MERCANTILE LAW - BAR Q AND A
1990-2006
Corporations that are 60% owned by Filipinos can
engage in the business of exploration, development
and utilization of natural resources. (Art XII Sec 2
1987 Consti) The election of aliens as members of
the BOD engaging in partially-nationalized
activites is allowed in proportion to their allowable
participation or share in the capital of such entities.
( sec 2-A, Anti-dummy law )
The absence of ratification or authorization from
the BOD makes the contract entered by the
President ______ ( di ako sure kung null and void
ba ung effect or voidable, double check mo case ).
Hence, not binding. ( yao ka sin Trading vs Ca GR
53820 June 15 1992 209 scra 763 )
The law provides that the total annual
compensation of the directors, in the preceding
year, cannot exceed 10% of the company’s net
income before income tax ( Sec 30 Corp Code )
A Director may set up another business provided
such business has no conflict of interest between
the Director and the Corporation so as to make the
case fall within the conflict of interest situation
under the law ( Sec 34 Corpo Code )
SH A, a director of Corp A and Corp B, owning 1%
of the outstanding capital of Corp A and Corp B.
Corp A plans to enter into a contract with Corp B
that will make both companies earn profits, in order
for the contract NOT to be voidable, at the meeting
of the BOD of Corp A, SH A should comply at the
meeting:
a) His presence as director at the meeting is not
necessary to constitute a quorum for such meeting;
b) his vote is not necessary for the approval of the
contract; and
c) the contract is fair and reasonable under the
circumstances
At the meeting of the BOD of Corp B to approve
the contract, SH A should make sure that:
a) there is no fraud involved; and
b) the contract is fair and reasonable under the
circumstances.
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If the conditions relating to the quorum and
required number of votes are not met, the contract
must be ratified by the vote of stockholders
representing atleast 2/3 of the outstanding capital
stock in a meeting called for the purpose.
furthermore, the adverse interest of Chito in the
contract must be disclosed and the contract is fair
and reasonable ( sec 32 and 33, bp 68 )
In the absence of BOD approval, such dealership
agreement is voidable. In the presence of BOD
approval, the following conditions should be met:
a) His presence as director at the meeting is not
necessary to constitute a quorum for such meeting;
b) his vote is not necessary for the approval of the
contract; and
c) the contract is fair and reasonable under the
circumstances
( sec 32 Corp Code )
There is no vested right of a Stockholder to be
elected as director. When a person buys stock in a
corporation he does so with the knowledge that its
affairs are dominated by a majority of the
stockholders. To this extent, the SH parted with his
personal right to regulate the disposition of his
property which he invested in the capital stock of
the corporation and surrendered it to the will of the
majority of his fellow incorporators or
stockholders.
Corporations have the power to make by-laws
declaring a person employed in the service of a
rival company to be ineligible, or if elected,
subjects him to removal, if he is also a director in a
corporation whose business is in competition with
or is antagonistic to the other corporation is valid.
The provision in the amended by-laws
disqualifying any SH who is also a director or SH
of a competing business from being elected to the
BOD of a Corp is valid. The corporation is
empowered to adopt a code of by-laws for its
government not inconsistent with the Corp Code.
Such disqualifying provision is not inconsistent
with the Corp Code.
( Gokungwei Jr vs SEC 1979 1980 )
The law recognize that every corporation has the
inherent power to adopt by-laws for its internal
government and to regulate the conduct and
prescribe the rights and duties of its members
towards itself and among themselves in reference
to the management of its affairs. ( SMC vs SEC 11
april 1979 )
The remedy available in case of deadlock is to
petition the SEC to arbitrate the dispute with such
powers as Sec 104 of the Corp Code provides.
The SEC can appoint a rehabilitation receiver or a
management committee to prevent paralyzation of
the business under PD 902-A while the petition to
break the deadlock is pending litigation.
In a close corporation, the restriction as to the
transfer of shares has to be state/annotated in the
AOI, the By-Laws and the certificate of stock. This
serves as notice to the person dealing with such
shares like rafael in this case. With such notice, he
is bound by the pricing stated in the by-laws. ( get
codal prov kasi sa question sabi lang nasa by-laws
) claim against the seller for the value of the shares
The RTC has jurisdiction over cases which
involves intra-corporate controversy. The
applicable rule is that there is a Transferred
Jurisdiction under Sec. 5.2 of the SRC, the
Commission’s Jurisdiction over all cases
enumerated under PD 902-A sec 5 has been
transferred to the Courts of general jurisdiction or
appropriate RTC.
The fact that the complaint was filed with the RTC,
complainants were no longer SH did not divest the
RTC of its jurisdiction over the case inasmuch as
the complainant was a former SH and the
controversy arose out of this relation.
( SEC vs CA Gr 93832 )
An intra-corporate controversy is a conflict
between SH, members or partners and the
corporation, association or partnership regarding
the regulation of the corporation. The controversy
must arise out of intra-corporate or partnership
relations of the parties; or between such
corporation, partnership or association and the
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State insofar as it concerns their individual
franchises. It is further required that the dispute be
intrinsically connected with the regulation of the
corporation. ( GR 149351 )
SEC is not the venue for actions involving intra-
corporate controversies.
Pursuant to Subsection 5.2 of the Securities
Regulation Code- the quasi-judicial jurisdiction of
the SEC to hear corporate cases, including intra-
corporate controversies, under SEC 5 PD 902-A,
has been expressly transferred to the designated
RTC. ( GR 112872 )
Conflicting claims between buyers of same shares
is not an intra-corporate controversy. The matter
should be submitted to the regular courts (RTC)
where the principal office of the corporation is
located.
In the absence of over-issuance of shares resulting
from the 2 transactions, the corporation should
recognize both claimant as rightful SH. This is
without prejudice to the right of the corporation to
which he sold to 2nd buyer.
Under corporation code (Sec 110), corporation sole
is one formed for the purpose of administering and
managing, as trustee, the affairs, property and
temporalities of any religous denomination, sect or
church. It is formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding
elder of such religous denomination, sect or
church.
Payment for the services rendered constitutes
previously contracted debt that do not violate the
pre-emptive rights of the SH because such right
need not be respected in payment of a previously
contracted debt, but only with the indicated SH
approval. ( Corp Code, 39,62 )
A Stock corporation may acquire its own shares
only when there exists in the books unrestricted
retained earnings to cover the repurchase of shares.
The purpose of the repurchase of shares must be a
legitimate business purpose of the corporation,
such as to:

a) Eliminate fractional shares arising out of stock
dividends;
b) Collect or Compromise an indebtedness to the
corporation arising out of unpaid subscription in a
deliquency sale;
c) to Purchase deliquent shares sold during the sale;
and
d) to Pay dissenting or withdrawing SH entitled to
such payment under the Corp Code. ( 41, 82 Corp
Code )
As a sole proprietorship, the proprietor of
Company A has the capacity to act and the
personality to sue Company B in the absence of
Incorporation. On the other hand, Company B is
estopped from asserting that its President had no
authority to enter into the contract, considering
that, in several of Company B’s letters, it had
clothed its President with apparent authority to deal
with Company A.
The Corporate Name should indicate the fact of
incorporation by adding Incorporation or
Incorporated.
The City of the Municipality and the Province in
the Philippines, and not merely the region or as its
BOD may later designate, to its place of principal
office.
The number of shares into which the capital stock
is divided, as well as the par value thereof or a
statement that said stock or a portion thereof are
without par value. ( Sec 14, 15 Corp Code )
The sale of substantially all of the assets of A
Corporation complying with the test under Sec. 40
of the Corporation Code, the transactions not being
in the ordinary course of business, and one thereby
the corporation would be rendered incapable of
continuing the business or accomplishing the
purpose for which it was incorporated.
The sale of Substantially all of the assets of A
Corporation will be valid, provided, first, there is
resolution of the BOD of A Corporation, second,
ratificatory vote of SH representing at least 2/3 of
the outstanding capital stock as mandated under
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Sec 40 of Corp Code. Otherwise, the sale would be
void. ( GR 117897 May 14 1997 )
To protect the interest of the creditors of A
corporation, considering the Corporation A has
entered a de facto stage of dissolution with the
ceasing of its operations, the creditors should
invoke the protection under Sec 122, that the
proceeds of the sale should first be applied towards
the settlement of the obligations of the corporation,
before any amount can be paid to the SH.
In case Corporation A failed to obtain the required
2/3 vote of the outstanding capital stock, then the
transaction is void. ( GR 117897 ). Corporation B
can have the purchase declared void and recover
the purchase price paid, as well as damages against
the directors and officers who undertook the
transaction in violation of the law.
The provision in by-law relieving directors from all
liability for any contract entered into by the
corporation with any firm in which the directors
may be interested is in violation of Sec 32.
In case of consummated transactions, the director
responsible should account the corporation for the
profits which he realized from the transaction. ( Sec
34 Corp Code )
A corporation acquire corporate existence upon the
date of issuance of certificate of incorporation.
2003, p28 - walang sagot
A stock corporation may be converted to non-stock
corporation by a mere amendment of the AOI. The
SH, however, are deemed to have waived their
right to share in the profits of the corporation.
A non-stock corp cannot be converted to stock
corporation by mere amendment of AOI because
the non-stock corp is deemed to have distributed an
asset of the corporation - i.e., its profits, among its
members, without prior dissolution of the
corporation. Under SEC 122, the non-stock corp
must be dissolved first.
The prime property of Corporation A can be
liquidated among the 5 SH after the property has
been conveyed by the corporation to the 5 SH, by
dividing or partitioning it among themselves in any
2 of the ff ways:
a) by Physical Division or Partition based on the
proportion of the values of their stockholdings; or
b) Selling the Property to a 3rd person and dividing
the proceeds among the 5 SH in proportion to their
Stockholdings; or
c) after the determination of the value of the
property, by Assigning or Transferring the
property to one SH with the obligation on the part
of said SH to pay the other 4 SH the amount in
proportion to the value of the Stockholding of each.
Not all directors and incorporators need not be
residents of the Philippines. Under Sec 10 of the
Corp Code, only a majority of the incorporators
need to be residents of the Philippines. As provided
in Sec 23 of the same code, only a majority of the
members of the BOD need to be residents of the
Philippines.
The documents to be submitted to the SEC to
incorporate a new company are:
a) AoI
b) Treasurer’s Affidavit;
c) Certificate of Authority from the Monetary
Board of the BSP;
d) Verification slip from the records of the SEC
whether or not the proposed name has already been
adopted by another corporation, partnership or
association;
e) Letter undertaking to change the proposed name
if already adopted by another corporation,
partnership or association;
f) Bank certificate of deposit concerning the paid-
up capital;
g) Letter authorizing the SEC or Monetary Board
or its duly authorized representative to examine the
bank records regarding the deposit of the paid-up
capital;
h) Registration Sheet;
If the By-laws are silent as to the place of meetings
of the SH and directors, the president presides over
the meeting of the directors, if there is no position
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of Chairman provided in the By-laws. If there is the
position of Chairman provided in the By-laws, the
Chairman presides over the meeting of the
Directors. ( Sec 54 Corp Code )
A SH questioning the validity of the corporate
resolutions passed at meeting conducted in a hotel
in Makati Metro Manila ( Principal Office is at
Pasig ) will not prosper considering that MM is a
city or municipality, the holding of the annual
stockholders meeting in Manila is prosper. ( Sec 51
Corp Code )
The law allows the BOD to hold its meeting
anywhere in the Philippines. The holding of the
BOD meeting in Makati was proper and the
validity of the resolutions adopted by the Board in
that meeting cannot be questioned. ( Sec 53 )
The nationality of a corporation organized and
incorporated under the laws of a foreign country,
but owned 100% by Filipinos, is, under the control
test of corporate nationality, this foreign
corporation is of Filipino Nationality. Where there
are grounds for piercing the veil of corporate entity,
that is, disregarding the fiction, the corporation will
follow the nationality of the controlling members
or SH, since the corporation will then be
considered as one and the same.
The foundation can use the funds donated to it by
its members for purchase of food and medicine for
distribution to the victims of the Pinatubo eruption
as long as the amount of donation is reasonable. (
Sec 36(9) Corp Code )
The foundation ( non-stock corp ) cannot operate a
specialty restaurant that caters to the general public
if the purpose of the corporation are limited to the
establishment and maintenance of the library and
museum. Such act will be ultra vires.
In case of vacancies in the BOT and there is no
quorum, the vacancies will have to be filled up in a
special meeting of the members. ( Sec 29 Corp
Code )
If the proposed investment is dispensable
ingredient to accomplish the primary purpose of
the Company, the approval for the proposed
investments will suffice by majority of the BOD
and the ratification of such approval by the SH
representing at least 2/3 of the outstanding capital
stock would be necessary. ( get basis )
If the proposed investment is an indispensable
ingredient which is a reasonable necessity in the
manufacture of the primary purpose, only the
approval of the BOD would be necessary. ( Sec 42
) separate juridical personality shall be applied. )
The procedure in securing the approval of the BOD
is as follows:
a) a notice of the BOD should be sent to all the
directors. The notice should state the purpose of the
meeting.
b) At the meeting, each of the project should be
approved by a majority of the BOD ( not merely a
majority of those present at the meeting ).
The procedure in securing the approval of the SH
is as follows:
a) Written notice of the proposed investment and
the time and place of the SH meeting should be sent
to each SH at his place of residence as shown on
the books of the corporation and deposited to the
addressee in the post office with postage prepaid,
or served personally.
b) At the meeting, each of the projects should be
approved by the SH representing at least 2/3 of the
outstanding capital stock. ( Sec 42 )
A corporation may invest its funds in another
corporation or business or for any other purpose
other than the primary purpose for which it was
organized when the said investment is approved is
ratified by the SH representing at least 2/3 of the
outstanding capital stock. Written notice of the
proposed investment and the date, time and place
of the SH meeting at which such proposal will be
taken up must be sent to each SH. ( Sec 42 )
A corporation, being an artificial person which has
no feelings, emotions or senses, and which cannot
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experience physical suffering or mental anguish, is
not entitled to moral damages. ( get xp, gr to eh )
xp: FBN Inc. vs AMEC, jan 17 2005
A corporate officer acting in what he considered as
his duty as an officer of the corporation, such
officer should not be held personally liable. ( note:
in the absence of any proof of an action of
corporate officer acting in personal capacity,
A person may own shares of stock in a corp. but
such ownership does not entitle him to the
possession of any specific property of the
corporation or a definite portion thereof. Neither is
he a co-owner of a corporate property. Properties
registered in the name of the corporation are owned
by it as an entity separate and distinct from its SH.
Such shares of stock do not represent specific
corporate property. ( GR 100866 )
Mere ownership of a person of 90% of the capital
stock is not of itself sufficient ground to disregard
his separate legal personality absent showing, for
example that he acted maliciously or in bad faith. (
GR 103372 )
The ff are tools available to the SH to replenish
capital;
a) additional subscription to shares of stock of the
corporation by SH or by investors;
b) advances by the SH to the corporation;
c) payment of unpaid subscription by the SH.
If a corporation continues to operate even with
depleted capital, the SH or the managers will not
be solidarily liable for the obligations incurred by
the corporation (separate entity). The obligations
incurred by the corporation are those of the
corporation which alone is liable therefor.
However, when the corporation is already
insolvent, the directors and officers become
trustees of the business and assets of the
corporation for the benefit of teh creditors and are
liable for negligence or mismanagement.
No matter how substantial the equity share that the
SH owns, the separate legal personality of a
corporation subsists.
A corporation cannot set-off an unpaid
subscription with an employees claim for salaries.
The unpaid subscription is not yet due as there is
no call.
A corporation has no right to withhold in payment
of unpaid subscription. To do so would violate
labor laws. ( Apodaco vs NLRC )
A corporation organized with an original
authorized capital stock of P100M is organized as
a stock corporation. In the absence of any
prohibition in its AoI or By-laws to declare
dividends, the corporation shall be deemed to have
the power to declare dividends under Sec 43. Since
it has the power to declare dividends, said
corporation is a stock corp.
The provision of Aoi that at dissolution the assets
of the corporation shall be given to a charitable
corporation does not prohibit the corporation from
declaring dividends before dissolution.
the absence of the directors’s approval will not
bind the corporation and its SH of the resolution
approved by SH representing 99% of the total
outstanding capital stock.
the remedy of a dissenter SH is to petition the RTC
to declare the 2 resolutions, as well as and all
actions taken by the BOD thereunder, null and
void.
A contract of the corporation with one or more of
its directors or trustees or officers is voidable, at the
option of such corporation. ( Sec 32 ) ( provided na
hindi ultra vires, otherwise, void )
The BOD declaration and payment of cash
dividends without approval of the SH is valid.
The loan to its sister company, the corporation is
engaged in fast-food business, is void for being an
ultra vires act on part of the food corp, and is not
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one of the powers provided for in Sec 36 of the
Corp code.
The 3 methods by which a stock corporation may
be voluntarily dissolved are:
a) Voluntary dissolution where no creditors are
affected. This is done by a majority vote of the
directors, and resolution of at least 2/3 vote of the
SH, submitted to the SEC.
b) Voluntary Dissolution where creditors are
affected. This is done by a petition for dissolution
which must be filed with the SEC, signed by a
majority of the members of the board of directors,
verified by the president or secretary, and upon
affirmative vote of SH representing at least 2/3 of
the outstanding capital stock.
c) Dissolution by shortening of the corporate term.
This is done by amendment of the AoI.
voting trust agreement issue p34 lee vs ca feb 4
1992
The requisites for a derivative suit are:
(a) He was a stockholder or member at the time the
acts or transactions subject of the action occurred
and at the time the action was filed;
(b) He exerted all reasonable efforts, and alleges
the same with particularity in the complaint, to
exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he
desires;
(c) No appraisal rights are available for the act or
acts complained of; and
(d) The suit is not a nuisance or harassment suit.
( Commart inc vs SEC 198 scra 73 1991 )
As a general rule, SH cannot bring a derivative suit
concerning an act that took place before he became
a SH. However, if the act complained of is
continuing one, SH may do so.
In a derivative suit, the action is instituted in the
name of a corp and reliefs are prayed therein for the
corp, by a minority SH. the law does not qualify the
term minority in terms of the number of shares
owned by a SH bringing the action in behalf of the
corp. ( SMC vs Khan 176 scra 448 )
Watered shares are those sold by the corporation
for less than the par/book value of services
rendered in relation to the total par value of the
shares.
discuss the principle of corporate opportunity.
Interim rules of procedure for intra-corporate
disputes.
Pendency of Derivative suit continues despite the
dissolution of corporation because it remains a
juridical person for purpose of dissolution for 3
years from the date of dissolution, precisely one of
the purposes is to allow the winding-up of its
affairs, including the termination of pending suits.
Gina must first exhaust any administrative
remedies before filing any derivative suit.
De facto Corporation - one which actually exists
for all practical purposes as a corporation but
which has no legal right to corporate existence as
against the state. It is essential to the existence of a
de facto corporation that there be (1) a valid law
under which a corporation might be incorporated,
(2) a bona fide attempt to organize as a corporation
under such law, and (3) actual use or exercise in
good faith of corporate powers conferred upon it
by law.
Corporation by estoppel - exist when persons
assume to act as a corporation knowing it to be
without authority to do so. In this case, those
persons will be liable as general partners for all
debts, liabilities and damages incurred or arising as
a result of their actions.
Profits - residual amounts representing return of
capital after deducting all corporate costs and
expenses from revenues. The accumulated profits,
from year to year, represent the corporate retained
earnings from which the dividends can be declared.
Cash dividends - represent an actual distribution of
accumulated profits to the SH as a return on their
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investments. Declaration of cash dividends
requires only the approval of the majority of the
BOD in a proper in a proper resolution.
Stock dividends - transfers of retained earnings to
capital stock, thereby increasing the number of
shares of stocks of each SH with no required cash
contribution. A two-thirds vote of the SH coupled
with a majority vote of the BOD, is needed to
declare stock dividends.
Private corporation - one formed for some private
purpose, benefit or end.
Public corporation - for for the government of a
portion of the State for the general good or welfare.
The true test is the purpose of the corporation. If
the corp is created for political or public purpose
connected with the administration of government,
then it is a public corp. If not, it is a private
corporation although the whole or substantially the
whole interest in the corporation belongs to the
State. A public corp is created by special legislation
or act of Congress. A private corporation must be
organized under Corp code.
Stock corp - one that has capital stock divided into
shares and is authorized to distribute to the holders
of such shares dividends or allotments of the
surplus profits on the basis of the shares held. All
other corp are non-stock corp.
No form of dividends can be declared and paid by
the corporation except from unrestricted retained
earnings appearing on its books. Dividends must be
paid in amounts proportional to all SH on the basis
of outstanding stock held by them. Cash or
property dividends, can be declared from such
unrestricted retained earnings by a proper
resolution of the BoD. Stock dividends, however,
must be declared by a proper resolution of the BoD
from existing unrestricted retained earnings and
ratified by SH representing at least two-thirds of
the outstanding capital stock of the corporation,
obtained in a meeting duly called for the purpose. (
Sec 43 )
All cash and stock dividends are always paid out of
the unrestricted retained earnings ( also called
surplus profit ) of the corporation. If the
corporation has no unrestricted retained earnings,
the dividends would have to be sourced from the
capital stock. This is illegal. It violates the
“TRUST FUND DOCTRINE” that provides that
the capital stock of the corporation is a trust fund
to be kept intact during the life of the corporation
for the benefit of the creditors of the corp. ( HR
108576 )
Failure to mention in the notice anything about a
stock dividend declaration and was taken up only
under the item “other business” in the agenda
meeting will not cancel and set aside stock
dividend declaration. Sec 43 provides that no stock
dividend shall be issued without the approval of the
SH representing not less than 2/3 of the outstanding
capital stock at a regular or special meeting duly
called for that purpose. In addition, sec 50 provides
that a written notice of the holding of the regular
meeting sent to the SH will suffice. The notice
itself specified the said subject matter.
There is no prohibition against the SH to
recommend to the BOD that it consider a
declaration of stock dividends. However, a
declaration of stock dividends should initially be
taken by the BOD and thereafter to be concurred in
by a 2/3 vote of SH.
Sec 43 prohibits stock corp from retaining surplus
profits in excess of 100% of their paid-in capital.
The instances when a corporation shall not be held
liable for not declaring dividends are:
a) when justified by definite corporate expansion
projects or programs approved by the BOD; or
b) when the corporation is prohibited under any
loan agreement with any financial institution or
creditor, whether local or foreign, from declaring
dividends without its or his consent, and such
consent has not yet been secured; or
c) when it can be clearly shown that such retention
is necessary under special circumstances obtaining
in the corporation, such as when there is need for
special reserve for probable contingencies.
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A proposed stipulation in the management contract
that the managing corporation, as an additional
compensation to it, should be entitled to 10% of
any stock dividend that may be declared. SH are
the only ones entitled to receive stock dividends. (
Nielson & Co. Vs Lepanto Mining ) In addition,
the unsubscribed capital stock of a corporation may
only be issued for cash or property or for services
already rendered constitutiong a demandable debt
( Sec 62 ).
The Doctrine of Corporate opportunity disqualifies
a director, trustee or officer from appropriating
from his personal benefit a transaction or
opportunity that pertains to the corporation, and
which under the duty of loyalty he should first
bring to the corporation for its use or exploitation.
The said doctrine is an enforcement of the duty of
loyalty of corporate directors and officers. ( Sec 31
)
The corp code provides that where a director, by
virtue of his office, acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to
the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the SH
owning or representing at least 2/3 of the
outstanding capital stock. ( Sec 34 )
The expiration of corporate term renders the
corporation dissolved ipso facto and cease to be a
corporate body for the purpose of continuing the
business for which it was organized, except only
for purposes connected with its winding up or
liquidation. ( PNB vs CFI of Rizal )
The absorbed corporation do not need to undertake
dissolution and winding up procedure because as a
result of the merger, the absorbed corporation is
automatically dissolved and its assets and liabilities
are acquired and assumed by the surviving
corporation.
The merger does not become effective until and
unless approved by the SEC. Before approval by
the SEC of the merger, the surviving corporation
has no legal personality with respect to receivables
due to the absorbed corporation.
Whether the receivable was incurred by the
absorbed corporation before or after the merger
agreement, or before or after the approval thereof
by the SEC, the said receivable would still belong
to the surviving corporation under Sec 80 which
does not make any distinction as to the assets and
liabilities of the absorbed corporation that the
surviving corporation would inherit.
The corporation, once dissolved, thereafter can
continues to be a body corporate for 3 years for
purposes of prosecuting and defending suits by and
against it and of enabling it to settle and close its
affairs, culminating in the final disposition and
distribution of its remaining assets. If the 3 year
extended life expires without a trustee or receiver
being designated by the corporation within that
period and by that time ( expiry of the 3 year
extended term ), the corporate liquidation is not yet
over, the liquidation can continue with the winding
up. The members of the BOD can continue with the
winding of the corporate affairs until final
liquidation. They can act as trustees or receivers for
this purpose.
The creditors may still pursue the corporation even
after the last day of its business operation and
corporate existence. The Corp is not actually
dissolved upon the expiration of its corporate term.
Sec 122 provides for 3 year period for liquidation
or winding up. ( GR 145855 November 24 2004 )
A foreign corporation is deemed to be doing
business in the Philippines if it is continuing the
body or substance of the business or enterprise for
which it was organized. It is the intention of any
entity to continue the body of its business in the
country. The grant and extension of 90 day credit
terms of a foreign corporation to a domestic
corporation for every purchase shows an intention
to continue transacting with the latter.
Any 3 of the following acts or activities constitute
doing business in the Philippines under our foreign
investment laws:
a) soliciting orders
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b) Opening offices by whatever name
c) Participating in the management, supervision or
control of any domestic entity
d) Entering into service contracts
e) Appointing representatives or distributors,
operating under the control of the foreign entity,
who is domiciled in the Philippines or who stays in
country for a period or periods totaling at least 180
days in any calendar year.
The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply
a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of
some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of
the purpose and object of the business corporation.
A corporation may enter into a joint venture.
However, inasmuch as the ter joint venture has no
precise legal definition, it may take various forms.
It could take the form of a simple pooling of
resources ( not involving incorporation ) between
two or more corporations for a specific project,
purpose or undertaking, or for a limited time. It
may involve the creation of a more formal structure
and, hence, the formation of a corporation. If the
joint venture would involve the creation of a
partnership, as the term is understood under the
Civil code, then a corporation cannot be a party to
it.
A corporate director, trustee or officer may be held
personally liable with the corporation under the ff
circumstances:
a) When he assents to a patently unlawful act of the
corporation;
b) when he acts in bad faith or with gross
negligence in directing the affairs of the
corporation, or in conflict with the interest of the
corporation resulting in damages to the
corporation, its SH or other persons;
c) when he consents to the issuance of watered
stocks or who, having knowledge thereof, does not
forthwith file with corporate secretary his written
objection thereto;
d) when he agrees to hold himself personally and
solidarily liable with the corporation; or
e) when he is made, by a specific provision of law,
to personally answer for the corporate action.
( Tramat Mercantile Inc vs CA GR 111008 Nov 7,
94 )
A creditor of a corporation may file an action
against a SH for the amount of unpaid subscription
in case where the corporation is insolvent. The
limit of the SH liability to the creditor is only up to
the extent of his unpaid subscription.
A creditor cannot file an action against a SH who
is fully paid up because he has already fully paid
for his subscription.
A creditor may file an action against a SH in his
capacity as director and officer because of the
corporation’s insolvency being the result of
fraudulent practices within the company
notwithstanding the full payment of his shares.
Directors are liable jointly and severally for
damages sustained by the corporation, SH or other
persons resulting from gross negligence or bad
faith in directing the affairs of the corporation. (
Sec 31 )
The complainant can avail the doctrine of piercing
the veil of corporate fiction which can be invoked
when a corporation is formed or used in avoiding a
just obligation. While it is true that a family
corporation may be organized to pursue an estate
tax planning, which is not per se illegal or
unlawful, the factual settings, however, indicate
the existence of a lawsuit that could subject pablo
to a substantial amount of damages. It would thus
be difficult for pablo to convincingly assert that the
incorporation of the family corporation was
intended merely as a case of “estate tax planning”.
( Tan boon bee v Jarencio 30 June 1988, Delpher
trades Corp vs IAC )
The sale by Corp A of its assets to Corp B does not
result in the transfer of the liabilities of the latter to,
nor in the assumption thereof by, the former. The
sale by Corp A of its assets is a sale of its property.
It does not involve the sale of the shares of stock of
the corp belonging to its SH. There is therefore no
merger or consolidation that took place. Corp A
continues to exist and remains liable to the creditor.
10
Corp B may be held liable for the debts of Corp A.
As a rule, doctrine of piercing the veil of corporate
fiction apples when two corporations have the
same BOD and Corp B owned substantially all of
the stocks of Corp A, which facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. ( CIR vs Norton
& Harrison 1964 )
The veil of corporate fiction may be pierced by
proving in court that the notion of legal entity is
being used to defeat public convenience, justify
wrong, protect fraud, or defend crime or the entity
is just an instrument or alter ego or adjunct of
another entity or person.
The doctrine of piercing the veil of corporate
entity, is the doctrine that allows the courts to look
behind the separate juridical personality of a
corporation and treat the corporation as an
association of persons and thereby make the
individual actors personally liable for corporate
liabilities. The fiction of corporate identity is
disregarded and the individuals comprising it can
be treated identically. The SH can be held directly
liable for corporate obligations, even to the extent
of their personal assets. ( GR 108734 May 29, 1996
)
The doctrine is applicable when the notion of legal
entity is used to -
a) defeat public convenience
b) justify wrong
c) Protect fraud
d) defend crime ( GR 142936 )
e) Shield a violation of the proscription against
forum shopping ( GR 137537 )
f) Work inequities among members of the
corporation internally, involving no rights of the
public or 3rd persons. ( GR 156104 )
g) Evade the lawful obligations of the corporation
like a judgment credit. ( GR 112546 )
h) Escape the liability arising from a debt. ( GR
88113 )
i) Avoid inclusion of corporate assets as part of the
estate of the decedent. ( GR L-35861 )
j) To promote or to shield unfair objectives. ( GR
80863 )
To prevent dilution of the SH ownership interest,
SH A shall have a pre-emptive right to 200 of the
new issue of 1000 shares because SH A is a SH of
record holding 200 shares in Corp A. Corp Code
provides that each SH has the pre-emptive right to
all issues of shares made by the corporation in
proportion to the number of shares he holds on
record in the corporation.
Pre-emptive right must be exercised in accordance
with the AOI or the By-laws. When the AOI and
the By-laws are silent, the BOD may fix a
reasonable time within which the SH may exercise
the right.
Corp A has an authorized capital stock of 1M
divided into 50,000 common shares and 50,000
preferred shares. At its inception, the Corporation
offered for subscription all the common shares.
However, when only 40,000 common shares were
subscribed. Recently, the directors though of
raising additional capital and decided to offer to the
public all the authorized shares of the Corporation
at their market value. SH A holding 4,000 shares,
has pre-emptive right to the remaining 10,000
shares. All SH 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.
( double check kung kasama sa pre-emptive right
ung stocks na hindi nasubscribe at inception )
The shares will be offered to existing SH, who are
entitled to pre-emptive right, at a price fixed by the
BOD, which shall not be less than the par value of
such shares.
A SH who disagrees with the issuance of new
shares and the pricing for the shares may not
invoke his appraisal right and demand payment for
his shareholdings.
30 days within which the SH must pay the unpaid
subscription from due date is required before he
11
could no longer serve as a director of the
corporation.
The deliquency did not not deprive the SH of his
right to receive dividends declared. However, the
cash dividend declared may be applied by the
corporation to the unpaid subscription. ( Sec 71
Corp Code )
Only after the laps of 30 days may the delinquent
SH may be deprived to vote.
A Corp passing a resolution authorizing additional
issuance of shares of stocks without noice nor
approval of the SH violates SH right’s of pre-
emption to the unissued shares because under SEC
39 of the Corp Code, all SH enjoy pre-emptive
right to subscribe to all issues of shares of any
class, including the reissuance of treasury shares in
proportion to their respective shareholdings.
Sec 81 provides that instances of Appraisal Right -
Any SH of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
a) In case any amendment to the AOI has the effect
of changing or restricting the rights of any SH or
class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares
of any class, or of extening or shortening the term
of corporate existence;
b) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
c) In case of merger or consolidation.
SH approval is necessary only for the removal of
the members of the BOD. For the removal of a
corporate officer of employee, the vote of the BOD
is sufficient for the purpose.
In case a minority stockholder elected only 1
director, the majority stockholders who can always
muster a 2/3 vote is not allowed, by a 2/3 vote,
remove a director, the law also provides, however,
that his right may not, without just cause, be
exercised so as to deprive the minority of
representation in the BOD. ( Sec 28, Corp Code;
Govt vs Agoncillo )
The rights of a SH are:
a) The right to vote, including the right to appoint
a proxy;
b) The right to share in the profits of the
corporation, including the right to declare stock
dividends;
c) The right to a proportionate share of the assets
of the corporation upon liquidation;
d) The right of appraisal;
e) The pre-emptive right to shares;
f) The right to inspect corporate books and records;
g) The right to elect directors;
h) Such other rights as may contractually be
granted to the SH by the corporation or by special
law.
Sec 72 Corp Code provides that holders of
subscribed shares not fully paid which are not
delinquent, shall have all the rights of a SH.
2 ways of increasing the Authorized Capital Stock
of Corp A from 1M(100,00 shares, P10.00 ea) to
1.5M:
a) Increase the number of shares from 100,000 to
150,000 shares with the same par value of P10.00
each.
b) Increase par value of 100,000 shares to P15.00
each.
3 practical reasons for a corporation to increase its
capital stock are:
a) to generate more working capital;
b) to have more shares with which to pay for the
acquisition of more assets like acquisition of
company car, stocks, house, machinery or
business; and
c) to have extra share with which to cover or meet
the requirement for declaration of stock dividend.
The delivery of stock certificate by A to B does not
per se prove B’s ownership of A’s stocks.
Jurisprudence dictates that stock certificate should
be duly endorsed by A at the time it was delivered
to B or that the procedure for the effective transfer
of shares of stock set out in the by-laws of Corp A,
12
if any, was observed. ( Razon vs IAC GR 74306
Mar 16,1992 )
An endorsed stock certificate to a friend, and the
latter selling the said certificate to a 3rd person who
purchased the same, will bar the original owner to
claim the shares of stock. As a rule, duly endorsed
stock certificate will estopped the original owner
from claiming said shares from the 3rd person, a
bona fide purchaser who relied on the endorsement
by the original owner of the certificate of stock.
In case where the certificate of stock was lost or
stole from the original owner, the latter has a right
to claim the certificate of stock from the thief who
has no right or title to the same. ( Cite 559 NCC -
One who has lost any movable or has been
unlawfully deprived thereof, may recover it from
the person in possession of the time )
The corporation may be compelled by mandamus
to register the shares of stock in the name of the
assignee. The only legal limitation imposed by Sec
63 of the corp code is when the corporation holds
any unpaid claim against the shares intended to be
transferred. The alleged claim of another heir of the
decedent is not sufficient to deny the issue of new
certificates of stock to his wife and children. It
would be otherwise if the transferee’s title to the
shares has no prima facie validity or is uncertain.
A stock corporation may only acquire its own
shares of stock if the trust fund doctrine is not
impaired. This is to say, for instance, that it may
purchase its own shares of stock by utilizing
merely its surplus profits over and above the
subscribed capital of the corporation.
The arrangement between the corporation and its
president, where the latter executed a promissory
note binding itself to pay its resigned
President/Director for his shares in the company, is
covered by the trust fund doctrine. The only
exceptions from the trust fund doctrine are the
redemption of redeemable shares and, in the case
of close corporation, when there should be a
deadlock and the SEC orders the payment of the
appraised value of the Stockholder’s share.
The execution of a promissory note by a
corporation to buy a SH shares and failure to pay
such obligation is within the RTC’s jurisdiction.
Settled is the rule that a corporation may only buy
its own shares of stock if it has enough surplus
profits therefore.
If a SH sold his shares to his friend and the latter
filed a case with the RTC against the Corp to
compel it to register the sale and to issue new
certificates of stock in his name is within the RTC’s
jurisdiction. An action to compel a corporation to
register a sale and to issue new certificates of stock
is itself an intra-corporate matter that exclusively
lies with the RTC.
2007-2013
If a director who owns a minority share, wants to
render his other business to the Company in which
he is a SH, such contract shall be voidable if duly
approved by the BOD at the option of the company.
( Sec 32 ). 3 requisites must concur for the validity
of said contract, first, such director is not necessary
to constitute a quorum for such meeting, second,
directors vote at such meeting was not necessary
for the approval of the contracts, third, each of the
contract are fair and reasonable under the
circumstances. In case the the 1st and 2nd
requisites are absent ( hindi siya director ng
company ), such contract may be ratified by the
vote of the SH representing at least 2/3 of the
outstanding capital stock. Provided, that full
disclosure of the adverse interest of the directors
involved is made at such meeting.
A filipino immigrant residing abroad, a filipino
residing in Quezon City, A resident alien residing
in Makati City, and an authorized representative
could all be incorporators and subscribers. ( Note:
Sec 10 requires that there must be at least 5 but not
more than 15 incorporators, who must all be natural
persons, and that a majority of the incorporators
must be residents of the Philippines. ). A minor
could neither be an incorporator nor a subscriber.
A domestic corporation ( 40% foreigners/60%
filipinos ), a foreign corporation registered with the
SEC, and a domestic corporation wholly owned by
Filipinos could not be incorporators as they are not
13
natural persons. However, they could be
subscribers.
Incorporators vs Subscribers:
a - All incorporators are required to sign and
acknowledge the AOI / Subscribers are not subject
to the same requirement
b - Incorporators could be either natural or juridical
persons
c - the number of incorporators cannot exceed 15 /
subscribers can be more than 15
A filipino immigrant residing abroad, a filipino
residing in Quezon City, A resident alien residing
in Makati City, and an authorized representative
could be directors subject to the residency
requirement and nationality requirement under the
law governing the business of the corporation. A
domestic corporation ( 40% foreigners/60%
filipinos ), a foreign corporation registered with the
SEC, and a domestic corporation wholly owned by
Filipinos could not be directors as they are not
natural persons. However, the aforementioned
corporations could have their respecive
representatives nominated and possibly elected as
directors by the SH. Each director must own at
least one share of the capital stock of the
Corporation. ( sec 23 )
In case of qualification to act as Treasurer of the
company, the Corp Code does not impose any
nationality or residency requirement in respect of
the Treasurer. Accordingly, anybody with the
qualifications required under the by-laws of the
corporation or under the laws governing the
business of the corporation, could be elected
Treasurer by the BOD. ( Treasurer could not be the
President at the same time, sec 25 )
The Secretary is required to be both a resident and
a citizen of the Philippines. Sec 10
The sale of all assets and liabilities of corp A to
Corp B will not result in the automatic dissolution
of termination of the existence of the former. A
decision to dissolve Corp A or to terminate its
corporate existence would require a separate
approval by a majority of the BOD of Corp A and
its SH holding at least 2/3 of the total outstanding
capital stock, as well as the separate approval by
the monetary board.
A corporation may be dissolved by voluntary
dissolution under sec 118 where no creditors are
affected, or sec 119 where creditors are affected or
by shortening of the corporate term under sec 120,
or involuntarily by the SEC under sec 122.
Dissolution under sec 118, 119, and 120 requires
the approval by a majority vote of the BOD and its
SH holding at least 2/3 of the total outstanding
capital stock, as well as approval by the Monetary
Board.
Note: The SEC has the authority under Sec 6 of PD
902-A to revoke the certificate of registration of a
corporation upon any of the grounds provided by
law, including the aforementioned Sec 6-A.
the Constitute precludes the legislature to pass a
law creating a private corporation. ( Art XII, sec 16
). Under the Constitution, Congress cannot, except
by general law, provide for the formation,
organization, or regulation of private corporation.
Only government owned or controlled
corporations that may be created or established
through special charters. It has been held that a
private corporation created pursuant to a special
law is a nullity, and such special law is void for
being in violation of the constitution. ( NDC vs
Phil. Veterans Bank GR 84132-33, 10 December
1990 )
The composition of the BOD of the of the National
Power Corporation (NPC) can be validly reduced
to 3 to be affected by legislative amendment of its
charter. The NPC, being a government owned or
controlled corporation is not governed by the
general provisions of the Corp Code.
In case of Separate corporation, the liability for its
obligations and losses will be limited to the amount
of her subscription in the absence of showing that
there is a ground to disregard its separate juridical
personality. In case of single proprietorship, her
liability for its debts and losses will be unlimited.
The formation and the operation of a corporate
requires a great deal of paper work and record-
keeping. This is not the situation in the case of
single proprietorship. In case of a separate
14
corporation, it can raise more funds for the business
that if she were to set up a single proprietorship. If
she were to set up the restaurant as a branch office
an existing corporation, the corporation will have
more funds as capital that if she were to form a
separate corporation. However, all the assets of the
existing corporation will be liable for the debts and
losses of the restaurant business.
The corporation must have at least 5 directors. Sec
14. A president, a treasurer, and secretary. Sec 25.
Every director must own at least one share of the
capital stock of the corporation, which must be
recorded in his name on the books of the
corporation, and a majority of the director must be
residents of the Philippines. Sec 25
The president must also be a director. The secretary
must be a resident and citizen of the Philippines.
Sec 25.
The remaining directors cannot elect new directors
to fill in the 2 vacancies. The BOD may fill up
vacancy only if the ground is NOT due to
expiration of term, removal or increase in the
number of board seats. In the case, the term of the
2 directors expired after one year. The Hold-over
period is not part of their term. The vacancies
should be filled up by the election by the SH. (
Valle Verde Country Club. Inc., vs Africa, 598
SCRA 202, 2009 )
The derivative suit is improper in case where the
SH is questioning the election of new directors. In
case of Derivative suit, the corporation, not the
individual SH, must be the aggrieved party and that
the SH is suing on behalf of the corporation. In the
case, what the SH is asserting is his individual right
as a SH to elect the 2 directors. The case partakes
more of an election contest under the rules on intra-
corporate controversy. ( Legaspi Towers 300, Inc.
vs Muer, 673 SCRA 453, 2012 )
A SH holding only one share can initiate a
derivative suit, knows as the minority SH’s suit. It
is allowed by law to enable the minority SH to
protect the interest of the corporation against illegal
or disadvantageous act of its officers or directors. (
Pascual vs Del Zaz Orozco, 19 Phil 82 1991 )

A derivative suit is an intra-corporate dispute as it
is instituted by a SH against other SH who are
officers and directors of the same corporation. ( PD
No. 9020A Sec 5(b) ). Such suit should be filed in
the RTC designated by the SC as a corporate or
commercial court.
A derivative suit will not prosper in the absence of
demand. There is, therefore, no exhaustion of
administrative remedies.
Dividends on shares of stock of a corporation,
whether cash dividend or stock dividend, can be
validly declared only out of unrestricted retained
earnings. Sec 42. It cannot be declared out of
capital. Otherwise, such declaration of dividend
will violate the trust fund doctrine.
A Preferred Stock Holder cannot compel a
Corporation to pay dividends which have to be
declared by the BOD, provided, there are sufficient
unrestricted retained earnings. Otherwise, the
corporation will be forced to use its capital to make
said payments in violation of the trust fund
doctrine. Redemption of shares cannot also be
compelled. While the certificate allows such
redemption, the option and discretion to do so are
clearly vested in the corporation. ( Republic
Planters Bank vs Agana 269 SCRA 1 1997 )
A stockholder is entitled for payment for the entire
shares subscribed and not only to the paid-up
portion thereof. The legal character of being a
“stockholder”, and therefore the entitlement to all
the rights of a stockholder, are determined from the
time of subscription and not from payment of the
subscription. Under sec 43, a stock corporation
may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in
property, or in stock to all stock-holders on the
basis of outstanding stock held by them, and not on
the basis o what stocks have been paid.
A SH cannot compel a Corp to issue the stock
certificate for the paid-ip portion thereof. No
Certificate of Stock can be issued to a subscriber
until the full amount of his subscription together
with interest and expense, if any is due, has been
15
paid. A subscription is one, entire and indivisible
whole contract which cannot be divided into
portions. The SH is not entitled to a Certificate of
Stock until he has remitted the full amount of his
subscription. Sec 64, Sec Opinion 6 January 1989
The members of the BOD cannot be sued in case
they approved a supply contract with another Corp
and the corporation subsequently failed to fulfil the
contract because they were not acting on their
personal capacities but rather in behalf of their
Corporation. Sec 23
The Corporation who entered into supply contract
with another Corp is liable for damages incurred by
the Corp in case of non-fulfilment of the Contract.
A corporate officer who knowingly consents to the
non-fulfilment of the contract could be sued in his
personal capacities.
The rules on liabilities of a corporation for the act
of its corporate officers and the liabilities of the
corporate officers and BOD of a corporation acting
in behalf of the corporation are: Corporation would
be liable for the acts of its BOD and officers if the
said acts were performed by them in accordance
with powers granted to them under the Corporation
Code, the AOI and by-laws of the Corporation, the
laws and regulations governing the business of, or
otherwise applicable to, the corporation, and, in the
case of officers, the resolutions approved by the
BOD. As the directors have a personality separate
from that of the corporation, they would be
personally liable only if they acted wilfully and
knowingly vote for or assent to a patently unlawful
act of the corporation, or when they are guilty of
gross negligence or bad faith in directing the affairs
of the corporation, or when they acquire any
personal or pecuniary interest in conflict with their
duty as directors, which acts result in damages to
the corporation, its SH or other persons, when they
agree to hold themselves personally and solidarily
liable with the corporation, or when they are made,
by a specific provision of law, to personally answer
for the corporate action. Sec 31
In case of death of taxicab passenger incurred by
Corp A, owned and controlled by A, due to
Constructing a building without installing a
protective net, in the absence of Company’s
account and property, the victim may sue A as the
person who owned and controlled Corp A under
the doctrine of “piercing the veil of corporate
fiction”. Although a corporation has a juridical
personality separate and distinct from that of its
SH, when the corporation is used merely as an alter
ego or controlled for the benefit of a SH, or when
it is necessary to render justice, then the courts
have the right to pierce the veil of corporate fiction
to hold the controlling SH-officer personally liable
for the corporate tort or wrong committed.
Likewise, the contractor could also be held liable
since being an independent contract, it is liable for
the fault or negligence of its people.
(In relation to above situation…)
As a defense, Corp A could use the Theory that the
company cannot be held liable for damages
because there was no fraud or negligence by its
officers in undertaking the project for the
construction of the building or the selection of a
construction company. Since a contractor is not an
agent of Corp A, the latter cannot be held liable for
the contractor’s negligence. It could also be argued
that piercing the veil of corporate fiction is a
remedy of last resort and cannot be availed of
without clear evidence showing fraud or disrespect
of the separate juridical personality of the
corporation. Mere control of equity has not been
considered as sufficient basis for piercing the veil.
(In relation to above situation…)
The Taxicab company can be liable for damages
because it failed to comply with its obligation as a
common carrier to use extraordinary diligence in
transporting the passenger, and because at the time
of death of the passenger, the cab driver was
violating a traffic regulation. Under 2185 of Civil
Code, it is presumed that a person driving a motor
vehicle has been negligent if at time of mishap he
was violating a traffic regulation, such as when he
was driving on the wrong side of the road. (
Mallari, Sr. Vs CA, GR 128607, 31 January 2000 )
A Stock and transfer book is a book which records
all stocks in the name of the SH alphabetically
arranged; the instalments paid or unpaid on all
16
stock for which subscription has been made and the
date of payment of any instalment, a statement of
every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such
other entries as the by-laws may prescribe. Sec 74
Appraisal right is the right of SH, who dissents
from the a fundamental or extraordinary corporate
action, to demand payment of the fair value of his
shares. It is the right of a SH to withdraw from the
corporation and demand payment of the fair value
of his shares after dissenting from certain corporate
acts involving fundamental changes in the
corporate structure. Sec 81
In a case where SH A dissent to the corporate act
converting preferred voting shares to non-voting
shares, and transferring his shares to B to whom
new certificates were issued, cannot exercise the
right of appraisal. When SH A transferred his
shares to B, and B was issued new stock
certificates, the appraisal right of A ceased, and B
acquired all the rights of a regular SH. The transfer
of shares from A to B constitutes an abandonment
of the appraisal right of A. All B acquired from the
issuance of new stock certificate was the right of a
regular SH. Sec 86
A corporation incorporated with 500 founders’s
shares and 78 common shares as its initial capital
stock subscription, and subsequently registered
merely 33 common shares, the sole heir of one of
the original incorporators may file a petition with
the SEC, supported by a copy of the AOI indicating
the incorporators initial capital stock subscription,
for the registration of his property rights. The AOI
defines the charter of the corporation and the
contractual relationship between the State and the
Corporation, the State and the SH, and between the
corporation and the SH. Its contents are thus
binding upon both corporation and the SH,
conferring on the heir of one of the original
incorporators a clear right to have his stockholding
recorded. ( Lanuza vs CA 454 Scra 54 2005 )
(In relation to above situation…)
A quorum consists of the majority of the totality of
the shares which have been subscribed and issued.
Thus, the quorum for such meeting would be 230
shares or majority of the 578 shares issued and owning or representing at least two-thirds of the
outstanding as indicated in the AOI. Sec 52 in re: outstanding capital stock would make the
Sec 137, Lanuza vs CA 454 Scra 54 ) transaction void, as being ultra vires.

The constitutional requirement of 60% Filipino
ownership of the capital of public utilities applies
not only to voting control but also to beneficial
ownership of the corporation, it should also apply
to the preferred shares. Preferred shares are also
entitled to vote in certain corporate matters. (
Gamboa vs Teves, 682 Scra 397, 2012 ) Therefore,
the issuance of preferred shares in favor of a
foreigner holding 40% common shares of the
issued and outstanding capital stock of a Corp is
illegal.
Ultra vires act on the part of corporate officers:
When a corporate officer enters into a contract on
behalf of the corporation without having been so
expressly or impliedly authorized by the BOD,
even when the act or contract falls within the
corporation’s express, implied or incidental power,
then the unauthorized act of the corporate officer is
deemed to be ultra vires.

The trust fund doctrine means that the capital stock,

properties and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors. Stated simply, the trust fund
doctrine states that all funds received by the
corporation in payment of the shares of stock shall
be held in trust for the corporate creditors and other
SH of the corporation. Under such doctrine, no
fund shall be used to buy back the issued shares of
stock except only in instances specifically allowed
by the Corporation. ( Boman Enviromental
Development Corporation vs CA, 167 scra 540
1988 )

Ultra vires act on the part of the corporation: Under

sec 45 of the corporation, no corporation shall
possess or exercise any corporate power except
those conferred by the Code or by its articles of
incorporation and except such as are necessary or
incidental to the exercise of the powers so
conferred. When a corporation does an act or
engages in an activity which is outside of its
express, implied or incidental powers set out in its
AOI, the act is deemed to be ultra vires.

Ultra vires act on the part of BOD: When the Board

engages in an activity or enters into a contract
without the ratificatory vote of the SH in those
instances where the Corporation Code so requires
such ratificatory vote, such as wen the corporation
is made to invest in another corporation or engage
in a business which is not in pursuit of its primary
purpose, the board resolution not ratified by SH
17