have the title and powers of a custodian or receiver. A
provisional director shall have all the rights and powers of a duly elected
director of the corporation, including the right to notice of and to vote at
meetings of directors, until such time as he shall be removed by order of the
Commission or by all the stockholders. His compensation shall be determined
by agreement between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence of agreement or
in the event of disagreement between the provisional director and the
corporation.
- Powers of the SEC in intra-corporate concerns has been transferred to
the proper commercial courts
- Prohibit, even if acting in good faith
- Provisional director appointed by the court
- Requiring the purchase, irrespective of unrestricted retained earnings
- The provision of the law above-quoted gives the SEC a very wide
discretion in respect to management of a close corporation in the event of a
deadlock. It may:
1. Cancel or alter any provision in the articles of incorporation, by-laws or
any stockholders agreement
2. Cancel, alter or enjoin any resolution or other act of the corporation or
its board of directors, stockholders or officers
3. Prohibit any act of the corporation or its board of directors,
stockholders or officers or other persons party to the action;
4. Requiring the purchase of the par value of the shares of any
stockholders, either by the corporation regardless of availability of
unrestricted earnings, or by the other shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.
Section 105
- Dishonesty is a ground for dissolution of a close corporation
- Even one stockholder may petition for dissolution
o when there is a relief available, dissolution would not be available in an
ordinary corporation
CLOSE CORPORATION ORDINARY STOCK CORPORATION
1. The number of stockholders cannot exceed 20 No limitation as to
number of shareholder
2. To the extent that all stockholders can be deemed directors, the
number of directors can effectively be more than 15 Maximum number
of directors is 15
3. Shares of stock are subject to specified restrictions Generally no
restriction on transfer of shares
4. Shares of stock are prohibited from being listed in the stock exchange
or offered for sale to the public No prohibition
5. Stockholders may take an active part in corporate management by
vesting management to them rather than a Board of Director
Management is lodged in the Board of Directors
6. Those active in management are personally liable for corporate torts
unless the corporation has obtained an adequate liability insurance
Directors are liable for torts only if they have acted negligently or
fraudulently
7. Directors can validly act even without a meeting Directors must, as
a rule, act as a body at a duly constituted meeting
8. Agreements between stockholders regarding the operations of the
business can validly be made Not valid and binding since stockholders
agreement cannot limit the discretion of the Board to manage corporate
affairs
9. To the extent that directors may be classified into one or more classes
and to be voted solely by a particular class of stock, cumulative voting may,
in effect, be restricted Ordinarily, no such classification and no restrictions
on cumulative voting
10. The articles of incorporation may provide that all officers shall be
elected or appointed by the stockholders Officers are elected by the
Board of Directors
11. It may provide for greater quorum and voting requirements in
meetings of stockholders and directors Although the articles of incorporation
or by-laws may provide for greater quorum and voting requirements in
directors meeting under section 25, those for stockholders meeting cannot
generally be altered
12. Restriction on transfer of shares should be indicated in the articles of
incorporation, by-laws and stock certificates Valid and binding if indicated in
the articles of incorporation and stock certificates
13. Pre-emptive rights of stockholders is broader as it include all issues
without exception Pre-emptive rights may be denied as provided for in
section 39
14. A stockholder may withdraw and compel the corporation to purchase
his shares for any reason with the limitation only that the corporation has
sufficient assets to cover its liabilities exclusive of capital stock Unless he
sells his shares, a stockholder cannot get back his investment nor compel the
corporation to buy his shares except in the exercise of his appraisal right
15. The proper forum may interfere in the management of a close
corporation in case of deadlocks under Section 104, even of the
directors/stockholders are acting in good faith Courts cannot interfere I
the business judgment of the directors/stockholders BUSINESS JUDGMENT
RULE
16. Any stockholder may petition the SEC for corporate dissolution on
grounds among others, provides for in section 105 Dissolution may be had
only on the grounds provided by the provisions of the Code on dissolution and
P.D. 902-A, as amended
Manuel Dulay Enterprises vs. CA
- What was the position of Manuel Dulay here? President, General
Manager and Treasurer
- Cannot act both as president and treasurer at the same time
- Since it is a close corporation owned by the family of Manuel Dulay,
save and except the secretary, it should be governed by Title XII
- Petitioner is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not
necessary to bind the corporation for the action of its president. At any rate, a
corporate action taken at a board meeting without proper call or notice in a
close corporation is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of the corporation after
having knowledge of the meeting which, in this case, petitioner Virgilio Dulay
failed to do.
- Virgilio Dulay is a signatory witness, he knows very well about the deed
of absolute sale, he is estopped
Naguiat vs. NLRC
- Section 100 par. 5. To the extent that the stockholders are actively
engaged in the management or operation of the business and affairs of a
close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance.
Family corporations is not automatically a close corporation the 3
qualifying conditions must be present.
SPECIAL CORPORATIONS
 2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
What provision governs educational corporations?
Section 106. Incorporation. - Educational corporations shall be governed by
special laws and by the general provisions of this Code. (n)
- Special laws like they Education Act of the Philippines
- These institutions of learning, once recognized by the government as
such are mandated by law to be incorporated within ninety (90) days under
the provisions of the Corporation Code and must, perforce, comply with the
requirements and procedure laid down there under. Their failure to so will not
immune the educational institution from suit as a corporation. (Chiang Kai
Siek Case)
- Favorable recommendation of government agency involved
Two types of educational corporations
- Certificate of completion in the academic field
- Vocational and technical ones
o Recommendation of DECS if certificate of completion in the academic
field
How is the governing board of an educational institution instituted?
- Non-stock- multiples of 5 only (example: 5,10,15)
- Stock- can be anywhere between 5 to 15
Can they consist of 7 or 9 members?
- Yes, if stock
Can they be incorporated also as non-stock?
- Yes
- B.P. 232 allows the organization of an educational institution that is
stock corporation, only if they do not issue a certificate of completion in the
academic field
Qualifications and disqualifications of the membership in the board of
an educational corporation
- Educational corporations are governed by special laws and general
provisions, hence if there is no provision in the special law, you go back to
section 25 and 27 of the general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional qualifications and disqualifications
Section 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no
one shall act as president and secretary or as president and treasurer at the
same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate
act, except for the election of officers which shall require the vote of a
majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Section 27. Disqualification of directors, trustees or officers. - No person
convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within
five (5) years prior to the date of his election or appointment, shall qualify as
a director, trustee or officer of any corporation. (n)
Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those established by religious groups and
mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of which
is owned by such citizens. The Congress may, however, require increased
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the
Philippines.

No educational institution shall be established exclusively for aliens and no

group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools
established for foreign diplomatic personnel and their dependents and, unless
otherwise provided by law, for other foreign temporary residents.
- Management is left solely to citizens of the Philippines
- Board of Directors manages the corporate affairs, foreigners cannot
therefore be elected in the board
- Exceptions are, mission boards and religious orders, which may have a
governing board consisting of foreigners
Term of office of governing board in an educational institutions
- Can serve a term of 5 years. If that be the case, 1/5 of their number
shall expire every year
Non-stock or stock, can they serve for a 1 year term only?
- Yes, the articles of incorporation may provide that it be 1 year only
What are these religious corporations spoken off?
- Corporation sole and religious societies
What is a corporation sole?
- Consists of one person only and his successor in some particular
station, who are incorporated by law in order to give them some legal
capacities and advantages, particularly that of perpetuity, which in their
natural persons they could not have had
May a corporation be organized by less than 5 natural persons?
- General rule, 5 to 15 natural persons(except cooperatives and
corporations primarily organized to hold equities in rural banks and may
rightfully become incorporators thereof)
- Exception, corporation sole, consist of only one person
May any person form or organize a corporation sole?
- No, not any person can form a corporation sole, section 110 provides:
Section 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
Is it required to file the articles of incorporation in the SEC?
- Yes
What should be contained in the articles of incorporation?
- Section 111 and section 112 provides for the contents and procedures
Section 111. Articles of incorporation. - In order to become a corporation sole,
the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect
or church are not inconsistent with his becoming a corporation sole and do
not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
filled, according to the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election
or letter of appointment of such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the
religious denomination, sect or church theretofore administered or managed
by him as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder shall be held in trust by him as a corporation sole, for the use, purpose,
behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
Is it required to indicate its terms of execution? Why not?
- Not required because they are supposed to exist in perpetuity
- However, it does not mean that it shall continue to exist forever, it
merely means that it has the capacity of continuous existence during a
particular period until dissolved in accordance with law
When will it acquire judicial personality? How do you compare this to
other types of corporation?
- After the filing the verified articles of incorporation along with the
documents required in Section 112 with the SEC, immediately becomes
endowed with corporate personality, this serves as an exception to the rule
that a corporation acquires juridical personality only upon the issuance of a
certificate of incorporation by the said government agency.
- Upon filing of verified articles of incorporation with the SEC, will not
require the approval of SEC
A corporation sole is possessed with the same power, rights and
privileges, to own, acquire and hold or convey properties like any other
corporation? True or False
- False, they have the same power rights and privileges, but when it
comes to alienation and acquisition, it must possess a court order, however
when there is a regulated method, a court order may be dispensed with <sec.
113>
Section 113. Acquisition and alienation of property. - Any corporation sole
may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes. Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon proof made to
the satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The application
for leave to sell or mortgage must be made by petition, duly verified, by the
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided,
That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and personal property, such rules,
regulations and discipline shall control, and the intervention of the courts
shall not be necessary. (159a)
 Since a corporation sole is consists only of one person, will the
registration of the property in the name of the corporation sole vest unto the
head thereof the ownership of the property?
- No, it will not vest unto the head, the head is acting merely as a
guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land Reg. Comm, et
al.
- Act only as a guardian
- Ownership devolves upon the congregation or religious denomination
- A corporation consists of one person only and his successors (who will
always be one at a time, in some particular station), who are incorporated by
law in order to give them some legal capacities and advantages, particularly
that of perpetuity, which in their natural persons they could not have had
- Roman Catholic Church has no nationality and that the framers of the
Constitution, as will be hereunder explained, did not have in mind the
religious corporations sole when they provided that 60 percent of the capital
thereof be owned by Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted into private land when the same has
been openly, continuously and exclusively in possession of the property as
concept of an owner for 30 years, automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the land should be in mind
- If they still form part of public domain they cannot be owned, but if
they are converted into private land, the constitutional prohibition will not
apply
If there is vacancy who will fill up the same? What if there is none,
what must the successor do?
- According to section 114:
Section 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
sole shall become the corporation sole on their accession to office and shall
be permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election,
or letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the religious
denomination, sect or church represented by the corporation sole to
administer the temporalities and manage the affairs, estate and properties of
the corporation sole during the vacancy shall exercise all the powers and
authority of the corporation sole during such vacancy. (158a)
If a corporation exists in equity may it not be dissolved?
Section 115. Dissolution. - A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange Commission
a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding
up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (n)
- While section 115 of the code provides for the process and procedure
for the dissolution of a corporate sole, there is nothing in the law itself which
would prohibit it from amending its articles of incorporation
- It is believed that authorization for the dissolution by the particular
religious denomination, sect or church, as required in sub-paragraph 3 of
section 115 would still be necessary in the case of amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term will not apply to a religious corporation
May a corporation sole be dissolved by judicial decree?
- General rule: No, because a corporation sole, is by its very nature
ecclesiastical and religious (doctrine of separation of church and state)
- Exception: police power of the state, if its purpose is being carried out
and is instead being used for illegal purpose, it may be so dissolved
What are religious societies?
- Under common law, a religious society is a body of persons associated
together for the purpose of maintaining religious worship.
Is it also required to file its articles of incorporation to the SEC?
- No <sec. 116> may
What should be contained in the articles of incorporation?
- Section 116 provides:
Section 116. Religious societies. - Any religious society or religious order, or
any diocese, synod, or district organization of any religious denomination,
sect or church, unless forbidden by the constitution, rules, regulations, or
discipline of the religious denomination, sect or church of which it is a part, or
by competent authority, may, upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration of its temporalities or for the
management of its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by the affidavit
of the presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body;
3. That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of
the religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the corporation is to be established
and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15). (160a)
Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not require to indicate its
term of existence
When will it acquire juridical personality?
- Only a corporation sole may come into existence without SEC approval,
section 19 will thus govern, Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to atty. Ladia because there are
those that can issue for example cooperatives- BUREAU OF COOPERATIVES
which register, home insurance guaranty corporation- HOME OWNERS
How may religious societies be dissolved?
- Go to the general rules governing dissolution, because the rules under
special corporations do not provide for such rule
DISSOLUTION
What is dissolution?
- Extinguishment of the corporate franchise and the termination of
corporate existence
3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise (voluntary dissolution);
3. By revocation of its corporate franchise (involuntary dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life expires, the corporation ceases to be
a body corporate for purposes of continuing the business for which it is
organized. But it shall nevertheless be continued as a body corporate for
three years after the time when it would have be dissolved, for the purpose of
prosecuting and defending suits by or against it and for enabling it gradually
to settle and close its affairs to dispose of and convey its property and to
divide its assets. There is no need for the institution of a proceeding for quo
warranto to determine the time and date of the dissolution of a corporation
because the period of corporate existence is provided in the articles of
incorporation. When such period expires and without any extension having
been made pursuant to law, the corporation is dissolved automatically insofar
as the continuation of its business is concerned.
- The rights of the lessor and the lessee over the improvements which
the latter constructed on the leased premises are governed by Article 1678 of
the Civil Code. The provision gives the lessee the right to remove the
improvements if the lessor chooses not to pay one half of the value thereof.
However, in the case at bar the law will not apply because the parties herein
have stipulated in the contract their own terms and conditions concerning the
improvements before the termination of the lease. Petitioner PNB as assignee
of PBM succeeded to the obligation of the latter under the contract of lease. It
could not possess rights more than what PBM had as lessee under the
contract. Hence, petitioner was duly bound to remove the improvements
before the expiration of the period of lease. Its failure to do so when the lease
was terminated was tantamount to a waiver of its rights and interest over the
improvements on the leased premise.
o 3 modes of dissolution, 3 modes of voluntary dissolution and 3 modes
of liquidation and winding up- FREQUENTLY ASKED IN THE FINALS
What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are affected; <sec.118>
2. Voluntary dissolution where creditors are affected; <sec. 119>
3. Shortening of corporate term. <sec. 120>
Voluntary dissolution where no creditors are affected <sec.118>
- The formal and procedural requirements necessary are the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member either by registered
mail or personal delivery at least thirty (30) days prior to the meeting
(scheduled by the board for the purpose of submitting the board action to
dissolve the corporation for approval of the stockholder or members.);
3. Publication of the notice of time, place and subject of the meeting for
three (3) consecutive weeks in a newspaper published in the place where the
principal office of said corporation is located or in a newspaper of general
circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the stockholders owning
at least 2/3 of the outstanding capital stock or 2/3 of the members at the
meeting duly called for the purpose;
5. A copy of the resolution authorizing the dissolution must be certified by
a majority of the board of directors or trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
Should this be strictly complied with?
- Yes, compliance with the requirements and formalities prescribed
above is mandatory such that failure to comply therewith will have no effect
on the legal existence of the corporation.
Will dissolution be effective and valid by a mere resolution of the BOD
and stockholders?
- No, a mere resolution by the stockholders or the BOD of a corporation
to dissolve the same does not affect the dissolution but that some other
steps, administrative or judicial is necessary. (Daguhoy Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it is only through the
State which can allow the termination of its existence; without consent of the
State, it will not be dissolved.
Voluntary dissolution where creditors are affected <sec.119>
- By virtue of a petition, when there are creditors affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members at a meeting duly
called for that purpose;
2. Petition for dissolution shall be filed with the SEC signed by a majority
of its board of directors or trustees or other officers having the management
of its affairs, verified by the president or secretary or one of its directors or
trustees, setting forth all claims and demands against it.
3. Issuance of an order by the SEC reciting the purpose of the petition
and fixing the date on or before which objections thereto may be filed by any
person, which date shall not be less than thirty days nor more than sixty days
after entry of the order.
4. Before such date, a copy of the order must be published once a week
for three (3) consecutive weeks in a newspaper of general circulation
published in the city or municipality where the principal office is situated or in
a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3)
public places in such city or municipality.
6. Upon five (5) days notice, given after the date on which the right to
file objections has expired, the SEC shall hear the petition and try any issue
made by the objections filed.
7. Judgment dissolving the corporation and directing of its assets as
justice requires and the appointment of a receiver (if necessary in its
discretion) to collect such assets and pay the debts of the corporation.
o The foregoing are also mandatory requirements
Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on the part of the court.
The code uses the word may; the law intended to let the shareholders have
the control of the assets of the corporation upon dissolution and winding up.
- The directors may also undertake liquidation and winding up of its
corporate affairs, and sound business judgment, on how they will wind up
Dissolution by shortening of corporate term <sec.120>
- Will be valid upon approval of the SEC, unlike general amendments,
which will be deemed approved if not acted upon by the SEC within 6 months
from the date of filing for a cause not attributable to the corporation.
- Shortening of the corporate term partakes the nature of an
amendment of the articles of incorporation. Section 16 under general
amendments allows written assent section 37 mandates that the vote must
be cast at a duly constituted meeting.
Section 120. Dissolution by shortening corporate term. - A voluntary
dissolution may be effected by amending the articles of incorporation to
shorten the corporate term pursuant to the provisions of this Code. A copy of
the amended articles of incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the shortened term, as
the case may be, the corporation shall be deemed dissolved without any
further proceedings, subject to the provisions of this Code on liquidation. (n)
o Intra-corporate- special commercial courts
Another way of dissolving a corporation is through involuntary
dissolution
Section 121. Involuntary dissolution. - A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds provided by existing laws,
rules and regulations. (n)
- Dissolution is tantamount to the imposition of death penalty
- Instead of dissolving the corporation, courts normally enjoin the further
commission of the questioned act
- The relief of dissolution will be awarded only where no other remedy is
available and it will not be allowed where the rights of the stockholders can
be, or are, protected in some other way (Republic vs. Bisaya Land Trans. Co.
Inc.)
What are the grounds for involuntary dissolution?
- It is commenced through a verified complaint or motu proprio by the
proper courts
- Section 6 of PD 902-A provides for the grounds for involuntary
dissolution as follows:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing
to the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of its
franchise;
4. Continuous inoperation for a period of at least five (5) years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by
the Commission within the prescribed period.
- Other grounds are provided for in the corporation code itself: among
them are:
1. Violation of any provision of the Code under section 144;
2. In case of deadlock in a close corporation as provided for in section
105;
3. In a close corporation, any acts of directors, officers or those in control
of the corporation which is illegal or fraudulent or dishonest or oppressive or
unfairly prejudicial to the corporation or any stockholder or whenever
corporate assets are being misapplied or wasted under section 105.
- Mere dishonesty is also a ground in a close corporation
- Other grounds can be found in other special laws like the Securities
Regulation Code and the General Banking Act as well as the Insurance Code.
Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial foreclosure of respondents
charter to show a mis-user of its franchise justifying such a forfeiture
- Object is to protect the public, and not to redress private grievances,
the mis-user must be such as to work or threaten a substantial injury to the
public, or such as to amount to a violation of the fundamental condition of the
contract by which the franchise was granted and thus defeat the purpose of
the grant
- Courts proceed with extreme caution which has for their object the
forfeiture of corporate franchise, and forfeiture will not be allowed, except
under express limitation, or for plain abuse of power by which the corporation
fails to fulfill the design and purpose of its organization. But when the abuse
or violation constitutes or threatens a substantial injury to the public or such
as to amount to a violation of the fundamental conditions of its charter, or its
conduct is characterized by obduracy or pertinacity in contempt of law,
dissolution will be granted
- Did the court dissolve the corporation? No, it did not, it granted the
corporation 6 months to cease and desist the performance of the questioned
act otherwise it will be dissolved
 Government vs. El Hogar
- 3 causes of action, the first is that the corporation violated the law by
holding on the property beyond that provide for by law, the second is that the
corporation undertook the management f petitioners belonging to delinquent
shareholders of the association, and lastly that the by-law provision, which
empowers the BD to cancel shares and to return to the owners thereof the
balance returning from the liquidation
Compare to Philippine Sugar Estate, wherein the court ruled
conditional dissolution. Why decree conditional dissolution in one and not in
the other case?
- Because in El Hogar the government was at fault, the government
wasnt able to issue the certificate of title on time
- When the case was instituted, El Hogar was already able to dispose
the properties in question, in Philippine Sugar Estate it was still the holding
the properties in order to enrich itself at the expense of the taxpayers
Republic vs. Security Credit and Acceptance Corp. et al.
- The corporation here is a lending institution and not a banking
institution
- Defendant corporation violated the law because before a corporation
may engage into a banking activity it must first obtain a secondary franchise
from the Central Bank
- Defendant corporation threatens substantial injury to the general
public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only where no other remedy is
available and it will not be allowed where the rights of the stockholders can
be, or are, protected in some other way
- Misuse and misapplication of the funds and assets of the respondent
were committed particularly by the corporate officers, where they can instead
be held personally liable
- Since there is another remedy available dissolution is not warranted
Assuming the above stated corporation is a close corporation, would
the court decree otherwise?
- Yes, because in a close corporation, mere dishonesty is a ground for
the dissolution
- Can even be dissolved by petition of only one stockholder on the
grounds stated in the code < sec. 105>
 Financing Corporation of the Philippines vs. Teodoro
- Minority stockholders may not ask for the dissolution of a corporation
in private suits and that such actions should be brought by the Government
through its legal officers, except in cases where the intervention of the State,
for one reason or another, cannot be obtained, as when the State is not
interested because the complaint is strictly a matter between the
stockholders and does not involve, in the opinion of the legal officer of the
Government, any of the acts or omissions warranting quo warranto
proceeding , in which minority stockholders are entitled to have such
dissolution. It should be exercised if necessary in order not to entirely ignore
and disregard the rights of said minority stockholders, especially when said
minority stockholders are unable to obtain redress and protection of their
rights within the corporation itself. Stockholders should not be left without
recourse
Present set up
- Any stockholder or member of a corporation can institute a dissolution
proceeding against his own corporation before the proper forum
- Special Commercial Courts, shall hear and decide intra-corporate
disputes
May a corporation ask for dissolution of the corporation when there is
no prejudice to the general public?
- Yes, in a close corporation, a petition for the dissolution of the
corporation may be instituted by any one individual shareholder on the
ground, even by mere dishonesty
Effects of dissolution
- The dissolution of a corporation not only terminates its primary
franchise to be a corporation, but generally prevents it from further
exercising other or secondary franchises which have been conferred to its. It
terminates its power to enter into contracts or t o continue the business as a
going concern.
- Based on this general rule, the Supreme Court held that a corporation,
whose corporate life expired, cannot lawfully pursue the business for which it
was organized. It cannot apply for a new certificate or a secondary franchise
for it is incapable of receiving a grant. Neither can it enforce a contract
executed prior its dissolution for the purpose of continuing the business of its
organization.
- In general the rights and liabilities of the corporation are not
extinguished by its dissolution.
Section 145. Amendment or repeal. - No right or remedy in favor of or against
any corporation, its stockholders, members, directors, trustees, or officers,
nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (n)
Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an activity that was
illegal
- A corporation where the corporate life has expired it cannot lawfully
pursue the business for which it was organized.
- the Supreme Court held that a corporation, whose corporate life
expired, cannot lawfully pursue the business for which it was organized. It
cannot apply for a new certificate or a secondary franchise for it is incapable
of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a medal for its illegal
acts
- It cannot apply for a new certificate or a secondary franchise for it is
incapable of receiving a grant. It was not even a corporation de facto. And
then, there is no application subscribed by the new corporation
- And yet as stated, the new corporation has not filed any application for
certificate of public convenience in Sabang, and has not published such
application.
Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would convey the idea clearly
manifested in the limitation but not for the purpose of continuing the
business for which it was established, that the 3-year period allowed by the
law is only for the purpose of winding up its affairs.
Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court applied the
constitutional provision
- Cannot be read as permitting to destroy the substantive rights
- Such would collide with the non-impairment of contracts clause of the
constitution
- Complainants will have the right to follow the assets of the corporation
in the hands of SRA or any other agency for that matter
After dissolution what next?
- Liquidation and winding up should follow
What is the definition of liquidation and winding up?
- Collection of all corporate assets, the payments of all its debts and
settlement of its obligations and the ultimate distribution of the corporate
assets, if any of it remains, to all stockholders in accordance with their
proportionate stockholdings in the corporation or in accordance with their
respective contracts of subscription.
Preference upon liquidation
- If there are preferred shares, the preference granted to such should be
complied with
- Preferred shares may give the holder thereof, preference only in the
dividends but also in the distribution of corporate assets upon liquidation or
termination of the corporate existence. If such is the intent, the contract of
subscription must so indicate lest they are placed on equal footing with
common shareholders
- Preference may be participating or non-participating
Dissolved corporations are granted a period of 3 years to liquidate
Section 122. Corporate liquidation. - Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three (3) years after
the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and
after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall
be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
However the 3 year period is not absolute
Liquidation may be undertaken in either of the 3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a corporation and although
there is no law authorizing it, neither is there anything that prohibits the BOD
from undertaking the same
- If this method is resorted to, the board will only have a period of 3
years to finish its task of liquidation
- Claims for or against the corporate entity not filed within the period will
become unenforceable as there exist no corporate entity against which they
can be enforced
- Actions pending for or against the corporation when the 3 year period
expires, are abated since after the period, the corporation ceases for all
intents and purposes and is no longer capable of suing or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate assets to a trustees
who will take charge of liquidation
- If this method is used, the three year period limitation imposed by
section 122 will not apply provided the designation of the trustee is made
within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum on petition or motu
proprio upon the dissolution of the corporation
- The appointment of a receiver is, however, permissive rather than
mandatory and the law tends to recognize that in cases of voluntary
dissolution there is no occasion for the appointment of a receiver except
under special circumstances and upon proper showing
- If a receiver is appointed, the 3 year period fixed by law within which to
complete the task of liquidation will not likewise apply because the dissolved
corporation is substituted by the receiver who may sue or be sued even after
that period
o Mere appointment of a receiver without anything more does imply in
the dissolution of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation when the 3 year period
expires, are abated since after that period, the corporation ceases for all
intents and purposes and is no longer capable of suing or being sued
- May be continued by the trustee provided done within the 3 year
period
- Should the corporation, therefore, finds it difficult to finish its
liquidation, it may, at any time during the three year period, convey all its
assets and receivables to a trustee to prosecute and defend suits by or
against the corporation begun before the expiration of said period
- The effect of the conveyance is to make the trustees the legal owners
of the property conveyed, subject to the beneficial interest therein of
creditors and stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is dissolved and the
liquidation of the assets is placed in the hands of receiver or assignee, the
period of 3 years prescribed by law is not applicable and the assignee may
institute all actions leading to the liquidation of the corporation even after the
expiration of 3 years.
- If the corporation carries out the liquidation of its assets through its
own officers and continues and defends the actions brought by or against it,
its existence shall terminate at the end of three years from the time of
dissolution; but if a receiver or assignee is appointed, with or without a
transfer of its properties within 3 years, the legal interest passes to the
assignee, the beneficial interest remaining in the members, stockholders,
creditors and other interested persons and said assignee may bring an action,
prosecute that which has already been commenced for the benefit of the
corporation, or defend the latter against any other action already instituted or
which may be instituted even outside of the period of three years fixed for
the offices of the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can continue prosecuting
suit even beyond the 3 year period fixed by law because he becomes the
legal owner of the rights, assets and properties conveyed to him
Gelano vs. CA
- Trustee as used in the corporation statute must be understood in its
general concept which could include the counsel to whom was entrusted in
the instant case, the prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditors and stockholders.
Debtors like the petitioners herein may not take advantage of the failure of
the corporation to transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show, in the first place. To sustain
petitioners contention would be to allow them to enrich themselves at the
expense of another, which all enlightened legal systems condemn.
- The counsel who prosecuted and defended the interest of the
corporation may be considered as a trustee at least with respect to the
matter in litigation only
 May a corporation that is already dissolved, transfer and assign its
assets and properties to a new corporation which will continue the business
of the dissolved one?
- Yes, provided all the stockholders gave their consent (Chung Ka Bio vs.
IAC)
Republic vs. Marsman Development Company & Chung Ka Bio vs. IAC
- During the three year period granted to a corporation to liquidate or
wind up its affairs, the BOD is not normally permitted to undertake any
activity outside the usual liquidation of the corporation. There is, however,
nothing to prevent the stockholders from conveying their respective
shareholdings toward the creation of a new corporation to continue the
business of the old. This is because winding up is the sole activity of the
dissolved corporation that does not intend to incorporate a new. If it does,
however, it is not unlawful for the old board of directors to negotiate and
transfer the assets of the dissolved corporation to the new corporation
intended to be created as long as the stockholders have given their consent
(Republic vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved corporation that does not
intend to incorporate anew. If it does, however, it is not unlawful for the old
board of directors to negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be created as long as the
stockholders have given their consent (Chung Ka Bio vs. IAC)
What happens to the remaining assets and properties of the dissolved
corporation if liquidation and winding up as provided in section 122 is not
complied with, as a result of which the 3 year period has elapsed
- If the three year extended life has expired without a trustee or receiver
having been expressly designated by the corporation within that period, the
board of directors o trustees itself, following the rationale of the Supreme
Courts decision in Gelano vs. CA may be permitted to do so continue as
trustees by legal implication to complete the liquidation. Still in the absence
of a BOD or BOT, those having any pecuniary interest in the assets, including
not only the shareholders but likewise the creditors of the corporation, acting
for and in its behalf, might make proper representations with the SEC, which
has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of the Supreme Court in the case of
Clemente vs. CA is wrong, opinion is further discussed after the Clemente
Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity or those
of its owners and creditors. If the three year extended life has expired without
a trustee or receiver having been expressly designated by the corporation
within that period, the board of directors o trustees itself, following the
rationale of the Supreme Courts decision in Gelano vs. CA may be permitted
to do so continue as trustees by legal implication to complete the
liquidation. Still in the absence of a BOD or BOT, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the
creditors of the corporation, acting for and in its behalf, might make proper
representations with the SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the
corporate concerns
o the ruling is wrong according to atty. Ladia
According to atty Ladia: What happens to a corporation that is already
dissolved, that has not been able to appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to exercise its rights granted in
section 122 after the 3 year period has elapsed, ceases to exist for all intents
and purposes, it can no longer sue or be sued
- according to 122 of the code, the property should be escheated,
accordingly:
Section 122. Corporate liquidation. - Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three (3) years after
the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and
after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall
be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
Definition
- Section 123. Definition and rights of foreign corporations. - For the
purposes of this Code, a foreign corporation is one formed, organized or
existing under any laws other than those of the Philippines and whose laws
allow Filipino citizens and corporations to do business in its own country or
state. It shall have the right to transact business in the Philippines after it
shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate
government agency. (n)
What if the law of the state of the foreign corporation does not allow
Filipino citizens to do business in their country?
- The phrase and whose laws allow Filipino citizens and corporations to
do business in its own country or state is not, however, an accurate inclusion
in the definition as ay corporation registered or organized under the laws of
another state is necessarily a foreign corporation whether or not the state of
its incorporation allow Filipino citizens or corporations to do business in that
forum.
- The said phrase was inserted by the framers of the law only as a
condition precedent to the grant of a license of a foreign corporation to do
business in the Philippines.
Composed of 100% Americans; organized under the laws other than
the Philippines
- The test is the incorporation test
- General rule: the place of its incorporation irrespective of the
nationality
- Exception: control test would apply in determining the corporate
nationality, i.e., the citizenship of the controlling stockholders determines the
nationality of the corporation
If a foreign corporation wants to transact business in the Philippines,
what must it do?
- Obtain a license
How may it do so?
- According to sec. 125:
Section 125. Application for a license. - A foreign corporation applying for a
license to transact business in the Philippines shall submit to the Securities
and Exchange Commission a copy of its articles of incorporation and by-laws,
certified in accordance with law, and 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:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue
in the transaction of its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of
shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order
to enable the Securities and Exchange Commission to determine whether
such corporation is entitled to a license to transact business in the
Philippines, and to determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate
under oath by the authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the country or state of the
applicant allow Filipino citizens and corporations to do business therein, and
that the applicant is an existing corporation in good standing. If such
certificate is in a foreign language, a translation thereof in English under oath
of the translator shall be attached thereto.
The application for a license to transact business in the Philippines shall
likewise be accompanied by a statement under oath of the president or any
other person authorized by the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other governmental agency in the
proper cases that the applicant is solvent and in sound financial condition,
and setting forth the assets and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no application for license
to transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate
government agency, whenever required by law. (68a)
Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the license, a foreign
corporation, except those engaged in foreign banking or insurance, shall
deposit with the SEC, for the benefit of creditors, securities consisting of
bonds or other evidence of indebtedness of the Philippine government or its
political subdivision, or of government owned or controlled corporation,
shares of stock in registered enterprises as this term is defined in R.A.
5186, shares of stock in domestic insurance companies and banks or any
combination thereof with an actual market value of 100,000
- Additional securities may be required by the SEC if the actual market
value of the securities on deposit has decreased by at least 10%. Section 126
of the code provides:
Section 126. Issuance of a license. - If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations, the
Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon
issuance of the license, such foreign corporation may commence to transact
business in the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered, revoked, suspended
or 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 Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of stock
in domestic corporations registered in the stock exchange, or shares of stock
in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however, That within six (6) months
after each fiscal year of the licensee, the Securities and Exchange
Commission shall require the licensee to deposit additional securities
equivalent in actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also
require deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of their
actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional
securities deposited with it if the gross income of the licensee has decreased,
or if the actual market value of the total securities on deposit has increased,
by more than ten (10%) percent of the actual market value of the securities
at the time they were deposited. The Securities and Exchange Commission
may, from time to time, allow the licensee to substitute other securities for
those already on deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to Philippine
residents, including the Government of the Republic of the Philippines. (n)
Other than section 125 and 126. What other requirements are set
under Philippine Law before a foreign corporation may transact business in
the Philippines
- Yes. A Resident agent is required. As a condition precedent to the grant
of a license to do or transact business in the Philippines, the foreign
corporation is required to designate its resident agent on whom summons
and other legal processes may be served in all actions or legal proceedings
against such corporation
- Section 128 provides:
Section 128. Resident agent; service of process. - The Securities and
Exchange Commission shall require as a condition precedent to the issuance
of the license to transact business in the Philippines by any foreign
corporation that such corporation file with the Securities and Exchange
Commission a written power of attorney designating some person who must
be a resident of the Philippines, on whom any summons and other legal
processes may be served in all actions or other legal proceedings against
such corporation, and consenting that service upon such resident agent shall
be admitted and held as valid as if served upon the duly authorized officers of
the foreign corporation at its home office. Any such foreign corporation shall
likewise execute and file with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in
consideration of its being granted by the Securities and Exchange
Commission a license to transact business in the Philippines, that if at any
time said corporation shall cease to transact business in the Philippines, or
shall be without any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred in the Philippines,
service of any summons or other legal process may be made upon the
Securities and Exchange Commission and that such service shall have the
same force and effect as if made upon the duly-authorized officers of the
corporation at its home office."
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal
process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such
service. All expenses incurred by the Commission for such service shall be
paid in advance by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty
to immediately notify in writing the Securities and Exchange Commission of
the new address. (72a; and n)
- The necessity of the appointment of a resident agent is only for the
purpose of receiving summons and other legal processes in any legal action
or proceeding against the foreign corporation
Who may be appointed as a resident agent?
- Section 127 provides that:
Section 127. Who may be a resident agent. - A resident agent may be either
an individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an
individual, he must be of good moral character and of sound financial
standing. (n)
May a partnership be appointed as a resident agent?
- Yes, domestic corporation taken in its general sense not legal sense
If there is a resident agent appointed. May summons be served to any
officers of the corporation?
- No, if there is a resident agent, the designation is exclusive and service
must be made only to the resident agent or else the service is without force
and effect unless made to him
- Thus, while the law allows service upon the SEC or any of its officers or
agents within the Philippines
- The two modes may become effective only if the foreign corporation
failed or neglected to designate such a person or an agent
- Summons must be made only to resident agent except when there is
no resident agent appointed
- Where such foreign corporation actually doing business here has not
applied for a license to do and has not designated an agent to receive
summons, then service of summons on it will be made pursuant to the
provisions of the rules of court. If such foreign corporation has a license to do
business, then summons to it will be served on the agent designated by it for
the purpose, or otherwise in accordance with the Corporation Law (General
Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd.)
If the foreign corporation conducts business in the Philippines without
the license requirement. What is the effect?
- Section 133 provides:
Section 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws. (69a)
- if they do so, the responsible officers may be subjected to the penal
sanctions provided for in section 144 of the code, which may either be fine or
imprisonment
What if it is not doing business without a license?
- If it is not transacting business in the Philippines, even without a
license, it can sue before the Philippine Courts
The general rule is that it is not the lack of required license but doing
business without a license which bars a foreign corporation form access to
our courts.
Exception:
1. Foreign corporations can sue before the Philippine Courts if the act or
transaction involved is an isolated transaction or the corporation is not
seeking to enforce any legal or contractual rights arising from, or growing out
of, any business which it has transacted in the Philippines
2. Neither is a license required before a foreign corporation may sue
before the forum if the purpose of the suit is to protect its trademark, trade
name, corporate name, reputation or goodwill;
3. Or where it is based on a violation of the Revised Penal Code;
4. Or merely defending a suit filed against it
5. Or where a party is stopped to challenge the personality of the
corporation by entering into a contract with it.
Rules laid down by the SC
A. As to whether or not it can sue B. As to whether or not it can be
sued
A foreign corporation transacting or doing business in the Philippines with a
license can sue before Philippine Courts A foreign corporation
transacting business in the Philippines with the requisite license can be sued
in the Philippine Courts
Subject to certain exceptions, a foreign corporation doing business in the
country without a license cannot sue in Philippine Courts A foreign
corporation transacting business in the Philippines without a license can be
sued in Philippine Courts
If it is not transacting business in the Philippines, even without a license, it
can sue before the Philippine Courts if it is not doing business in the
Philippines, it cannot be sued in Philippine Courts for lack of jurisdiction
A foreign corporation not doing business in the Philippines, may it be
sued?
- If it is not transacting business in the country it cannot be sued for lack
of jurisdiction
Is there any sanction that can be enforced to foreign corporations
which are doing business without the required license?
- Penal sanctions under section 144
- Any violation of the code is subject to such penal sanctions
What would constitute doing business?
- The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it
over to another. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization
(Mentholatum Co. Inc. vs. Mangaliman)
Mentholatum vs. Mangaliman
- The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it
over to another. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization
- Whatever transaction the Philippine-American Drug Co. had executed
in view of the law, the Mentholatum Co. did it itself. And the Mentholatum Co.
being a foreign corporation doing business in the Philippines without the
license required by section 68 of the Corporation Law, it may not prosecute
this action for violation of trade mark and unfair competition
Why is foreign corporations barred access from our courts if they do
business without a license?
- Marshall-Wells Co. vs. Henry W. Elser and Co.
Marshall-Wells Co. vs. Henry W. Elser and Co.
- The object of the statute was to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. The object of the
statute was not to prevent the foreign corporation from performing single
acts, but to prevent it from acquiring a domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in local
courts.
Bulakhidas vs. Navarro
- It is settled that if a foreign corporation is not engaged in business in
the Philippines, it may not be denied the right to file an action in Philippine
courts for isolated transactions
- The object of section 68 and 69 of the Corporation law was not to
prevent the foreign corporation from performing single acts, but to prevent it
from acquiring a domicile for the purpose of business without taking the steps
necessary to render it amenable to suit in the local courts. It was never the
purpose of the Legislature to exclude a foreign corporation which happens to
obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs. Manila Port Service
- It must stated that the section is not applicable to a foreign corporation
performing single acts or isolated transactions. There is nothing to show
that the petitioner has been in the Philippines engaged in continuing business
or enterprise for which it was organized, when the sixteen bundles were
erroneously discharged in manila, for it to be considered as transacting
business in the Philippines. The fact is that the bundles, the value of which is
sought to be recovered, were landed not as a result of a business transaction,
isolated or otherwise, but due to a mistaken belief that they were part of the
shipment of forty similar bundles consigned to persons or entities in the
Philippines, there is no justification therefore, for invoking the section
 There were 3 contracts entered into, how come they were still not
considered as doing business? (Antam Consolidted, Inc. vs. CA)
- Every case shall be judged in the light of its peculiar circumstances,
where a single act or transaction however, is not merely incidental or casual
but indicates the foreign corporations intention to do other business in the
Philippines, said single act or transaction constitutes doing or engaging in
or transacting business in the Philippines
- In the case at bar, the transaction entered into by the respondent with
the petitioners are not a series of commercial dealings which signify an intent
on the part of the respondent to do business in the Philippines but constitute
an isolated one which does not fall under the category of doing business.
- The records show that the only reason why the respondent entered
into the second and third transactions with the petitioner was because it
wanted to recover the loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction and in order to give
the latter a chance to make good on their obligation. From these facts alone,
it can be deducted that in reality there was only one agreement between the
petitioners and the respondent.
- The three seemingly different transactions were entered into by the
parties only in an effort to fulfill the basic agreement and in no way indicate
an intent on the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as a foreign corporation
doing business in the Philippines
- 3 contracts, but according to the court was not doing business in the
Philippines
Far East Intl import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme Court was doing
business in the Philippines
- Every case shall be judged in the light of its peculiar circumstances,
where a single act or transaction however, is not merely incidental or casual
but indicates the foreign corporations intention to do other business in the
Philippines, said single act or transaction constitutes doing or engaging in
or transacting business in the Philippines
- In the instant case, the testimony of Atty. Pablo Ocampo, that appellant
was doing business in the Philippines corroborated by no less than Nabuo
Toshida, one of appellants officers, that he was sent to the Philippines to look
into the operation of mines, thereby revealing the defendants desire to
continue engaging in business here, after receiving the shipment of the scrap
iron under consideration, making the Philippines a base thereof.
- In such a case, the single act of transaction is not merely incidental or
casual, but is of such character as distinctly to indicate a purpose on the part
of the operations for the conduct of a part of corporations ordinary business
If a corporation appoints a distributor or a representative, will it
necessarily imply doing business in the country?
- If the foreign corporation maintained an independent status during the
existence of the disputed contract.
- Appointment of a distributor or representative in the Philippines, unless
it has an independent status (transacts and does business in its own name
and for its account and not of the foreign corporation)
- if that be the case the mere appointment of a distributor will not
constitute doing business
How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner ASPAC and the
respondents show that there are provisions which are highly restrictive in
nature, such as to reduce petitioner ASPAC to a mere extension or instrument
of the private respondents
- ITEC was doing business without a license, however ASPAC is estopped
- by entering into the Representative Agreement with ITEC, petitioner is
charge with knowledge that ITEC was not licensed to engage in business
activities in the country, and is thus stopped from raising in defense such
incapacity of ITEC, having chosen to ignore or even presumptively take
advantage of the same
- In top-weld we ruled that a foreign corporation may be exempted from
the license requirements in order to institute an action in our courts if its
representative in the country maintained an independent status during the
existence of the disputed contract. Petitioner is deemed to have acceded to
such independent character when it entered into the Representative
Agreement with ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal or contract rights
arising from, or growing out of any business which it has transacted in the
Philippine Islands. The sole purpose of the action is to protect its reputation,
its corporate name, its goodwill, whenever that reputation, corporate name or
goodwill have through the natural development of its trade, established
themselves
- And it contends that its rights to the use of its corporate and trade
name, is a property right, a right in rem, which may assert and protect
against all the world, in any of the courts of the world even in jurisdictions
where it does not transact business just the same as it may protect its
tangible property, real or personal, against trespass, or conversion
- Since it is the trade and not the mark that is to be protected a
trademark acknowledges no territorial boundaries or municipalities or states
or nations, but extends to every market where the traders goods have
become known and identified by the use of the mark
General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business in the Philippine
Islands and which is unlicensed and unregistered to do business here, but is
widely and favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to maintain
an action in the Islands
- Mentholatum case was subsequently derogated when Congress,
purposely to counteract the effects of said case, enacted R.A. 638, inserting
Section 21-A in the Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts for infringement of a
mark or trade-name, for unfair competition, or false designation of origin and
false description, whether or not it has been licensed to do business in the
Philippines under Act Numbered Fourteen hundred and fifty-nine, as
amended, otherwise known as Corporation Law, at the time it brings
complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and MIL-ORO MFG.
Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity Fair Mills Inc. vs. T.
Eaton Co. this court further said:
By the same token, the petitioner should be given the same treatment in the
Philippines as we make available to our own citizens. We are obliged to
assure to nationals of countries of the Union an effective protection against
unfair competition on the same way that they are obligated to similarly
protect Filipino Citizen and firms
- The ruling in the aforecited case is in consonance with the Convention
of the Union of Paris for the protection of Industrial Property to which the
Philippines became a party. Article 8 thereof provides that 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 trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts, in the first place it
was not doing business in the Philippines
- The marketing of its products in the Philippines is done through an
exclusive distributor, Rustan Commercial Corporation. The latter is an
independent entity which buys and then markets not only products of the
petitioner but also many other products bearing equally well-known and
established trademarks and trade-names
Assuming Rustans had no independent status would the SC grant
Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it can bring action
because the case involves a violation of our penal code
- Such was a violation of article 189 of the RPC, if prosecution follows
after the completion of the preliminary investigation being conducted by the
Special Prosecutor the information shall be in the name of the People of the
Philippines and no longer the petitioner which is only an aggrieved party
since a criminal offense is essentially an act against the State. It is the latter
which is principally the injured party although there is a private right violated
- The records show that the goodwill and reputation of the petitioners
products bearing the trademark Lacoste date back even before 1964 when
Lacoste clothing apparels were forst marketed in the Philippines. To allow
Hemandas to continue using the trademark Lacoste for the simple reason
that he was the first registrant in the Supplemental Register of a trademark
used in international commerce and not belonging to him is to render
nugatory the very essence of the law on trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
- The law denies to a foreign corporation the right to maintain suit
unless it has previously complied with a certain requirement, then such
compliance, or the fact that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge of appellants alone,
and it would be unfair to impose upon appellee the burden of asserting and
proving the contrary. It is enough that foreign corporations are allowed by law
to seek redress in our courts under certain conditions: the interpretation of
the law should not go so far as to include, in effect, an inference than those
conditions have been met from the mere fact that the party suing is a foreign
corporation
Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos in the case at bar,
since the petitioner is not maintaining any suit but is merely defending one
against itself; it did not file any complaint but only a corollary defensive
petition to prohibit the lower court from further proceeding with a suit that it
had no jurisdiction to entertain
What law govern foreign corporation doing and transacting business in
the Philippines with a license
- Laws of the Republic of the Philippines save and except that would
normally be those matters which concern its formation, organization or
dissolution, or those fixing the relationship, liabilities, responsibilities, or
duties of the stockholders, members or officers of the foreign corporation or
their relations to each other.
- In effect, intra-corporate or internal matters not affecting creditors or
the public in general are governed not by Philippine laws but the law under
which the foreign corporation was formed or organized
Section 129. Law applicable. - Any foreign corporation lawfully doing business
in the Philippines shall be bound by all laws, rules and regulations applicable
to domestic corporations of the same class, except such only as provide for
the creation, formation, organization or dissolution of corporations or those
which fix the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation.
(73a)
Will the pre-emptive rights of a foreign corporation be governed by the
same section of the code? Is the pre-emptive rights of a stockholder in a
domestic corporation same as the pre-emptive of a stockholder of a foreign
corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign corporation? How do you
distinguish this case from a Philippine law?
- Since it concerns the rights of stockholders it is the law of New York
that should govern
Is the license to do business of a foreign corporation subject to
suspension or revocation? What are the grounds?
- Section 134 provides:
Section 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended by the Securities
and Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-
laws or of any articles of merger or consolidation within the time prescribed
by this Title;
5. A misrepresentation of any material matter in any application, report,
affidavit or other document submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do business in
the Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines. (n)
SEC does not have the sole authority to suspend or revoke the license
of a foreign corporation doing business in the Philippines, other government
agencies like the Central Bank , the Insurance Commission may also do so
within their respective dominion, despite the provision of section 134
If the SEC believes that revocation is warranted, section 135 provides
that:
Section 135. Issuance of certificate of revocation. - Upon the revocation of
any such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of revocation. (n)
Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign corporations. - Subject to existing laws
and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a
petition for withdrawal of license. No certificate of withdrawal shall be issued
by the Securities and Exchange Commission unless all the following
requirements are met;
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have
been paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.

P.D. 902-A
P.D. 902-A was amended by R.A. 8799 or the SECURITIES REGULATION
CODE in the year 2000
The jurisdiction of SEC for cases falling under section 5 thereof was
transferred to the courts of general jurisdiction designated by the SC, they
were called special commercial courts, the only exceptions were revocation of
corporate franchise and calling of elections
However the SEC retained receivership or suspension payments within
June 20,2000
Jurisdiction of special commercial courts are exclusive and original,
jurisdiction is conferred by law; 1 Special Commercial Court per region except
MAKATI and QUEZON CITY which has two
Devices or Schemes
- Pyramid scheme (misrepresentation)-Special Commercial Courts
- Syndicated estafa- not bailable
Alleje case
- Falls squarely under sec. 5 (a) Special Commercial Courts
- Allegation corporate officers employing schemes in diverting
- Not only detrimental to corporation, but general membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it may be filed to any
court
Intra-corporate
- Exclusive and original jurisdiction of special commercial courts
- Sole criteria is there must be an intra-corporate relationship
- Pertaining to a controversy (speaks also of intra-partnership
controversy, that partnership must be registered with the SEC)
Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
Intra-corporate relationship alone will not suffice to put it in the ambit
of special commercial courts and courts of general jurisdiction may take
cognizance
Case of a transferee of shares of stock to compel the corporation to
recognize him as a stockholder
How can it be intra-corporate when he is not yet fully paid
- When the transferee has done all he can be required to do to render
the transfer effectual and the corporation refuses to register the transfer, the
requirement of the registration is waived and the transferee is considered
technically a stockholder who may sue to enforce the right to have the
transfer registered
Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not yet prima facie; it will
not be considered intra-corporate
Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
In Andaya the court said that a corporate officer elected or appointed
by the BOD is always a corporate act
- The fact that petitioner sought payment of his back wages, other
benefits as well as moral and exemplary damages and attorneys fees in his
complaint will not operate to prevent the SEC from exercising its jurisdiction
under P.D. 902-A. The jurisdiction will not wrest on the NLRC just because of
that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to special commercial courts
and not in the NLRC
- SEC has jurisdiction over cases of removal from employment of
corporate officers
- The relationship of a person to a corporation, whether as officer or as
agent or employee or not determined by the nature of the servides
performed, but by the incidents of the relationship on they actually exist
- Corporate officers dismissal is always a corporate act or intra-corporate
controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction exception will not apply to mere
recovery
Main consideration
- Asserts his right to the office or questions the propriety or validity of
his ouster or removal, it will be the special commercial courts and not the
NLRC
Securities Regulation Code
- Transferred jurisdiction of the SEC to Special Commercial Courts
- Suspension of payment, appointment of management receivership
What is the reason for suspension of all claims?
- The reason for suspending actions for claims against the corporation is
not really to enable the management committee or the rehabilitation receiver
to substitute the defendant in any pending action against it before any court,
tribunal or body. The real justification is to enable the management
committee or rehabilitation receiver to effectively exercise his powers free
from any Judicial or extra-judicial interference that might unduly hinder or
prevent the rescue of the debtor company. To allow such other actions to
continue would only add to the burden of the management committee pr
rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed towards
restructuring and rehabilitation.(PAL vs. Spouses Sadic and Kurangking)
- To enable the receiver to effectively exercise his or her power free form
any judicial or extra-judicial that may disturb
3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a distress company;
ask the court to be given time to the payment of liability by postponing the
payment
- When it has sufficient assets and liabilities but forces the impossibility
of meeting them when they respectively fall due
2. Suspension of receiver with a management committee with a
rehabilitation play or suspension of payments accompanied by a proposal for
rehabilitation (with or without rehabilitation)
- corporation has sufficient assets to cover its liabilities, but sees the
possibility; is or without rehabilitation plans; normally would attach the
rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation has no sufficient assets
to its liabilities
May it still be revived?
- Yes, it may still be revived
How can a corporation with more liabilities than assets continue its
operations profitably?
- Even if the distressed company has no sufficient assets and liabilities it
can go for suspension
- It asked for a management committee without a receiver plan
(Victorius Milling case)
Convert their claims into equity
- Their liability was almost wiped out they became stockholders instead
of creditors
- After 5 years those who converted sold it back to the corporation,
thereby making profits
Amendment is for the economic development of the country
What if walang amendment, e mas maraming liabilities kesa assets
Suspension order- all actions for claims against the corporation are
accordingly suspended at whatever stage the proceedings maybe
Effect of suspension- you cannot foreclose
What are claims?
- Debts or demands of pecuniary nature. Assertion of a right to have
money paid
- Claims against the corporation shall be suspended, assertion of a right
to have money paid; it must present a monetary claim, liquidated or
unliquidated
Nullification of corporations does not present a monetary claim of
pecuniary nature
 Union vs. CA
- It does not allow a mere individual to file the petition which is limited to
corporations partnership or associations.
- Where no authority is granted to hear petitions of individuals for
suspension of payments, such petition are beyond the competence of the
SEC
What happens if there is a suspension order?
Explain the key phrase quality is equity
- All creditors stand on equal footing, secure or unsecure, holding or lien
or without a lien, no creditor may enforce his lien while rehabilitation is going
(Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
Rule of the thumb
- Automatic suspension even if not decreed in the decision itself
- Once lifted the preferred creditors will regain their preference
Appointment of a management committee
- Take over the management committee of the distressed corporation
- Extraordinary and drastic remedy
- Without any remedy
What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-corporate dispute is that if
there is an intra-corporate relationship
Why is there suspension of all actions against claims when a receiver is
appointed?
- To enable the management committee to exercise its powers
Sy Chim vs. Sy Siy Ho (before a management committee may be opt
by a court)
- 2 requisites for a valid appointment of management committee
1. Imminent danger of dissipation, loss, wastage or destruction of assets
or other corporate properties
2. Paralysis of business operations, the mere apprehension of future
misconduct based upon prior management
- Save and except in the case of a close corporation in case of deadlock
management committee is allowed to take over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an imminent danger of
dissipation, loss wastage or destruction of assets or other properties of a
corporation and paralysis of its business operations, the mere apprehension
of future misconduct based upon prior mismanagement will not authorize the
appointment of a management committee
Section 5 and 6(D) governed by separate rules; interim rules and intra-
corporate controversy
Venue of actions
- Rules of court- where the parties are residing
- Intra-corporate- no matter where the parties are residing it will be in
the city or municipality where the principal office is located
Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing the creditors a copy of
the petition and attachments thereof
- A creditor may now file the suspension proceedings; provides that
creditors owns at least 25%
Intra-corporate- rule 1 section 6
Service of summons- rule 2 section 5
- Summons may be made to anyone
In case of intra-corporate dispute, elections, fraud, etc; if they are
governed by interim rules of procedure on intra-corporate controversies
 Venue
- Special commercial courts where principal office is located/established
(section 5 rule 1)
- Matters of payment/suspension must be filed in the city/ municipality
where corporation is located
Under old rule, creditors have no right to institute an action for
receivership; now creditors, if they sold 20% they can institute an action for
receivership
Section 5
- Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate controversy
If the controversy arose out of an intra-corporate dispute rules on
interim rules of procedure of intra-corporate controversies shall govern
Rule 4 section 17- immunity from suit
Rehabilitation receiver shall not subject to any action, claim or demand
in connection with any act done omitted by him in good faith in the exercise
of his functions and powers herein conferred
Claim
- Right to payment, whether or not it is reduced to judgment, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or unsecured
Investment contracts
- A contract, transaction or scheme whereby a person invests his money
in a common enterprise and is led to expect profits primarily from the effects
of others
The management committee and rehabilitation receiver are
empowered to:
1. Take custody and control of all assets of the corporation
2. Evaluate assets and liabilities, earnings operations of the corporation
3. Determine the best way to protect the investors and creditors
4. Study, review evaluate the feasibility of continuing operation and
structures
5. Submit recommendations to the RTC regarding rehabilitation plan
6. Rehabilitate the corporation if determined to be feasible by the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)

- Also known as the Blue Sky Law since it was enacted to protect the public
from unscrupulous promoters who stake business which have no basis and
sell shares and interest therein to investors, who are then left holding
certificates representing nothing more than a claim to a square of the blue
sky.

-SEC. 2. Declaration of State Policy. The State shall establish a socially

conscious, free market that regulates itself, encourage the widest
participation of ownership in enterprises, enhance the democratization of
wealth, promote the development of the capital market, protect investors,
ensure full and fair disclosure about securities, minimize if not totally
eliminate insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market.

BROKER - person who buys and sells securities for the account of others.

DEALER - person who buys and sells securities for his/her own account in the
ordinary course of business.

NOTE: No person shall engage in the business of buying or selling

securities in the Philippines as a broker or dealer, or act as a salesman, or an
associated person of any broker or dealer unless registered as such with the
Commission. (Sec 28)

SECURITES - shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instrument, whether written or electronic in character. It
includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments;
b) Other instruments as may in the future be determined by the
Commission;
c) Fractional undivided interests in oil, gas or other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or participation in a profit
sharing agreement, certificates of deposit for a future subscription;
f) Proprietary or non proprietary membership certificates incorporations;
and
g) Shares of stock, bonds, debentures, notes, evidences of indebtedness,
asset-backed securities;

GR: Securities shall not be sold or offered for sale or distribution within the
PH, without a registration statement filed with and approved by SEC. Prior to
such sale, information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made available to each
prospective purchaser. (Sec 8)

EXCEPT: Exempt Securities under Sec 9

a) Any security issued or guaranteed by the Government of the PH, or by
any political subdivision or agency thereof, or by any person controlled or
supervised by, and acting as an instrumentality of said Government.
b) Any security issued or guaranteed by the government of any country
with diplomatic relations with the PH, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, that the SEC may
require compliance with the form and content of disclosures the Commission
may prescribe.
c) Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.
d) Any security or its derivatives the sale or transfer of which, by law, is
under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue.
e) Any security issued by a bank except its own shares of stock.

AND Exempt Transactions under Sec 10

a) A judicial sale, or sale by an executor, administrator, guardian or
receiver or trustee in insolvency or bankruptcy.
b) By or for the account of a pledge holder, or mortgagee or any other
similar lien holder selling or offering for sale or delivery in the ordinary course
of business and not for the purpose of avoiding the provisions of this Code, to
liquidate a bona fide debt, a security pledged in good faith as security for
such debt.
c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the
owners account, such sale or offer for sale, subscription or delivery not being
made in the course of repeated and successive transactions of a like
character by such owner, or on his account by such representative and such
owner or representative not being the underwriter of such security.
d) Distribution by a corporation, actively engaged in the business
authorized by its AOI, of securities to its stockholders or other security
holders as a stock dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection with the sale of such capital stock.
f) Issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, where the entire mortgage together with all the
bonds or notes secured thereby are sold to a single purchaser at a single
sale.
g) Issue and delivery of any security in exchange for any other security of
the same issuer pursuant to a right of conversion entitling the holder of the
security surrendered in exchange to make such conversion: Provided, That
the security so surrendered has been registered under this Code or was,
when sold, exempt from the provisions of this Code, and that the security
issued and delivered in exchange, if sold at the conversion price, would at the
time of such conversion fall within the class of securities entitled to
registration under this Code. Upon such conversion the par value of the
security surrendered in such exchange shall be deemed the price at which
the securities issued and delivered in such exchange are sold.
h) Brokers transactions, executed upon customers orders, on any
registered Exchange or other trading market.
i) Subscriptions for shares of the capital stock of a corporation prior to
the incorporation thereof or in pursuance of an increase in its authorized
capital stock under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in connection
with the sale or disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly
incorporated, or its authorized capital increased.
j) The exchange of securities by the issuer with its existing security
holders exclusively, where no commission or other remuneration is paid or
given directly or indirectly for soliciting such exchange.
k) The sale of securities by an issuer to fewer than twenty (20) persons in
the Philippines during any twelve-month period.
l) The sale of securities to any number of the following qualified buyers:
(i) Bank; (ii) Registered investment house; (iii)insurance company; (iv)
Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the Commission may by
rule determine as qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.

PROTECTION OF SHAREHOLDERS INTEREST

1. Tender Offers (Sec 19)

2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)

TENDER OFFER A publicly announced intention acting alone or in concert

with others to acquire equity securities of a company. (2002 Bar Exams)

Instances when Tender Offer is Required

1. When the person intends to acquire 15% or more of the equity share of
a public company pursuant to an agreement made between or among the
person and one or more sellers;
2. When the person intends to acquire 30% or more of the equity share of
a public company within a period of 12 months;
3. When the person intends to acquire shares that would result in an
ownership of more than 50% of the equity shares of a public company.

PROXY SOLICITATION

NOTE: A broker or dealer who holds or acquires the proxy for at least ten per
centum (10%) or such percentage as the Commission may prescribe of the
outstanding share of the issuer, shall submit a report identifying the
beneficial owner within ten (10) days after such acquisition, for its own
account or customer, to the issuer of the security, to the Exchange where the
security is traded and to the Commission. (Sec 20.5)

FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS

1. Wash Sale (Sec 24.1(a)(i)) any transaction in a security which

involves no change in the beneficial ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) order or orders for the purchase or
sale of security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price for the sale or purchase of such
security has, or will be entered by or for the same or different parties.

Note: Wash sale and matched orders become illegal when they are used as a
means to create false appearance of active trading in the security concerned.

3. Marking the close placing the purchase order, at or near the close of
the trading period. The price that was closed will then be the price that will
be posted on the following trading day.
4. Painting the tape involves a series of transactions that are reported
publicly to give the impression of an activity in a security.
5. Squeezing the float the part of an outstanding security intentionally
held by dealers or other persons with a view of reselling them later for profit.
6. Hype and dump Act employed by a person or group of persons of
purchasing the outstanding capital stock of a dormant public shell company
for a nominal amount and merge it with their privately held company. They
would then gain control of the majority stocks of the merged entity. Stock
certificates are often re-issued in the name of the merged entity to relatives
and associates who act as nominees of the person or persons employing the
device. They would then look for a broker-dealer who would be willing to
make a hype of the securities. The broker-dealer then generates volume
and advance bid price. When the market reaches a high price, they would
dump their shareholdings and bail out.
7. Boiler Room Operations involves an intensive selling campaign
through numerous salesmen by telephone or through direct mail offerings for
securities of either a certain type or from a specific issuer. Investors are
induced to purchase through hard-sell based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the tape, Squeezing the float, Hype and
dump, Boiler Room Operations become unlawful if it is effected to either raise
the price or induce the purchase of a security or of a controlling, controlled,
or commonly controlled company by others or to depress the price to induce
the sale of a security, whether of the same or of a different class, of the same
issuer or of a controlling, controlled company or common controlled company
by others or to create active trading to induce the purchase through said
devices or schemes.

8. Circulating or Disseminating Information circulating an information

that any of the security listed in the exchange will or is likely to rise or fall
because of manipulative market operations of any one or more persons
conducted for the purpose of raising or depressing the price of the security
and thus inducing the purchase of such security.
9. Making False or Misleading Statements with respect to any material
fact which he knew or had reasonable ground to believe was so false or
misleading for the purpose of inducing the purchase or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of security effected either
alone or with others through any series of transactions for the purchase or
sale thereof, if done for such purpose.
11. Short sale selling of security which the vendor does not own unless
done in accordance with the rules and regulations of the SEC.
12. Insider Trading the act of an insider to buy or sell security of the
issuer while in possession of material information with respect to such
security that is not generally made known to the public unless (a) The insider
proves that the information was not gained from such relationship; or (b) If
the other party selling to or buying from the insider (or his agent) is
identified, the insider proves: (i) that he disclosed the information to the
other party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information.

Note: When is information material non-public? - if: (a) It has not been
generally disclosed to the public and would likely affect the market price of
the security after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or (b) would be
considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.

Note: Who is an insider? - Insider means: (a) the issuer; (b) a director or
officer (or person performing similar functions) of, or a person controlling the
issuer; (c) a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer or the
security that is not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an
issuer or a security that is not generally available to the public; or (e) a
person who learns such information by a communication from any of the
foregoing insiders.

INDEPENDENT DIRECTOR
Person other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the
corporation, which would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director.

Corporations which require an Independent Director

1. An exchange; or
2. Any corporation with a class of equity securities listed for trading on an
Exchange or with assets in excess of P50M and having 200 or more holders,
at least 200 of which are holding at least 100 shares of a class of its equity
securities or which has sold a class of equity securities to the public pursuant
to an effective registration statement shall have at least two (2) independent
directors or such independent directors shall constitute at least 20% of the
members of such board, whichever is the lesser.

OPTION TRADING
Put a transferrable option or offer to deliver a given number of shares
of stock at a stated price on any given time during the stated period.
Call a transferrable option to buy a specified number of share at a
stated price
Straddle a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding under this Code,
parties being investigated and/or charged may propose in writing an offer of
settlement with the Commission. The Commission may only agree to a
settlement offer based on its findings that such settlement is in the public
interest. Any agreement to settle shall have no legal effect until publicly
disclosed. Such decision may be made without a determination of guilt on the
part of the person making the offer.

DAMAGES
All suits to recover damages shall be brought before the Regional Trial
Court, which shall have exclusive jurisdiction to hear and decide such suits.
The Court is authorized to award damages in an amount not exceeding triple
the amount of the transaction plus actual damages.

NOTES
If there are goods involved in the multimarket, it is beyond the
jurisdiction of SEC (Ex First Quadrant)
Criminal charge for violation of SRC is a specialized dispute, hence it
must be first referred with SEC (Baviera vs. Paglinawan G.R. No. 168380
Feb 8, 2007)
T3 Rule in trading of Securities Trading day + 3 more days you must
comply with your obligations.