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MERCANTILE LAW - BAR Q AND A

1990-2006 If the conditions relating to the quorum and


required number of votes are not met, the contract
Corporations that are 60% owned by Filipinos can must be ratified by the vote of stockholders
engage in the business of exploration, development representing atleast 2/3 of the outstanding capital
and utilization of natural resources. (Art XII Sec 2 stock in a meeting called for the purpose.
1987 Consti) The election of aliens as members of furthermore, the adverse interest of Chito in the
the BOD engaging in partially-nationalized contract must be disclosed and the contract is fair
activites is allowed in proportion to their allowable and reasonable ( sec 32 and 33, bp 68 )
participation or share in the capital of such entities.
( sec 2-A, Anti-dummy law ) In the absence of BOD approval, such dealership
agreement is voidable. In the presence of BOD
The absence of ratification or authorization from approval, the following conditions should be met:
the BOD makes the contract entered by the a) His presence as director at the meeting is not
President ______ ( di ako sure kung null and void necessary to constitute a quorum for such meeting;
ba ung effect or voidable, double check mo case ). b) his vote is not necessary for the approval of the
Hence, not binding. ( yao ka sin Trading vs Ca GR contract; and
53820 June 15 1992 209 scra 763 ) c) the contract is fair and reasonable under the
circumstances
The law provides that the total annual ( sec 32 Corp Code )
compensation of the directors, in the preceding
year, cannot exceed 10% of the company’s net There is no vested right of a Stockholder to be
income before income tax ( Sec 30 Corp Code ) elected as director. When a person buys stock in a
corporation he does so with the knowledge that its
A Director may set up another business provided affairs are dominated by a majority of the
such business has no conflict of interest between stockholders. To this extent, the SH parted with his
the Director and the Corporation so as to make the personal right to regulate the disposition of his
case fall within the conflict of interest situation property which he invested in the capital stock of
under the law ( Sec 34 Corpo Code ) the corporation and surrendered it to the will of the
majority of his fellow incorporators or
SH A, a director of Corp A and Corp B, owning 1% stockholders.
of the outstanding capital of Corp A and Corp B. Corporations have the power to make by-laws
Corp A plans to enter into a contract with Corp B declaring a person employed in the service of a
that will make both companies earn profits, in order rival company to be ineligible, or if elected,
for the contract NOT to be voidable, at the meeting subjects him to removal, if he is also a director in a
of the BOD of Corp A, SH A should comply at the corporation whose business is in competition with
meeting: or is antagonistic to the other corporation is valid.
a) His presence as director at the meeting is not
necessary to constitute a quorum for such meeting; The provision in the amended by-laws
b) his vote is not necessary for the approval of the disqualifying any SH who is also a director or SH
contract; and of a competing business from being elected to the
c) the contract is fair and reasonable under the BOD of a Corp is valid. The corporation is
circumstances empowered to adopt a code of by-laws for its
government not inconsistent with the Corp Code.
At the meeting of the BOD of Corp B to approve Such disqualifying provision is not inconsistent
the contract, SH A should make sure that: with the Corp Code.
a) there is no fraud involved; and ( Gokungwei Jr vs SEC 1979 1980 )
b) the contract is fair and reasonable under the
circumstances.
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The law recognize that every corporation has the State insofar as it concerns their individual
inherent power to adopt by-laws for its internal franchises. It is further required that the dispute be
government and to regulate the conduct and intrinsically connected with the regulation of the
prescribe the rights and duties of its members corporation. ( GR 149351 )
towards itself and among themselves in reference
to the management of its affairs. ( SMC vs SEC 11 SEC is not the venue for actions involving intra-
april 1979 ) corporate controversies.
Pursuant to Subsection 5.2 of the Securities
The remedy available in case of deadlock is to Regulation Code- the quasi-judicial jurisdiction of
petition the SEC to arbitrate the dispute with such the SEC to hear corporate cases, including intra-
powers as Sec 104 of the Corp Code provides. corporate controversies, under SEC 5 PD 902-A,
has been expressly transferred to the designated
The SEC can appoint a rehabilitation receiver or a RTC. ( GR 112872 )
management committee to prevent paralyzation of
the business under PD 902-A while the petition to Conflicting claims between buyers of same shares
break the deadlock is pending litigation. is not an intra-corporate controversy. The matter
should be submitted to the regular courts (RTC)
In a close corporation, the restriction as to the where the principal office of the corporation is
transfer of shares has to be state/annotated in the located.
AOI, the By-Laws and the certificate of stock. This
serves as notice to the person dealing with such In the absence of over-issuance of shares resulting
shares like rafael in this case. With such notice, he from the 2 transactions, the corporation should
is bound by the pricing stated in the by-laws. ( get recognize both claimant as rightful SH. This is
codal prov kasi sa question sabi lang nasa by-laws without prejudice to the right of the corporation to
) claim against the seller for the value of the shares
which he sold to 2nd buyer.
The RTC has jurisdiction over cases which
involves intra-corporate controversy. The Under corporation code (Sec 110), corporation sole
applicable rule is that there is a Transferred is one formed for the purpose of administering and
Jurisdiction under Sec. 5.2 of the SRC, the managing, as trustee, the affairs, property and
Commission’s Jurisdiction over all cases temporalities of any religous denomination, sect or
enumerated under PD 902-A sec 5 has been church. It is formed by the chief archbishop,
transferred to the Courts of general jurisdiction or bishop, priest, minister, rabbi or other presiding
appropriate RTC. elder of such religous denomination, sect or
church.
The fact that the complaint was filed with the RTC,
complainants were no longer SH did not divest the Payment for the services rendered constitutes
RTC of its jurisdiction over the case inasmuch as previously contracted debt that do not violate the
the complainant was a former SH and the pre-emptive rights of the SH because such right
controversy arose out of this relation. need not be respected in payment of a previously
( SEC vs CA Gr 93832 ) contracted debt, but only with the indicated SH
approval. ( Corp Code, 39,62 )
An intra-corporate controversy is a conflict
between SH, members or partners and the A Stock corporation may acquire its own shares
corporation, association or partnership regarding only when there exists in the books unrestricted
the regulation of the corporation. The controversy retained earnings to cover the repurchase of shares.
must arise out of intra-corporate or partnership The purpose of the repurchase of shares must be a
relations of the parties; or between such legitimate business purpose of the corporation,
corporation, partnership or association and the such as to:
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Sec 40 of Corp Code. Otherwise, the sale would be
a) Eliminate fractional shares arising out of stock void. ( GR 117897 May 14 1997 )
dividends;
b) Collect or Compromise an indebtedness to the To protect the interest of the creditors of A
corporation arising out of unpaid subscription in a corporation, considering the Corporation A has
deliquency sale; entered a de facto stage of dissolution with the
c) to Purchase deliquent shares sold during the sale; ceasing of its operations, the creditors should
and invoke the protection under Sec 122, that the
d) to Pay dissenting or withdrawing SH entitled to proceeds of the sale should first be applied towards
such payment under the Corp Code. ( 41, 82 Corp the settlement of the obligations of the corporation,
Code ) before any amount can be paid to the SH.

As a sole proprietorship, the proprietor of In case Corporation A failed to obtain the required
Company A has the capacity to act and the 2/3 vote of the outstanding capital stock, then the
personality to sue Company B in the absence of transaction is void. ( GR 117897 ). Corporation B
Incorporation. On the other hand, Company B is can have the purchase declared void and recover
estopped from asserting that its President had no the purchase price paid, as well as damages against
authority to enter into the contract, considering the directors and officers who undertook the
that, in several of Company B’s letters, it had transaction in violation of the law.
clothed its President with apparent authority to deal
with Company A. The provision in by-law relieving directors from all
liability for any contract entered into by the
The Corporate Name should indicate the fact of corporation with any firm in which the directors
incorporation by adding Incorporation or may be interested is in violation of Sec 32.
Incorporated.
In case of consummated transactions, the director
The City of the Municipality and the Province in responsible should account the corporation for the
the Philippines, and not merely the region or as its profits which he realized from the transaction. ( Sec
BOD may later designate, to its place of principal 34 Corp Code )
office.
A corporation acquire corporate existence upon the
The number of shares into which the capital stock date of issuance of certificate of incorporation.
is divided, as well as the par value thereof or a
statement that said stock or a portion thereof are 2003, p28 - walang sagot
without par value. ( Sec 14, 15 Corp Code )
A stock corporation may be converted to non-stock
The sale of substantially all of the assets of A corporation by a mere amendment of the AOI. The
Corporation complying with the test under Sec. 40 SH, however, are deemed to have waived their
of the Corporation Code, the transactions not being right to share in the profits of the corporation.
in the ordinary course of business, and one thereby
the corporation would be rendered incapable of A non-stock corp cannot be converted to stock
continuing the business or accomplishing the corporation by mere amendment of AOI because
purpose for which it was incorporated. the non-stock corp is deemed to have distributed an
asset of the corporation - i.e., its profits, among its
The sale of Substantially all of the assets of A members, without prior dissolution of the
Corporation will be valid, provided, first, there is corporation. Under SEC 122, the non-stock corp
resolution of the BOD of A Corporation, second, must be dissolved first.
ratificatory vote of SH representing at least 2/3 of
the outstanding capital stock as mandated under
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The prime property of Corporation A can be of Chairman provided in the By-laws. If there is the
liquidated among the 5 SH after the property has position of Chairman provided in the By-laws, the
been conveyed by the corporation to the 5 SH, by Chairman presides over the meeting of the
dividing or partitioning it among themselves in any Directors. ( Sec 54 Corp Code )
2 of the ff ways:
A SH questioning the validity of the corporate
a) by Physical Division or Partition based on the resolutions passed at meeting conducted in a hotel
proportion of the values of their stockholdings; or in Makati Metro Manila ( Principal Office is at
b) Selling the Property to a 3rd person and dividing Pasig ) will not prosper considering that MM is a
the proceeds among the 5 SH in proportion to their city or municipality, the holding of the annual
Stockholdings; or stockholders meeting in Manila is prosper. ( Sec 51
c) after the determination of the value of the Corp Code )
property, by Assigning or Transferring the
property to one SH with the obligation on the part The law allows the BOD to hold its meeting
of said SH to pay the other 4 SH the amount in anywhere in the Philippines. The holding of the
proportion to the value of the Stockholding of each. BOD meeting in Makati was proper and the
validity of the resolutions adopted by the Board in
Not all directors and incorporators need not be that meeting cannot be questioned. ( Sec 53 )
residents of the Philippines. Under Sec 10 of the
Corp Code, only a majority of the incorporators The nationality of a corporation organized and
need to be residents of the Philippines. As provided incorporated under the laws of a foreign country,
in Sec 23 of the same code, only a majority of the but owned 100% by Filipinos, is, under the control
members of the BOD need to be residents of the test of corporate nationality, this foreign
Philippines. corporation is of Filipino Nationality. Where there
are grounds for piercing the veil of corporate entity,
The documents to be submitted to the SEC to that is, disregarding the fiction, the corporation will
incorporate a new company are: follow the nationality of the controlling members
a) AoI or SH, since the corporation will then be
b) Treasurer’s Affidavit; considered as one and the same.
c) Certificate of Authority from the Monetary
Board of the BSP; The foundation can use the funds donated to it by
d) Verification slip from the records of the SEC its members for purchase of food and medicine for
whether or not the proposed name has already been distribution to the victims of the Pinatubo eruption
adopted by another corporation, partnership or as long as the amount of donation is reasonable. (
association; Sec 36(9) Corp Code )
e) Letter undertaking to change the proposed name
if already adopted by another corporation, The foundation ( non-stock corp ) cannot operate a
partnership or association; specialty restaurant that caters to the general public
f) Bank certificate of deposit concerning the paid- if the purpose of the corporation are limited to the
up capital; establishment and maintenance of the library and
g) Letter authorizing the SEC or Monetary Board museum. Such act will be ultra vires.
or its duly authorized representative to examine the
bank records regarding the deposit of the paid-up In case of vacancies in the BOT and there is no
capital; quorum, the vacancies will have to be filled up in a
h) Registration Sheet; special meeting of the members. ( Sec 29 Corp
Code )
If the By-laws are silent as to the place of meetings
of the SH and directors, the president presides over If the proposed investment is dispensable
the meeting of the directors, if there is no position ingredient to accomplish the primary purpose of
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the Company, the approval for the proposed experience physical suffering or mental anguish, is
investments will suffice by majority of the BOD not entitled to moral damages. ( get xp, gr to eh )
and the ratification of such approval by the SH
representing at least 2/3 of the outstanding capital xp: FBN Inc. vs AMEC, jan 17 2005
stock would be necessary. ( get basis )
A corporate officer acting in what he considered as
If the proposed investment is an indispensable his duty as an officer of the corporation, such
ingredient which is a reasonable necessity in the officer should not be held personally liable. ( note:
manufacture of the primary purpose, only the in the absence of any proof of an action of
approval of the BOD would be necessary. ( Sec 42 corporate officer acting in personal capacity,
) separate juridical personality shall be applied. )

The procedure in securing the approval of the BOD A person may own shares of stock in a corp. but
is as follows: such ownership does not entitle him to the
possession of any specific property of the
a) a notice of the BOD should be sent to all the corporation or a definite portion thereof. Neither is
directors. The notice should state the purpose of the he a co-owner of a corporate property. Properties
meeting. registered in the name of the corporation are owned
b) At the meeting, each of the project should be by it as an entity separate and distinct from its SH.
approved by a majority of the BOD ( not merely a Such shares of stock do not represent specific
majority of those present at the meeting ). corporate property. ( GR 100866 )

The procedure in securing the approval of the SH Mere ownership of a person of 90% of the capital
is as follows: stock is not of itself sufficient ground to disregard
his separate legal personality absent showing, for
a) Written notice of the proposed investment and example that he acted maliciously or in bad faith. (
the time and place of the SH meeting should be sent GR 103372 )
to each SH at his place of residence as shown on
the books of the corporation and deposited to the The ff are tools available to the SH to replenish
addressee in the post office with postage prepaid, capital;
or served personally. a) additional subscription to shares of stock of the
corporation by SH or by investors;
b) At the meeting, each of the projects should be b) advances by the SH to the corporation;
approved by the SH representing at least 2/3 of the c) payment of unpaid subscription by the SH.
outstanding capital stock. ( Sec 42 )
If a corporation continues to operate even with
A corporation may invest its funds in another depleted capital, the SH or the managers will not
corporation or business or for any other purpose be solidarily liable for the obligations incurred by
other than the primary purpose for which it was the corporation (separate entity). The obligations
organized when the said investment is approved is incurred by the corporation are those of the
ratified by the SH representing at least 2/3 of the corporation which alone is liable therefor.
outstanding capital stock. Written notice of the However, when the corporation is already
proposed investment and the date, time and place insolvent, the directors and officers become
of the SH meeting at which such proposal will be trustees of the business and assets of the
taken up must be sent to each SH. ( Sec 42 ) corporation for the benefit of teh creditors and are
liable for negligence or mismanagement.
A corporation, being an artificial person which has
no feelings, emotions or senses, and which cannot

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No matter how substantial the equity share that the one of the powers provided for in Sec 36 of the
SH owns, the separate legal personality of a Corp code.
corporation subsists.
The 3 methods by which a stock corporation may
A corporation cannot set-off an unpaid be voluntarily dissolved are:
subscription with an employees claim for salaries. a) Voluntary dissolution where no creditors are
The unpaid subscription is not yet due as there is affected. This is done by a majority vote of the
no call. directors, and resolution of at least 2/3 vote of the
SH, submitted to the SEC.
A corporation has no right to withhold in payment b) Voluntary Dissolution where creditors are
of unpaid subscription. To do so would violate affected. This is done by a petition for dissolution
labor laws. ( Apodaco vs NLRC ) which must be filed with the SEC, signed by a
majority of the members of the board of directors,
A corporation organized with an original verified by the president or secretary, and upon
authorized capital stock of P100M is organized as affirmative vote of SH representing at least 2/3 of
a stock corporation. In the absence of any the outstanding capital stock.
prohibition in its AoI or By-laws to declare c) Dissolution by shortening of the corporate term.
dividends, the corporation shall be deemed to have This is done by amendment of the AoI.
the power to declare dividends under Sec 43. Since
it has the power to declare dividends, said voting trust agreement issue p34 lee vs ca feb 4
corporation is a stock corp. 1992

The provision of Aoi that at dissolution the assets The requisites for a derivative suit are:
of the corporation shall be given to a charitable
corporation does not prohibit the corporation from (a) He was a stockholder or member at the time the
declaring dividends before dissolution. acts or transactions subject of the action occurred
and at the time the action was filed;
the absence of the directors’s approval will not (b) He exerted all reasonable efforts, and alleges
bind the corporation and its SH of the resolution the same with particularity in the complaint, to
approved by SH representing 99% of the total exhaust all remedies available under the articles of
outstanding capital stock. incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he
the remedy of a dissenter SH is to petition the RTC desires;
to declare the 2 resolutions, as well as and all (c) No appraisal rights are available for the act or
actions taken by the BOD thereunder, null and acts complained of; and
void. (d) The suit is not a nuisance or harassment suit.

A contract of the corporation with one or more of ( Commart inc vs SEC 198 scra 73 1991 )
its directors or trustees or officers is voidable, at the
option of such corporation. ( Sec 32 ) ( provided na As a general rule, SH cannot bring a derivative suit
hindi ultra vires, otherwise, void ) concerning an act that took place before he became
a SH. However, if the act complained of is
The BOD declaration and payment of cash continuing one, SH may do so.
dividends without approval of the SH is valid.
In a derivative suit, the action is instituted in the
The loan to its sister company, the corporation is name of a corp and reliefs are prayed therein for the
engaged in fast-food business, is void for being an corp, by a minority SH. the law does not qualify the
ultra vires act on part of the food corp, and is not term minority in terms of the number of shares

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owned by a SH bringing the action in behalf of the investments. Declaration of cash dividends
corp. ( SMC vs Khan 176 scra 448 ) requires only the approval of the majority of the
BOD in a proper in a proper resolution.
Watered shares are those sold by the corporation
for less than the par/book value of services Stock dividends - transfers of retained earnings to
rendered in relation to the total par value of the capital stock, thereby increasing the number of
shares. shares of stocks of each SH with no required cash
contribution. A two-thirds vote of the SH coupled
discuss the principle of corporate opportunity. with a majority vote of the BOD, is needed to
declare stock dividends.
Interim rules of procedure for intra-corporate
disputes. Private corporation - one formed for some private
purpose, benefit or end.
Pendency of Derivative suit continues despite the
dissolution of corporation because it remains a Public corporation - for for the government of a
juridical person for purpose of dissolution for 3 portion of the State for the general good or welfare.
years from the date of dissolution, precisely one of
the purposes is to allow the winding-up of its The true test is the purpose of the corporation. If
affairs, including the termination of pending suits. the corp is created for political or public purpose
connected with the administration of government,
Gina must first exhaust any administrative then it is a public corp. If not, it is a private
remedies before filing any derivative suit. corporation although the whole or substantially the
whole interest in the corporation belongs to the
De facto Corporation - one which actually exists State. A public corp is created by special legislation
for all practical purposes as a corporation but or act of Congress. A private corporation must be
which has no legal right to corporate existence as organized under Corp code.
against the state. It is essential to the existence of a
de facto corporation that there be (1) a valid law Stock corp - one that has capital stock divided into
under which a corporation might be incorporated, shares and is authorized to distribute to the holders
(2) a bona fide attempt to organize as a corporation of such shares dividends or allotments of the
under such law, and (3) actual use or exercise in surplus profits on the basis of the shares held. All
good faith of corporate powers conferred upon it other corp are non-stock corp.
by law.
No form of dividends can be declared and paid by
Corporation by estoppel - exist when persons the corporation except from unrestricted retained
assume to act as a corporation knowing it to be earnings appearing on its books. Dividends must be
without authority to do so. In this case, those paid in amounts proportional to all SH on the basis
persons will be liable as general partners for all of outstanding stock held by them. Cash or
debts, liabilities and damages incurred or arising as property dividends, can be declared from such
a result of their actions. unrestricted retained earnings by a proper
resolution of the BoD. Stock dividends, however,
Profits - residual amounts representing return of must be declared by a proper resolution of the BoD
capital after deducting all corporate costs and from existing unrestricted retained earnings and
expenses from revenues. The accumulated profits, ratified by SH representing at least two-thirds of
from year to year, represent the corporate retained the outstanding capital stock of the corporation,
earnings from which the dividends can be declared. obtained in a meeting duly called for the purpose. (
Sec 43 )
Cash dividends - represent an actual distribution of
accumulated profits to the SH as a return on their
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All cash and stock dividends are always paid out of
the unrestricted retained earnings ( also called A proposed stipulation in the management contract
surplus profit ) of the corporation. If the that the managing corporation, as an additional
corporation has no unrestricted retained earnings, compensation to it, should be entitled to 10% of
the dividends would have to be sourced from the any stock dividend that may be declared. SH are
capital stock. This is illegal. It violates the the only ones entitled to receive stock dividends. (
“TRUST FUND DOCTRINE” that provides that Nielson & Co. Vs Lepanto Mining ) In addition,
the capital stock of the corporation is a trust fund the unsubscribed capital stock of a corporation may
to be kept intact during the life of the corporation only be issued for cash or property or for services
for the benefit of the creditors of the corp. ( HR already rendered constitutiong a demandable debt
108576 ) ( Sec 62 ).

Failure to mention in the notice anything about a The Doctrine of Corporate opportunity disqualifies
stock dividend declaration and was taken up only a director, trustee or officer from appropriating
under the item “other business” in the agenda from his personal benefit a transaction or
meeting will not cancel and set aside stock opportunity that pertains to the corporation, and
dividend declaration. Sec 43 provides that no stock which under the duty of loyalty he should first
dividend shall be issued without the approval of the bring to the corporation for its use or exploitation.
SH representing not less than 2/3 of the outstanding The said doctrine is an enforcement of the duty of
capital stock at a regular or special meeting duly loyalty of corporate directors and officers. ( Sec 31
called for that purpose. In addition, sec 50 provides )
that a written notice of the holding of the regular The corp code provides that where a director, by
meeting sent to the SH will suffice. The notice virtue of his office, acquires for himself a business
itself specified the said subject matter. opportunity which should belong to the
corporation, thereby obtaining profits to the
There is no prohibition against the SH to prejudice of such corporation, he must account to
recommend to the BOD that it consider a the latter for all such profits by refunding the same,
declaration of stock dividends. However, a unless his act has been ratified by a vote of the SH
declaration of stock dividends should initially be owning or representing at least 2/3 of the
taken by the BOD and thereafter to be concurred in outstanding capital stock. ( Sec 34 )
by a 2/3 vote of SH.
The expiration of corporate term renders the
Sec 43 prohibits stock corp from retaining surplus corporation dissolved ipso facto and cease to be a
profits in excess of 100% of their paid-in capital. corporate body for the purpose of continuing the
business for which it was organized, except only
The instances when a corporation shall not be held for purposes connected with its winding up or
liable for not declaring dividends are: liquidation. ( PNB vs CFI of Rizal )

a) when justified by definite corporate expansion The absorbed corporation do not need to undertake
projects or programs approved by the BOD; or dissolution and winding up procedure because as a
b) when the corporation is prohibited under any result of the merger, the absorbed corporation is
loan agreement with any financial institution or automatically dissolved and its assets and liabilities
creditor, whether local or foreign, from declaring are acquired and assumed by the surviving
dividends without its or his consent, and such corporation.
consent has not yet been secured; or
c) when it can be clearly shown that such retention The merger does not become effective until and
is necessary under special circumstances obtaining unless approved by the SEC. Before approval by
in the corporation, such as when there is need for the SEC of the merger, the surviving corporation
special reserve for probable contingencies.
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has no legal personality with respect to receivables b) Opening offices by whatever name
due to the absorbed corporation. c) Participating in the management, supervision or
control of any domestic entity
Whether the receivable was incurred by the d) Entering into service contracts
absorbed corporation before or after the merger e) Appointing representatives or distributors,
agreement, or before or after the approval thereof operating under the control of the foreign entity,
by the SEC, the said receivable would still belong who is domiciled in the Philippines or who stays in
to the surviving corporation under Sec 80 which country for a period or periods totaling at least 180
does not make any distinction as to the assets and days in any calendar year.
liabilities of the absorbed corporation that the
surviving corporation would inherit. The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply
The corporation, once dissolved, thereafter can a continuity of commercial dealings or
continues to be a body corporate for 3 years for arrangements, and contemplate to that extent the
purposes of prosecuting and defending suits by and performance of acts or works, or the exercise of
against it and of enabling it to settle and close its some of the functions normally incident to, and in
affairs, culminating in the final disposition and progressive prosecution of, commercial gain or of
distribution of its remaining assets. If the 3 year the purpose and object of the business corporation.
extended life expires without a trustee or receiver
being designated by the corporation within that A corporation may enter into a joint venture.
period and by that time ( expiry of the 3 year However, inasmuch as the ter joint venture has no
extended term ), the corporate liquidation is not yet precise legal definition, it may take various forms.
over, the liquidation can continue with the winding It could take the form of a simple pooling of
up. The members of the BOD can continue with the resources ( not involving incorporation ) between
winding of the corporate affairs until final two or more corporations for a specific project,
liquidation. They can act as trustees or receivers for purpose or undertaking, or for a limited time. It
this purpose. may involve the creation of a more formal structure
and, hence, the formation of a corporation. If the
The creditors may still pursue the corporation even joint venture would involve the creation of a
after the last day of its business operation and partnership, as the term is understood under the
corporate existence. The Corp is not actually Civil code, then a corporation cannot be a party to
dissolved upon the expiration of its corporate term. it.
Sec 122 provides for 3 year period for liquidation
or winding up. ( GR 145855 November 24 2004 ) A corporate director, trustee or officer may be held
personally liable with the corporation under the ff
A foreign corporation is deemed to be doing circumstances:
business in the Philippines if it is continuing the a) When he assents to a patently unlawful act of the
body or substance of the business or enterprise for corporation;
which it was organized. It is the intention of any b) when he acts in bad faith or with gross
entity to continue the body of its business in the negligence in directing the affairs of the
country. The grant and extension of 90 day credit corporation, or in conflict with the interest of the
terms of a foreign corporation to a domestic corporation resulting in damages to the
corporation for every purchase shows an intention corporation, its SH or other persons;
to continue transacting with the latter. c) when he consents to the issuance of watered
stocks or who, having knowledge thereof, does not
Any 3 of the following acts or activities constitute forthwith file with corporate secretary his written
doing business in the Philippines under our foreign objection thereto;
investment laws: d) when he agrees to hold himself personally and
a) soliciting orders solidarily liable with the corporation; or
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e) when he is made, by a specific provision of law,
to personally answer for the corporate action. Corp B may be held liable for the debts of Corp A.
( Tramat Mercantile Inc vs CA GR 111008 Nov 7, As a rule, doctrine of piercing the veil of corporate
94 ) fiction apples when two corporations have the
same BOD and Corp B owned substantially all of
A creditor of a corporation may file an action the stocks of Corp A, which facts justify the
against a SH for the amount of unpaid subscription conclusion that the latter is merely an extension of
in case where the corporation is insolvent. The the personality of the former, and that the former
limit of the SH liability to the creditor is only up to controls the policies of the latter. ( CIR vs Norton
the extent of his unpaid subscription. & Harrison 1964 )

A creditor cannot file an action against a SH who The veil of corporate fiction may be pierced by
is fully paid up because he has already fully paid proving in court that the notion of legal entity is
for his subscription. being used to defeat public convenience, justify
wrong, protect fraud, or defend crime or the entity
A creditor may file an action against a SH in his is just an instrument or alter ego or adjunct of
capacity as director and officer because of the another entity or person.
corporation’s insolvency being the result of
fraudulent practices within the company The doctrine of piercing the veil of corporate
notwithstanding the full payment of his shares. entity, is the doctrine that allows the courts to look
Directors are liable jointly and severally for behind the separate juridical personality of a
damages sustained by the corporation, SH or other corporation and treat the corporation as an
persons resulting from gross negligence or bad association of persons and thereby make the
faith in directing the affairs of the corporation. ( individual actors personally liable for corporate
Sec 31 ) liabilities. The fiction of corporate identity is
disregarded and the individuals comprising it can
The complainant can avail the doctrine of piercing be treated identically. The SH can be held directly
the veil of corporate fiction which can be invoked liable for corporate obligations, even to the extent
when a corporation is formed or used in avoiding a of their personal assets. ( GR 108734 May 29, 1996
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 The doctrine is applicable when the notion of legal
unlawful, the factual settings, however, indicate entity is used to -
the existence of a lawsuit that could subject pablo a) defeat public convenience
to a substantial amount of damages. It would thus b) justify wrong
be difficult for pablo to convincingly assert that the c) Protect fraud
incorporation of the family corporation was d) defend crime ( GR 142936 )
intended merely as a case of “estate tax planning”. e) Shield a violation of the proscription against
( Tan boon bee v Jarencio 30 June 1988, Delpher forum shopping ( GR 137537 )
trades Corp vs IAC ) f) Work inequities among members of the
corporation internally, involving no rights of the
The sale by Corp A of its assets to Corp B does not public or 3rd persons. ( GR 156104 )
result in the transfer of the liabilities of the latter to, g) Evade the lawful obligations of the corporation
nor in the assumption thereof by, the former. The like a judgment credit. ( GR 112546 )
sale by Corp A of its assets is a sale of its property. h) Escape the liability arising from a debt. ( GR
It does not involve the sale of the shares of stock of 88113 )
the corp belonging to its SH. There is therefore no i) Avoid inclusion of corporate assets as part of the
merger or consolidation that took place. Corp A estate of the decedent. ( GR L-35861 )
continues to exist and remains liable to the creditor.
10
j) To promote or to shield unfair objectives. ( GR could no longer serve as a director of the
80863 ) corporation.

To prevent dilution of the SH ownership interest, The deliquency did not not deprive the SH of his
SH A shall have a pre-emptive right to 200 of the right to receive dividends declared. However, the
new issue of 1000 shares because SH A is a SH of cash dividend declared may be applied by the
record holding 200 shares in Corp A. Corp Code corporation to the unpaid subscription. ( Sec 71
provides that each SH has the pre-emptive right to Corp Code )
all issues of shares made by the corporation in
proportion to the number of shares he holds on Only after the laps of 30 days may the delinquent
record in the corporation. SH may be deprived to vote.

Pre-emptive right must be exercised in accordance A Corp passing a resolution authorizing additional
with the AOI or the By-laws. When the AOI and issuance of shares of stocks without noice nor
the By-laws are silent, the BOD may fix a approval of the SH violates SH right’s of pre-
reasonable time within which the SH may exercise emption to the unissued shares because under SEC
the right. 39 of the Corp Code, all SH enjoy pre-emptive
right to subscribe to all issues of shares of any
Corp A has an authorized capital stock of 1M class, including the reissuance of treasury shares in
divided into 50,000 common shares and 50,000 proportion to their respective shareholdings.
preferred shares. At its inception, the Corporation
offered for subscription all the common shares. Sec 81 provides that instances of Appraisal Right -
However, when only 40,000 common shares were Any SH of a corporation shall have the right to
subscribed. Recently, the directors though of dissent and demand payment of the fair value of his
raising additional capital and decided to offer to the shares in the following instances:
public all the authorized shares of the Corporation a) In case any amendment to the AOI has the effect
at their market value. SH A holding 4,000 shares, of changing or restricting the rights of any SH or
has pre-emptive right to the remaining 10,000 class of shares, or of authorizing preferences in
shares. All SH of a stock corporation shall enjoy any respect superior to those of outstanding shares
pre-emptive right to subscribe to all issues or of any class, or of extening or shortening the term
disposition of shares of any class, in proportion to of corporate existence;
their respective shareholdings. b) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
( double check kung kasama sa pre-emptive right substantially all of the corporate property and
ung stocks na hindi nasubscribe at inception ) assets as provided in the Code; and
c) In case of merger or consolidation.
The shares will be offered to existing SH, who are
entitled to pre-emptive right, at a price fixed by the SH approval is necessary only for the removal of
BOD, which shall not be less than the par value of the members of the BOD. For the removal of a
such shares. corporate officer of employee, the vote of the BOD
is sufficient for the purpose.
A SH who disagrees with the issuance of new
shares and the pricing for the shares may not In case a minority stockholder elected only 1
invoke his appraisal right and demand payment for director, the majority stockholders who can always
his shareholdings. muster a 2/3 vote is not allowed, by a 2/3 vote,
remove a director, the law also provides, however,
30 days within which the SH must pay the unpaid that his right may not, without just cause, be
subscription from due date is required before he exercised so as to deprive the minority of

11
representation in the BOD. ( Sec 28, Corp Code; if any, was observed. ( Razon vs IAC GR 74306
Govt vs Agoncillo ) Mar 16,1992 )

The rights of a SH are: An endorsed stock certificate to a friend, and the


a) The right to vote, including the right to appoint latter selling the said certificate to a 3rd person who
a proxy; purchased the same, will bar the original owner to
b) The right to share in the profits of the claim the shares of stock. As a rule, duly endorsed
corporation, including the right to declare stock stock certificate will estopped the original owner
dividends; from claiming said shares from the 3rd person, a
c) The right to a proportionate share of the assets bona fide purchaser who relied on the endorsement
of the corporation upon liquidation; by the original owner of the certificate of stock.
d) The right of appraisal;
e) The pre-emptive right to shares; In case where the certificate of stock was lost or
f) The right to inspect corporate books and records; stole from the original owner, the latter has a right
g) The right to elect directors; to claim the certificate of stock from the thief who
h) Such other rights as may contractually be has no right or title to the same. ( Cite 559 NCC -
granted to the SH by the corporation or by special One who has lost any movable or has been
law. unlawfully deprived thereof, may recover it from
the person in possession of the time )
Sec 72 Corp Code provides that holders of
subscribed shares not fully paid which are not The corporation may be compelled by mandamus
delinquent, shall have all the rights of a SH. to register the shares of stock in the name of the
assignee. The only legal limitation imposed by Sec
2 ways of increasing the Authorized Capital Stock 63 of the corp code is when the corporation holds
of Corp A from 1M(100,00 shares, P10.00 ea) to any unpaid claim against the shares intended to be
1.5M: transferred. The alleged claim of another heir of the
a) Increase the number of shares from 100,000 to decedent is not sufficient to deny the issue of new
150,000 shares with the same par value of P10.00 certificates of stock to his wife and children. It
each. would be otherwise if the transferee’s title to the
b) Increase par value of 100,000 shares to P15.00 shares has no prima facie validity or is uncertain.
each.
A stock corporation may only acquire its own
3 practical reasons for a corporation to increase its shares of stock if the trust fund doctrine is not
capital stock are: impaired. This is to say, for instance, that it may
a) to generate more working capital; purchase its own shares of stock by utilizing
b) to have more shares with which to pay for the merely its surplus profits over and above the
acquisition of more assets like acquisition of subscribed capital of the corporation.
company car, stocks, house, machinery or
business; and The arrangement between the corporation and its
c) to have extra share with which to cover or meet president, where the latter executed a promissory
the requirement for declaration of stock dividend. note binding itself to pay its resigned
President/Director for his shares in the company, is
The delivery of stock certificate by A to B does not covered by the trust fund doctrine. The only
per se prove B’s ownership of A’s stocks. exceptions from the trust fund doctrine are the
Jurisprudence dictates that stock certificate should redemption of redeemable shares and, in the case
be duly endorsed by A at the time it was delivered of close corporation, when there should be a
to B or that the procedure for the effective transfer deadlock and the SEC orders the payment of the
of shares of stock set out in the by-laws of Corp A, appraised value of the Stockholder’s share.

12
The execution of a promissory note by a natural persons. However, they could be
corporation to buy a SH shares and failure to pay subscribers.
such obligation is within the RTC’s jurisdiction.
Settled is the rule that a corporation may only buy Incorporators vs Subscribers:
its own shares of stock if it has enough surplus a - All incorporators are required to sign and
profits therefore. acknowledge the AOI / Subscribers are not subject
to the same requirement
If a SH sold his shares to his friend and the latter b - Incorporators could be either natural or juridical
filed a case with the RTC against the Corp to persons
compel it to register the sale and to issue new c - the number of incorporators cannot exceed 15 /
certificates of stock in his name is within the RTC’s subscribers can be more than 15
jurisdiction. An action to compel a corporation to
register a sale and to issue new certificates of stock A filipino immigrant residing abroad, a filipino
is itself an intra-corporate matter that exclusively residing in Quezon City, A resident alien residing
lies with the RTC. in Makati City, and an authorized representative
could be directors subject to the residency
2007-2013 requirement and nationality requirement under the
law governing the business of the corporation. A
If a director who owns a minority share, wants to domestic corporation ( 40% foreigners/60%
render his other business to the Company in which filipinos ), a foreign corporation registered with the
he is a SH, such contract shall be voidable if duly SEC, and a domestic corporation wholly owned by
approved by the BOD at the option of the company. Filipinos could not be directors as they are not
( Sec 32 ). 3 requisites must concur for the validity natural persons. However, the aforementioned
of said contract, first, such director is not necessary corporations could have their respecive
to constitute a quorum for such meeting, second, representatives nominated and possibly elected as
directors vote at such meeting was not necessary directors by the SH. Each director must own at
for the approval of the contracts, third, each of the least one share of the capital stock of the
contract are fair and reasonable under the Corporation. ( sec 23 )
circumstances. In case the the 1st and 2nd
requisites are absent ( hindi siya director ng In case of qualification to act as Treasurer of the
company ), such contract may be ratified by the company, the Corp Code does not impose any
vote of the SH representing at least 2/3 of the nationality or residency requirement in respect of
outstanding capital stock. Provided, that full the Treasurer. Accordingly, anybody with the
disclosure of the adverse interest of the directors qualifications required under the by-laws of the
involved is made at such meeting. corporation or under the laws governing the
business of the corporation, could be elected
A filipino immigrant residing abroad, a filipino Treasurer by the BOD. ( Treasurer could not be the
residing in Quezon City, A resident alien residing President at the same time, sec 25 )
in Makati City, and an authorized representative
could all be incorporators and subscribers. ( Note: The Secretary is required to be both a resident and
Sec 10 requires that there must be at least 5 but not a citizen of the Philippines. Sec 10
more than 15 incorporators, who must all be natural
persons, and that a majority of the incorporators The sale of all assets and liabilities of corp A to
must be residents of the Philippines. ). A minor Corp B will not result in the automatic dissolution
could neither be an incorporator nor a subscriber. of termination of the existence of the former. A
A domestic corporation ( 40% foreigners/60% decision to dissolve Corp A or to terminate its
filipinos ), a foreign corporation registered with the corporate existence would require a separate
SEC, and a domestic corporation wholly owned by approval by a majority of the BOD of Corp A and
Filipinos could not be incorporators as they are not its SH holding at least 2/3 of the total outstanding
13
capital stock, as well as the separate approval by corporation, it can raise more funds for the business
the monetary board. that if she were to set up a single proprietorship. If
she were to set up the restaurant as a branch office
A corporation may be dissolved by voluntary an existing corporation, the corporation will have
dissolution under sec 118 where no creditors are more funds as capital that if she were to form a
affected, or sec 119 where creditors are affected or separate corporation. However, all the assets of the
by shortening of the corporate term under sec 120, existing corporation will be liable for the debts and
or involuntarily by the SEC under sec 122. losses of the restaurant business.
Dissolution under sec 118, 119, and 120 requires
the approval by a majority vote of the BOD and its The corporation must have at least 5 directors. Sec
SH holding at least 2/3 of the total outstanding 14. A president, a treasurer, and secretary. Sec 25.
capital stock, as well as approval by the Monetary
Board. Every director must own at least one share of the
Note: The SEC has the authority under Sec 6 of PD capital stock of the corporation, which must be
902-A to revoke the certificate of registration of a recorded in his name on the books of the
corporation upon any of the grounds provided by corporation, and a majority of the director must be
law, including the aforementioned Sec 6-A. residents of the Philippines. Sec 25
The president must also be a director. The secretary
the Constitute precludes the legislature to pass a must be a resident and citizen of the Philippines.
law creating a private corporation. ( Art XII, sec 16 Sec 25.
). Under the Constitution, Congress cannot, except
by general law, provide for the formation, The remaining directors cannot elect new directors
organization, or regulation of private corporation. to fill in the 2 vacancies. The BOD may fill up
Only government owned or controlled vacancy only if the ground is NOT due to
corporations that may be created or established expiration of term, removal or increase in the
through special charters. It has been held that a number of board seats. In the case, the term of the
private corporation created pursuant to a special 2 directors expired after one year. The Hold-over
law is a nullity, and such special law is void for period is not part of their term. The vacancies
being in violation of the constitution. ( NDC vs should be filled up by the election by the SH. (
Phil. Veterans Bank GR 84132-33, 10 December Valle Verde Country Club. Inc., vs Africa, 598
1990 ) SCRA 202, 2009 )

The composition of the BOD of the of the National The derivative suit is improper in case where the
Power Corporation (NPC) can be validly reduced SH is questioning the election of new directors. In
to 3 to be affected by legislative amendment of its case of Derivative suit, the corporation, not the
charter. The NPC, being a government owned or individual SH, must be the aggrieved party and that
controlled corporation is not governed by the the SH is suing on behalf of the corporation. In the
general provisions of the Corp Code. case, what the SH is asserting is his individual right
as a SH to elect the 2 directors. The case partakes
In case of Separate corporation, the liability for its more of an election contest under the rules on intra-
obligations and losses will be limited to the amount corporate controversy. ( Legaspi Towers 300, Inc.
of her subscription in the absence of showing that vs Muer, 673 SCRA 453, 2012 )
there is a ground to disregard its separate juridical
personality. In case of single proprietorship, her A SH holding only one share can initiate a
liability for its debts and losses will be unlimited. derivative suit, knows as the minority SH’s suit. It
The formation and the operation of a corporate is allowed by law to enable the minority SH to
requires a great deal of paper work and record- protect the interest of the corporation against illegal
keeping. This is not the situation in the case of or disadvantageous act of its officers or directors. (
single proprietorship. In case of a separate Pascual vs Del Zaz Orozco, 19 Phil 82 1991 )
14
paid. A subscription is one, entire and indivisible
A derivative suit is an intra-corporate dispute as it whole contract which cannot be divided into
is instituted by a SH against other SH who are portions. The SH is not entitled to a Certificate of
officers and directors of the same corporation. ( PD Stock until he has remitted the full amount of his
No. 9020A Sec 5(b) ). Such suit should be filed in subscription. Sec 64, Sec Opinion 6 January 1989
the RTC designated by the SC as a corporate or
commercial court. The members of the BOD cannot be sued in case
they approved a supply contract with another Corp
A derivative suit will not prosper in the absence of and the corporation subsequently failed to fulfil the
demand. There is, therefore, no exhaustion of contract because they were not acting on their
administrative remedies. personal capacities but rather in behalf of their
Corporation. Sec 23
Dividends on shares of stock of a corporation,
whether cash dividend or stock dividend, can be The Corporation who entered into supply contract
validly declared only out of unrestricted retained with another Corp is liable for damages incurred by
earnings. Sec 42. It cannot be declared out of the Corp in case of non-fulfilment of the Contract.
capital. Otherwise, such declaration of dividend
will violate the trust fund doctrine. A corporate officer who knowingly consents to the
non-fulfilment of the contract could be sued in his
A Preferred Stock Holder cannot compel a personal capacities.
Corporation to pay dividends which have to be
declared by the BOD, provided, there are sufficient The rules on liabilities of a corporation for the act
unrestricted retained earnings. Otherwise, the of its corporate officers and the liabilities of the
corporation will be forced to use its capital to make corporate officers and BOD of a corporation acting
said payments in violation of the trust fund in behalf of the corporation are: Corporation would
doctrine. Redemption of shares cannot also be be liable for the acts of its BOD and officers if the
compelled. While the certificate allows such said acts were performed by them in accordance
redemption, the option and discretion to do so are with powers granted to them under the Corporation
clearly vested in the corporation. ( Republic Code, the AOI and by-laws of the Corporation, the
Planters Bank vs Agana 269 SCRA 1 1997 ) laws and regulations governing the business of, or
otherwise applicable to, the corporation, and, in the
A stockholder is entitled for payment for the entire case of officers, the resolutions approved by the
shares subscribed and not only to the paid-up BOD. As the directors have a personality separate
portion thereof. The legal character of being a from that of the corporation, they would be
“stockholder”, and therefore the entitlement to all personally liable only if they acted wilfully and
the rights of a stockholder, are determined from the knowingly vote for or assent to a patently unlawful
time of subscription and not from payment of the act of the corporation, or when they are guilty of
subscription. Under sec 43, a stock corporation gross negligence or bad faith in directing the affairs
may declare dividends out of the unrestricted of the corporation, or when they acquire any
retained earnings which shall be payable in cash, in personal or pecuniary interest in conflict with their
property, or in stock to all stock-holders on the duty as directors, which acts result in damages to
basis of outstanding stock held by them, and not on the corporation, its SH or other persons, when they
the basis o what stocks have been paid. agree to hold themselves personally and solidarily
liable with the corporation, or when they are made,
A SH cannot compel a Corp to issue the stock by a specific provision of law, to personally answer
certificate for the paid-ip portion thereof. No for the corporate action. Sec 31
Certificate of Stock can be issued to a subscriber
until the full amount of his subscription together In case of death of taxicab passenger incurred by
with interest and expense, if any is due, has been Corp A, owned and controlled by A, due to
15
Constructing a building without installing a stock for which subscription has been made and the
protective net, in the absence of Company’s date of payment of any instalment, a statement of
account and property, the victim may sue A as the every alienation, sale or transfer of stock made, the
person who owned and controlled Corp A under date thereof, and by and to whom made; and such
the doctrine of “piercing the veil of corporate other entries as the by-laws may prescribe. Sec 74
fiction”. Although a corporation has a juridical
personality separate and distinct from that of its Appraisal right is the right of SH, who dissents
SH, when the corporation is used merely as an alter from the a fundamental or extraordinary corporate
ego or controlled for the benefit of a SH, or when action, to demand payment of the fair value of his
it is necessary to render justice, then the courts shares. It is the right of a SH to withdraw from the
have the right to pierce the veil of corporate fiction corporation and demand payment of the fair value
to hold the controlling SH-officer personally liable of his shares after dissenting from certain corporate
for the corporate tort or wrong committed. acts involving fundamental changes in the
Likewise, the contractor could also be held liable corporate structure. Sec 81
since being an independent contract, it is liable for
the fault or negligence of its people. In a case where SH A dissent to the corporate act
converting preferred voting shares to non-voting
(In relation to above situation…) shares, and transferring his shares to B to whom
As a defense, Corp A could use the Theory that the new certificates were issued, cannot exercise the
company cannot be held liable for damages right of appraisal. When SH A transferred his
because there was no fraud or negligence by its shares to B, and B was issued new stock
officers in undertaking the project for the certificates, the appraisal right of A ceased, and B
construction of the building or the selection of a acquired all the rights of a regular SH. The transfer
construction company. Since a contractor is not an of shares from A to B constitutes an abandonment
agent of Corp A, the latter cannot be held liable for of the appraisal right of A. All B acquired from the
the contractor’s negligence. It could also be argued issuance of new stock certificate was the right of a
that piercing the veil of corporate fiction is a regular SH. Sec 86
remedy of last resort and cannot be availed of
without clear evidence showing fraud or disrespect A corporation incorporated with 500 founders’s
of the separate juridical personality of the shares and 78 common shares as its initial capital
corporation. Mere control of equity has not been stock subscription, and subsequently registered
considered as sufficient basis for piercing the veil. merely 33 common shares, the sole heir of one of
the original incorporators may file a petition with
(In relation to above situation…) the SEC, supported by a copy of the AOI indicating
The Taxicab company can be liable for damages the incorporators initial capital stock subscription,
because it failed to comply with its obligation as a for the registration of his property rights. The AOI
common carrier to use extraordinary diligence in defines the charter of the corporation and the
transporting the passenger, and because at the time contractual relationship between the State and the
of death of the passenger, the cab driver was Corporation, the State and the SH, and between the
violating a traffic regulation. Under 2185 of Civil corporation and the SH. Its contents are thus
Code, it is presumed that a person driving a motor binding upon both corporation and the SH,
vehicle has been negligent if at time of mishap he conferring on the heir of one of the original
was violating a traffic regulation, such as when he incorporators a clear right to have his stockholding
was driving on the wrong side of the road. ( recorded. ( Lanuza vs CA 454 Scra 54 2005 )
Mallari, Sr. Vs CA, GR 128607, 31 January 2000 )
(In relation to above situation…)
A Stock and transfer book is a book which records A quorum consists of the majority of the totality of
all stocks in the name of the SH alphabetically the shares which have been subscribed and issued.
arranged; the instalments paid or unpaid on all Thus, the quorum for such meeting would be 230
16
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 Ultra vires act on the part of corporate officers:
ownership of the capital of public utilities applies When a corporate officer enters into a contract on
not only to voting control but also to beneficial behalf of the corporation without having been so
ownership of the corporation, it should also apply expressly or impliedly authorized by the BOD,
to the preferred shares. Preferred shares are also even when the act or contract falls within the
entitled to vote in certain corporate matters. ( corporation’s express, implied or incidental power,
Gamboa vs Teves, 682 Scra 397, 2012 ) Therefore, then the unauthorized act of the corporate officer is
the issuance of preferred shares in favor of a deemed to be ultra vires.
foreigner holding 40% common shares of the
issued and outstanding capital stock of a Corp is
illegal.

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