CORPORATION LAW
the partnership.
 Corporation is one of the types of business
organizations. It is also the most important in
economic development.
INTRODUCTION
 Sole Proprietorship
- One man form of business entity, personally
answers all liabilities, but enjoys all the profits
with the exclusion of others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer
liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether they be
natural or juridical
- does not entail continuity because after the
undertaking is completed it is already the end
- particular partnership and joint venture would
be similar, but there is already a decision of
the Supreme Court declaring them as different
- when they do not register, it does not exist
- Foreign corporations enters into an agreement
with a domestic corporation, it must be
registered. Generally they do not need to be
registered.
 Corporations
- They may enter into joint venture, but
generally they cannot enter into a partnership,
but there are exceptions allowed by the SEC:
the 3 exceptions must go hand in hand
1. The articles of incorporation expressly
authorized the corporation to enter into
contracts of partnership;
2. The agreement or articles of partnership
must provide that all the partners will
manage the partnership; and
3. The articles of partnership must stipulate
that all the partners are and shall be jointly
and severally liable for all obligations of
Definition and Attributes
 4 Attributes of a Corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly
authorized by law or incident to its
existence.
 Doctrine of limited capacity
- Only such powers as are expressly granted
to it by law and by its articles of
incorporation including others which are
incidental to such conferred powers, those
reasonably necessary to accomplish its
purpose and those which may be incidental
to its existence
- Can do things as the law asks or allows it to
do
- If it does anything beyond, it shall be
considered as ULTRA VIRES
 General rule: Moral damages cannot be
granted to corporations
 Exception: Filipinas Broadcasting Network
Inc. vs. Ago Med
- In cases of slander, libel and other forms of
defamation (should not qualify because the
code does not qualify whether natural or
juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be
recovered in the following and analogous
cases:
(1) A criminal offense resulting in physical
injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other
lascivious acts;
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 (4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21,
26, 27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted,
raped, or abused, referred to in No. 3 of this
article, may also recover moral damages.
The spouse, descendants, ascendants, and
brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order
named.
 Advantages:
1. Capacity to act as a single unit
2. Limited shareholder's liability
3. Continuity of existence
4. Feasibility of greater undertaking
5. Transferability of shares
6. Centralized Management
7.Standardized method of organization,
management, and finance.
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
Disadvantages:
1. Formal proceeding (such as board
meetings) are required;
2. Business transactions limited to the
State unless authorized by foreign State;
3. Credit is limited in view of shareholder's
limited liability;
4. Unity of incompatible and conflicting
elements in view of transferability of shares;
5. Minority shareholders have practically no
say in the conduct of corporate affairs;
6. In large scale enterprises, stockholders'
voting rights may become merely fictitious and
theoretical because of disinterested in
management, wide-scale ownership
and inaccessible place of meeting;
7. "Double taxation" may be imposed on
corporate income;
8. Corporation are subject to many
legal controls and restrictions.
 A corporation is a person, therefore
protected by the due process clause and
equal protection clause of the Constitution
CLASSIFICATION OF CORPORATIONS
Section 3 Stock and non-stock
- Importance of knowing, determining what
provisions of the code or the law may be
applicable
Section 3. Classes of corporations. -
Corporations formed or organized under
this Code may be stock or non-stock
corporations. Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of
such shares dividends or allotments of
the surplus profits on the basis of the
shares held are stock corporations. All
other corporations are non-stock
corporations. (3a)
 Non-stock- (title 10)
Non-stock corporation - of those where no part of
their income is distributable as dividends to its
members, trustees or officers subject to provisions
on dissolution.
- primarily exist for purposes other than for profit, it
of does not follow that they cannot make profits as an
incident to their operations.
- profits obtained cannot be distributed as dividends
but are used merely for the furtherance of their
purpose or purposes.
 Stock (Section 51)
Two (2) requisites must be complied with,
1. a capital stock divided into shares,
and
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 2. authorized to distribute dividends or - Immediate benefit, aim or advantage of
allotments as surplus profits to its stockholders private individuals
on the basis of the shares held by each
of them. - Those formed for some private purpose,
benefit, aim or end
 Stockholders must generally cast their votes in
the meeting; section 4 governed primarily by - Distinction: public for governmental purpose
the law creating them
 Corporation Sole
Section 4. Corporations created by special
- Exemption to the rule because it is
laws or charters. - Corporations created by
special laws or charters shall be governed composed only of one person
primarily by the provisions of the special law or
charter creating them or applicable to them, - An incorporator may also be a juridical
supplemented by the provisions of this Code, person
insofar as they are applicable. (n)
 Close corporation
 Section 3
- There is exclusivity of shares of stock
- The two (2) requisites must always concur
- Section 96-105
1. That they have a capital stock divided into
shares; and, - Restrictions to transfer shares

2. That they are authorized to distribute - Only those indicated can own shares
dividends or allotments as surplus profits to its
- Article must provide that there will be no
stockholders on the basis of the shares held
public offering
by each of them.
 Open corporation
 Section 4
- openly admit investors
- Created by a special law, they have their own
character - example: stock exchange
- They are not immune from suit unless
 Domestic/ Foreign
provided by the law of their creation
 Test
- Primarily governed by the law creating them
- Incorporation test
- Their subsidiaries are entirely different or
independent from that of the other - If incorporated under the laws of the
Philippines it is a domestic corporation
 Close corporation
 ME Gray vs. CA
- There is no exemption it is absolute
- Parent or Holding/ subsidiaries and affiliates
 Public corporation
- Affiliates- no majority vote
- Political or governmental purposes
SMC 12%
- Those formed or organized for the government
or a portion of the State or any of its political
subdivision and which have for their purpose CBP
HERSHEY CBPl 12%
the general good and welfare
12%
 Private Corporation

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Affiliate is subject to common control by the 12 %
owners
 De jure
- cannot be attached by the state even in a quo
warranto proceeding
 De facto
- exists by virtue of colorable compliance
- Attached directly only by the state in a quo
warranto proceeding
 Corporation by estoppel
- So defectively formed, but still considered
corporation, but only in relation to those who
cannot deny their existence section 20 and 21
FORMATION AND ORGANIZATION
 3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
 Purpose clause
- Defining the scope of authority of the
corporate enterprise or undertaking. Both
confirmed and limited
 4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and secondary
must be specified
4. Lawfully combined
- Provision that states, cannot be issued less
than par, exception is treasury shares because
it can be issued less than par
- A corporation commences only upon issuance
of the certificate, prior thereto it has no being
and cannot transact business. Promoters
cannot act for a projected corporation
- Metro Manila - paid up capital requirement
is 10 M
- Non- stock- mere mention of the operating
capital
- Mention the authorized capital
- Restrictions
- Mandatory in close
- Not mandatory in ordinary
- Non-stock
- If value is not more than 100,000
 A corporation cannot use any other name
unless it has been amended
 Section 19
- If confusingly similar it will not be allowed to
be registered
- Verification slip from the records officer
Section 19. Commencement of
corporate existence. - A private corporation
formed or organized under this Code
commences to have corporate existence
and juridical personality and is deemed
incorporated from the date the Securities
and Exchange Commission issues a
certificate of incorporation under its official
seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law. (n)
- Words corporation or inc. either in full or
abbreviated form must be included
Section 18. Corporate name. - No
corporate name may be allowed by the
Securities and Exchange Commission if the
proposed name is identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
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 protected by law or is patently deceptive, - section 51 meetings may only be within the
confusing or contrary to existing laws. When a boundaries of the city where the principal
change in the corporate name is approved, the office
Commission shall issue an amended
certificate of incorporation under the amended - non-stock may be held anywhere in the
name. (n)
Philippines, if provided in its by-laws
 Doctrine of secondary meaning - where summons may be served
- A word or phrase originally incapable of
- registration of chattel mortgage must be
exclusive appropriation [usually generic] with
registered in the register of deeds where the
reference to an article in the market, because
principal office is located
of geographically or otherwise descriptive,
might nevertheless have been used so long  Clavecilla Radio System vs. Antillon
and so exclusively by one producer with
reference to his article that, in that trade and to - action not upon a written contract
that branch of the purchasing public, the word
or phrase has become to mean that the article - city where the defendant resides
was his product.
 Term of existence
 Section 18
- corporate term required
- Lyceum of the Philippines case, the additional
- determining what point in time the juridical
geographical name does not make it
personality will cease to exist
confusingly similar
- enter into contract only when it has juridical
- actual confusion is not necessary- Philips
personality
case “it is enough that there is probable
confusion”
- once it ceases to exist, it no longer has
 2 requisites must be proven personality

- that the complainant corporation acquired a - exist for another 3 years only for purposes
prior right over the use of such corporate of liquidation
name
- Dissolution - it is automatic
- identical, deceptively or confusingly, patently
 When should extension be made?
deceptive
- General rule: Not earlier than 5 years
 Principal Office
- Exception: unless there are justifiable
- statement of principal office is required
reasons
- city and municipality not only province must be
 May it be extended after expiration?
specified
- Alhambra cigar vs. SEC once it ceases to
- principal office NOT operations office
exist it has no vested politic, exist only for a
- necessary because it will establish the period of 3 years only for liquidation and for
that purpose only
residence of corporations
 How many incorporators should there be?
- venue of actions for or against the
corporations - 5-15
- venue of meetings  May a corporation be an incorporator?

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- General rule: only natural persons
- Exception: cooperatives and corporation
primarily organized to hold equities in rural
banks
 How about minors?
- NO, because they must be of legal age
- May a corporation organized by incorporators
consisting solely of foreigners
- Yes, there is no nationality requirement only
residence, as long as majority are residents of
the Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles as
originally forming the corporation and who are
signatories of the articles of incorporation.
- Must be signatories to be incorporators
Section 5. Corporators and
incorporators, stockholders and members. -
Corporators are those who compose a
corporation, whether as stockholders or as
members. Incorporators are those
stockholders or members mentioned in the
articles of incorporation as originally forming
and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are
called stockholders or shareholders.
Corporators in a non-stock corporation are
called members. (4a)
 Define corporators <sec.5>
- All persons who compose the corporation at
any given time and need not be among those
who execute the articles of incorporation at the
start of its formation and organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are
called stockholders or shareholders.
Corporators in a non-stock corporation are
called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a
corporation from being a stockholder
- Incorporator must subscribe to 1 share
- There are those that are exclusively
reserved to Filipinos
- An incorporator maybe a corporator as long
as he is a stockholder
 section 6
Section 6. Classification of shares.
- The shares of stock of stock corporations
may be divided into classes or series of
shares, or both, any of which classes or
series of shares may have such rights,
privileges or restrictions as may be stated in
the articles of incorporation: Provided, That
no share may be deprived of voting rights
except those classified and issued as
"preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided,
further, That there shall always be a class or
series of shares which have complete
voting rights. Any or all of the shares or
series of shares may have a par value or
have no par value as may be provided for in
the articles of incorporation: Provided,
however, That banks, trust companies,
insurance companies, public utilities, and
building and loan associations shall not be
permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by
any corporation may be given preference in
the distribution of the assets of the
corporation in case of liquidation and in the
distribution of dividends, or such other
preferences as may be stated in the articles
of incorporation which are not violative of
the provisions of this Code: Provided, That
preferred shares of stock may be issued
only with a stated par value. The board of
directors, where authorized in the articles of
incorporation, may fix the terms and
conditions of preferred shares of stock or
any series thereof: Provided, That such
terms and conditions shall be effective upon
the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued
without par value shall be deemed fully paid
and non-assessable and the holder of such
shares shall not be liable to the corporation
or to its creditors in respect thereto:
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 Provided; That shares without par value may
not be issued for a consideration less than the
value of five (P5.00) pesos per share:
Provided, further, That the entire consideration
received by the corporation for its no-par value
shares shall be treated as capital and shall not
be available for distribution as dividends.
A corporation may, furthermore,
classify its shares for the purpose of insuring
compliance with constitutional or legal
requirements.
Except as otherwise provided in the
articles of incorporation and stated in the
certificate of stock, each share shall be equal
in all respects to every other share.
Where the articles of incorporation
provide for non-voting shares in the cases
allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote
on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation
with another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as provided
in this Code shall be deemed to refer only to
stocks with voting rights. (5a)
 How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non
stock corporation whose number of
trustees, though not less than five and not
more than [15] should be divisible by five
[5], meaning they must have either five, ten,
or fifteen trustees and no other;
2. In close corporations where all the
stockholders are considered as members of
the board of directors thereby effectively
allowing twenty members in the board.
3. The by-laws of a corporation may provide
for additional qualifications and
disqualifications of its members of the board
of directors or trustees. However it may not
do away with the minimum disqualifications
lay down by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of directors
or trustees. - Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall
be exercised, all business conducted and all
property of such corporations controlled and
held by the board of directors or trustees to
be elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation,
who shall hold office for one (1) year until
their successors are elected and qualified.
(28a)
Every director must own at least
one (1) share of the capital stock of the
corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who ceases
to be the owner of at least one (1) share of
the capital stock of the corporation of which
he is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
 May a domestic corporation have a
governing board consisting solely of
foreigners?
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 - YES, section 23 majority of them must be
residents of the Philippines, no nationality
requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only
partially nationalized, aliens can be elected as
such directors, [unless the law provides
otherwise] but their number shall only be in
proportion to their equity or participation in the
capital stock of the corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is absolute
and may not be done away with. Corporate by-
laws may, however, provide for additional
qualifications and disqualifications.
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
 Section 27 and 23 minimum disqualifications
and qualifications
 Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs.
SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares par
value 1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D company metro manila 10 M if located in
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the
maximum amount it cannot issue more unless
amended
Maximum shares it can issue is 1M shares unless
amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized
capital stock
 Paid- up must be at least 25%-minimum
 Section 13
- Total subscription compliance with minimum
25% total
- Any combination would comply with the
minimum required by section 30
Section 30. Compensation of
directors. - In the absence of any provision
in the by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of the
net income before income tax of the
corporation during the preceding year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less
than 5k
 Is there a minimum authorized capital
imposed by the code?
- If there is minimum paid-up logically there
should also be a minimum capital =5000
 Minimum paid-up capital for a financing
MM
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 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges
of the stockholders;
- For regulation and control of the issuance of
sale of corporate securities for the protection
of purchasers and stockholders.
- As a management control device.
- To comply with statutory requirements
particularly those which provide for certain
limitations on foreign ownership and shares
like overseas employment agencies requiring
to own at least 75% of the shares of stock
thereof.
- To better insure return on investment which
can be affected through the issuance of
redeemable shares or preferred shares, i.e.,
granting the holders thereof, preference as to
dividends and/or distribution of assets in case
of liquidation; and,
- For flexibility in price, particularly, no par
shares may be issued or sold from time to time
at different price depending on the net worth of
the company since they do not purport to
represent an actual of fixed value.
 Section 6
- Each shall be equal in all respects to every
other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and
outstanding stocks?
- Section 137
Section 137. Outstanding capital
stock defined. - The term "outstanding capital
stock", as used in this Code, means the total
shares of stock issued under binding
subscription agreements to subscribers or
stockholders, whether or not fully or partially
paid, except treasury shares. (n)
- Voting and dividend rights, it refers to the
outstanding capital stocks
- Only outstanding stocks are allowed to vote
and receive dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting
and dividend rights
- may be reissued by the corporation
- once reissued they become outstanding
stocks again
 Common shares
- carry the right to vote
 Preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the
remaining assets upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE
BECAUSE IF NOT THEY ARE PRESUMED
TO BE EQUAL
- It may include such other preferences not
inconsistent with the Code. This is so
because Section 6 of the said law allows a
stock corporation to issue preferred shares
subject only to the limitations imposed
therein which are:
a. They can be issued only with sated par
value; and,
b. The preferences must be stated in the
articles of incorporation and in the certificate
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 of stock, otherwise, each share shall be, in all retention is necessary under special
respect, equal to every other share. circumstances obtaining in the corporation,
such as when there is need for special
 Participating reserve for probable contingencies. (n)

- Must be stated because the presumption is - It depends because there are three types of
that it is participating non-cumulative preferred shares

 Cumulative - Discretionary dividend type

- Irrespective of whether or not they where - Mandatory if earned

earned
- Earned cumulative or dividend credit type
 Preferred
 Compare cumulative share from non-
- May be denied cumulative, earned cumulative or dividend
credit type
- Unless denied they are still entitled
- Cumulative share –whether or not earned
 What if hindi i-declare kahit na may dividends
rights for the previous years? May they be - Non-cumulative earned cumulative or
denied dividend rights because they are non dividend credit type- only if earned
holders of non-cumulative? NOTE: YOU
CANNOT COMPEL THE CORPORATION TO  Par
DECLARE DIVIDENDS UNLESS IT
EXCEEDS 100 % PAID UP CAPITAL SEC. 43 - stated par value; shall not be issued less
than par
Section 43. Power to declare
 No par
dividends. - The board of directors of a stock
corporation may declare dividends out of the
- without stated par value
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock - once fully paid no longer liable
held by them: Provided, That any cash
dividends due on delinquent stock shall first be  Corporations cannot use its capitals in
applied to the unpaid balance on the declaring dividends; not all can issue no par
subscription plus costs and expenses, while value section 6
stock dividends shall be withheld from the
delinquent stockholder until his unpaid  Voting
subscription is fully paid: Provided, further,
That no stock dividend shall be issued without - entitled to vote at any motion brought up in
the approval of stockholders representing not writing
less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting  Non-voting
duly called for the purpose. (16a)
- not entitled to vote
Stock corporations are prohibited from
retaining surplus profits in excess of one  What types of shares may be denied of the
hundred (100%) percent of their paid-in capital right to vote?
stock, except: (1) when justified by definite
corporate expansion projects or programs - Preferred and redeemable shares
approved by the board of directors; or (2)
when the corporation is prohibited under any  Is it correct to state that common shares
loan agreement with any financial institution or
can never be denied the right to vote?
creditor, whether local or foreign, from
declaring dividends without its/his consent,
- Only preferred and redeemable shares are
and such consent has not yet been secured;
or (3) when it can be clearly shown that such denied unless provided in this code

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- PWEDENG MA-DENY YUNG COMMON
SHARES, KASI YUNG FOUNDER’S SHARES
MERON SILANG EXCLUSIVE RIGHTS NA
SILA LANG ANG MERON, SO PWEDE
SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG
COMMON SHARE RIGHTS
- Example: founders shares- may be given
certain rights and privileges
- Even common shares may be denied the right
to vote of founders’ shares issued <sec.7>
Section 7. Founders' shares. -
Founders' shares classified as such in the
articles of incorporation may be given certain
rights and privileges not enjoyed by the
owners of other stocks, provided that where
the exclusive right to vote and be voted for in
the election of directors is granted, it must be
for a limited period not to exceed five (5) years
subject to the approval of the Securities and
Exchange Commission. The five-year period
shall commence from the date of the aforesaid
approval by the Securities and Exchange
Commission. (n)
 Do you include non-voting shares in passing a
valid corporate act?
- Even non-voting shares are entitled to vote
under section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its own
shares if it has unrestricted retained earnings
 Exception: redeemable shares may be
reacquired irrespective of retained earnings
 Treasury shares
- They are treasury while in the treasury
account of the corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the
right to vote?
- Once reissued they shall become
outstanding stocks again and purchasers
shall be entitled to all the rights and
privileges as the other holders have
 Section 57 treasury shares have no voting
and dividend rights. Why not?
Section 57. Voting right for
treasury shares. - Treasury shares shall
have no voting right as long as such shares
remain in the Treasury. (n)
- Answer: commissioner vs. manning page
62 first par.
“Although authorities may differ on
the exact legal and accounting status of so-
called treasury shares, they are more or
less in agreement that treasury shares are
stocks issued and fully paid for and
reacquired by the corporation either by
purchase, donation, forfeiture or other
means. Treasury shares are therefore
issued shares but being in the treasury they
do not have the status of outstanding
shares. Consequently, although a treasury
share, not having been retired by the
corporation re-acquiring it, may be re-issued
or sold again, such shares, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because
dividends cannot be declared by the
corporation to itself, nor in meetings of the
corporation as voting stock, for otherwise
equal distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetrate their
control of the corporation, though it still
represents a paid for interest in the property
of the corporation. The foregoing essential
features of a treasury stocks are lacking in
the questioned shares.
In this case, and under the terms of
the trust agreement, the shares of stock of
Reese participated in dividends which
the trustee received and the said shares
were voted upon by the trustee in all
corporation meetings. They were not,
therefore, treasury shares.”
 When the law speaks of outstanding rights it
does not include treasury shares
11
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding
stocks again
- The corporation may cancel them; in effect
there will be a reduction in the outstanding
capital stocks
- The code does not require ordinary
corporations to provide for restrictions, but it
does not likewise prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the
articles of incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily
required in close corporations
- If it does not provide restrictions it is not a
close corporation
- Specified persons- close corporations
- If not one of those specified you are not
included because there is exclusivity in close
corporations
- Should also be in the by-laws not only in the
articles of incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of
incorporation
- But the grounds in section 17 are not
 Section 23-27 minimum qualifications, but
there may be additional
 When will the corporation commence to
 Grounds for disapproval
- Only substantial and not strict is required
- Section 19
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles
of incorporation or amendment may be
rejected or disapproved. - The Securities
and Exchange Commission may reject the
articles of incorporation or disapprove any
amendment thereto if the same is not in
compliance with the requirements of this
Code: Provided, That the Commission shall
give the incorporators a reasonable time
within which to correct or modify the
objectionable portions of the articles or
amendment. The following are grounds for
such rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurer's Affidavit concerning
the amount of capital stock subscribed
and/or paid is false;
4. That the percentage of ownership of the
capital stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the
Constitution.
No articles of incorporation or
amendment to articles of incorporation of
banks, banking and quasi-banking
institutions, building and loan associations,
trust companies and other financial
intermediaries, insurance companies, public
utilities, educational institutions, and other
corporations governed by special laws shall
be accepted or approved by the
Commission unless accompanied by a
favorable recommendation of the
appropriate government agency to the
effect that such articles or amendment is in
accordance with law. (n)
exclusive
exist?
Section 19. Commencement of
corporate existence. - A private corporation
12
 formed or organized under this Code
commences to have corporate existence and
juridical personality and is deemed
incorporated from the date the Securities and
Exchange Commission issues a certificate of
incorporation under its official seal; and
thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance
with law. (n)
 A corporation de jure can come into existence
only upon the issuance of the certificate of
registration by the SEC? TRUE OR FALSE?
- TRUE
- EXCEPTION: CORPORATION SOLE <sec.
112>
Section 112. Submission of the
articles of incorporation. - The articles of
incorporation must be verified, before filing, by
affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied
by a copy of the commission, certificate of
election or letter of appointment of such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by
any notary public.
From and after the filing with the
Securities and Exchange Commission of the
said articles of incorporation, verified by
affidavit or affirmation, and accompanied by
the documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by him
as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held
in trust by him as a corporation sole, for the
use, purpose, behalf and sole benefit of his
religious denomination, sect or church,
including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
(n)
- CORPORATION SOLE- upon filing of the
verified articles of incorporation, once filed it
is vested with a judicial capacity
 General rule section 19
- Vested with judicial capacity upon issuance
of the certificate by the SEC
o However it is not accurate
according to atty. Ladia because
there are those that can issue for
example cooperatives- BUREAU
OF COOPERATIVES which
register, home insurance guaranty
corporation- HOME OWNERS
 Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by the
CONCERNED government corporation or
agency
- Prior there to it has no being
- The transfer of the property was not valid, it
likewise did not have the right to transfer
 De jure
- Strict or substantial compliance
 De facto
- 4 requisites must go hand in hand take out
anyone of them there can be no de facto
corporation
1. There is a valid statute under which the
corporation could have been created as a
de jure corporation.
2. An attempt, in good faith, to form a
corporation according to the requirements
of law, which goes far enough to amount to
a “colorable compliance” with the law;
3. A user of corporate powers, the transaction
of business in some way as if it were a
corporation; and,
4. Good faith in claiming to be and doing
business as a corporation.
13
 Are the rights and obligations between officers
and directors of a de jure and de facto the
same?
- YES. Governed by the same law, rules and
regulations
 Only important in determining, is for the
purpose of applying the rules with regards to
the direct and collateral attack
 The existence of a de jure cannot be
questioned even by the State, either directly or
indirectly
 Existence of a de facto can be questioned only
by the State directly in a quo warranto
proceeding only
 Municipality of Malabang vs. Benito
- What is the missing link so as to consider it a
de facto? A law, because the executive order
is unconditional
- An unconditional act affords no rights, creates
no office
- Legal contemplation it was never passed at all
- It can therefore be questioned by any person
 If the certificate of registration has not been
issued, may a corporation de facto exist?
- NO!
- Number 4 requirement, good faith in claiming
to be and doing business as a corporation
 Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by the SEC,
the members knew and therefore they were
not acting in good faith, therefore anybody can
question its existence
 Corporation by estoppel
- So defectively formed so that they are not to
be considered a de jure or de facto
- General partners- liable even beyond his
promise even his personal properties are
prone to attachment
 Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3rd persons involved and
the problem arises between there members,
therefore they themselves know that there
is no corporation by estoppel
 Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non
existing corporation
- Section 21, you arrive at the same decision
 Chiang Kai Siek vs. CA
- SC based its decision from the provision of
the education act
- It cannot immune itself by virtue of its non
compliance with the law
 Assuming there was no law?
- YES, it may still be sued as a school for the
past 32 years the school represented itself
as possessed of juridical personality
 General rule: a 3rd party transacting with a
non existent corporation shall be estopped
to deny
 Asia banking vs. standard products
- General rule: absence of fraud a person
who has dealt with a non incorporated
corporation shall be stopped to deny from
actions in which it had benefited
- Exemptions: when there is fraud the general
rule shall not apply
 Salvatierra vs. Garlitos
14
- As a general rule a person who has contracted
it a corporation lacking personality
- Doctrine is not applicable where fraud takes
part in the transaction
 Another exemption
 International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape
from a contract where he is benefited
- In this case petitioner is not trying to escape
liability, but rather the one claiming from the
contract
 Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to
our courts unless they attain a license to
engage in business in the Philippines but
applying corporation by estoppels, the court
allowed
 Municipality of Malabang case
- No law, hence may be questioned by any
person
- An unconstitutional act is not a law, t confers
no rights, it imposes no duties, it affords no
protections, it crates o office, it is in legal
contemplation, as inoperative as though it had
never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves
there must be a 3rd party
- Cannot escape when benefited
- General rule: you deal with a corporation,
as to estop it
- Exceptions: 1. fraudulently misrepresents
the third person may file an action directly to
those members, 2. 3rd party will not be
estopped if he is not trying to escape liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the corporation
failed to commence transaction?
- Automatic
 Operated but becomes subsequently
inoperative for 5 years only a ground for
suspension, proper notice and hearing
 Commencement
- Example realty company
CORPORATE CHARTER AND ITS AMENDMENTS
 What do you understand by the word
charter? Is it the same as articles of
incorporation?
- Corporate charter is broader
 Franchise
- Primary power granted by the state to be
and act as a corporation
- Secondary franchise is the right or privilege
that the corporation may exercise
 You cannot issue investment contracts
without a secondary franchise, kailangan
primary muna hindi pwede mauna
secondary kasi sa section 19 it does not
exist until issued with a certificate of
registration or incorporation
 Corporate entity
- Corporation exist separately and
independently from the stockholders
15
- Stockholders cannot bring an action, to bring
back the properties of a corporation
- Corporation has no interest in the individual
properties of its members
 Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the
recovery of the properties of its members
 Caram vs. CA
- Stockholders cannot be held liable for the
legitimate obligations of the corporation, they
exist separately and independently from one
another
 Cruz vs. Dalisay
- Final judgment against a corporation cannot
be enforced against stockholders
 Rustan Pulp vs. CA
- Corporation exist separately and
independently
- Corporation are juridical entities, they exist
only in legal contemplation, can act only
through its authorized representatives
 Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the
corporation
 Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot
be enforced against stockholders, etc., even if
stockholders, etc. happens to own a
substantial interest in the corporation, mere
ownership does not disregard the corporate
entity theory
 Corporate entity for legal or legitimate
purposes only
 Two or more corporations, one of them will be
treated as a mere alter-ego
 You cannot pierce the veil of corporate
fiction when there are no facts attendant in
the case
 Corporate Entity Theory
- The corporation is possessed with a
personality separate and distinct from the
individual stockholders or members and is
not affected by the personal rights,
obligations or transactions of the latter
 Instrumentality rule
- Where one corporation is so organized and
controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may
be disregarded
- Courts are concerned with reality and not
form
- Mere ownership of all or substantially all of
the shares of stock of a corporation is not,
in itself, insufficient ground for disregarding
the separate corporate personality. And for
the separate personality of the corporation
to be disregarded, the wrong doing must be
clearly and convincingly established
- Fraud must be proven by clear and
convincingly evidence amounting to more
than preponderance. It cannot be justified
by speculation and can never be presumed.
And only if it sought to hold the stockholders
liable directly for corporate debt
 Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is one
and the same
 Marvel bldg. vs. David
- There must be facts before the court will be
justified in piercing the veil of corporate
fiction
- Corporation was a mere extension of the
personality of the person
16
 Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived
by the court here?
- Subscribed capital where all advanced by
Yutivo, the board where the same as Yutivo
 Commissioner of Internal Revenue vs. Norton
and Harrison
- Court applied the general rule
- Mere substantial ownership does not
mean that it has a same corporate entity
 La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same
family, workers were made interchangeably
 Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their
official capacity)
 Tesco vs. WCC
- The two corporations where located in the
same office
 Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
 Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality
rule? “where one corporation is so organized
and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate
entity of the “instrumentality” may be
disregarded.”
- Has no separate mind of its own. What is the
degree of control?
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence
of its own.
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty or dishonest and
unjust act in contravention of plaintiff’s legal
rights; and,
3. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of.
- The absence of one of the elements
prevents “piercing the corporate veil.” In
applying the “instrumentality” or “alter ego”
doctrine, the courts are concerned with
reality and not form, with how the
corporation operated and the individual
defendant’s relationship to that operation.
 There must facts and circumstances before
warrant piercing the veil of corporate fiction
 The control necessary does not mean stock
ownership
 MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all
of the capital stock of a corporation does
not necessary mean that it is a mere
business conduit of the stockholder, that
conclusion is amply justified where it is
shown, as in the case before us, that the
operations of the corporation were so
merged with the stockholders as to be
practically indistinguishable from them. To
hold the latter liable for the corporation’s
obligations is not to ignore the corporation’s
separate entity, but merely to apple the
established principle that such entity cannot
be invoked or used for purposes that could
not have been intended by the law that
created that separate personality.”
 Tan boon bee vs. Jarencio
- Why would a drug company need a printing
machine
17
- The property must be in pursuance of a
company business
 Cease vs. CA
- Alter-ego or the extension of the person of
forest ware does the court pierced the veil of
corporate fiction
- As to not deprive the holders of their
successional rights
- Mere ownership of all or substantially all is not
a justification of piercing the veil of corporate
fiction
 Fraud must be proven by clear and convincing
evidence cannot presume or speculate, there
must be facts and circumstances
 Fraud must be clear and convincing evidence
more than preponderance
 Remo Jr. vs. IAC
- The resolution was not entered to defraud
anyone
 Del Rosario vs. National Labor Commission
- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
 Indophil Textile Mill vs. CALICA
- How do you distinguish this ruling to La
Campana, having the same issues:
- La campana, one payroll, employees were
made interchangeable. Acrylic had its own
standards
 PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested
party
- Assets and machineries
 Amendment of the articles of incorporation
- Express power granted to a corporation
 Section 16
- Appraisal right
- Section 81 to object on certain acts and
transactions
Section 81. Instances of appraisal
right. - Any stockholder of a corporation
shall have the right to dissent and demand
payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing
preferences in any respect superior to those
of outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
Are non-voting shares included in amending the
articles of incorporation
1 100/s
XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would
be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the
foregoing instances
1 1
2 2
3 3
18
 4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that
would result to dissolution require prior
approval by the SEC
Section 37. Power to extend or
shorten corporate term. - A private corporation
may extend or shorten its term as stated in the
articles of incorporation when approved by a
majority vote of the board of directors or
trustees and ratified at a meeting by the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally: Provided, That in case of extension
of corporate term, any dissenting stockholder
may exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness unless approved by a
majority vote of the board of directors and, at a
stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the incurring,
creating or increasing of any bonded
indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of
the incurring, creating, or increasing of any
bonded indebtedness and of the time and
place of the stockholder's meeting at which
the proposed increase or diminution of the
capital stock or the incurring or increasing of
any bonded indebtedness is to be
considered, must be addressed to each
stockholder at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally.
A certificate in duplicate must be
signed by a majority of the directors of the
corporation and countersigned by the
chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section
have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount paid
by each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no-par stock allotted to
each stock-holder if such increase is for the
purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the
capital stock or the incurring, creating or
increasing of any bonded indebtedness
shall require prior approval of the Securities
and Exchange Commission.
19
 One of the duplicate certificates shall
be kept on file in the office of the corporation
and the other shall be filed with the Securities
and Exchange Commission and attached to
the original articles of incorporation. From and
after approval by the Securities and Exchange
Commission and the issuance by the
Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for
filing any certificate of increase of capital stock
unless accompanied by the sworn statement
of the treasurer of the corporation lawfully
holding office at the time of the filing of the
certificate, showing that at least twenty-five
(25%) percent of such increased capital stock
has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed
has been paid either in actual cash to the
corporation or that there has been transferred
to the corporation property the valuation of
which is equal to twenty-five (25%) percent of
the subscription: Provided, further, That no
decrease of the capital stock shall be
approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or
create bonded indebtedness, or increase the
same, with the approval by a majority vote of
the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called
for the purpose.
Bonds issued by a corporation shall
be registered with the Securities and
Exchange Commission, which shall have the
authority to determine the sufficiency of the
terms thereof. (17a)
 The vote must be cast at the meeting called
for that purpose
 Written assent would not suffice
 When do amendments become valid and
effective?
- Only upon the approval of the SEC TRUE OR
FALSE?
- FALSE because it can be valid upon the date
of filing if not acted upon within 6 months
without fault attributable to the corporation
 Why is it retroactive?
 What provision may be amended, altered or
repealed
 Can you change name, address for
example she married or changed address?
- NO. you cannot change that
 Fait accompli, are beyond the powers or
authority of the corporation to change, alter
or modify. These would include the
following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first
elected by the subscribers or members to
act as such until his successor has been
duly elected and qualified,
- The number of shares and amount originally
subscribed and paid out of the original
authorized capital stock of the corporation,
- The date and place of execution of the
articles of incorporation,
- The signatories and acknowledgment
thereof.
- All other provisions or matters stated or
contained in the articles are subject to
amendment.
 Founder’s or signatories hindi pwede palitan
 Names, nationalities- you cannot
 Capital- right granted by law to all
corporation
 Paid up capital- NO
 Restriction and transfer of shares in
ordinary stock corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close
corporation
20
 Section 96. Definition and
applicability of Title. - A close corporation,
within the meaning of this Code, is one whose
articles of incorporation provide that: (1) All the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to
one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Any corporation may be incorporated
as a close corporation, except mining or oil
companies, stock exchanges, banks,
insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall
primarily govern close corporations: Provided,
That the provisions of other Titles of this Code
shall apply suppletorily except insofar as this
Title otherwise provides.
 Transfer clause, executor clause,
acknowledgment, treasury affidavit-NO
 Philippine First Insurance case
- Mere change in the name of a corporation or
by merely complying with the law is general
amendment
- It does not change its personality. It is the
same person in a different name. the charter is
the same
 Amendment of a corporate term
- Extending the same can never be made 7
years prior? TRUE or FALSE
- FALSE. It can be if there are justifiable
reasons for earlier extension as may be
determined by the SEC
 Can you extend the corporate term if it has
already expired?
- Once the term expires without an
amendment having happen it ceases to
exist as a body politic. It is dissolved
automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension
whose term has already expired
- All of them involved are institutions of
learning, it was the case in order to avoid
confusion that would arise later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of directors
or trustees. - Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall
be exercised, all business conducted and all
property of such corporations controlled and
held by the board of directors or trustees to
be elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation,
who shall hold office for one (1) year until
their successors are elected and qualified.
(28a)
Every director must own at least
one (1) share of the capital stock of the
corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who ceases
to be the owner of at least one (1) share of
the capital stock of the corporation of which
he is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day
to day
- Stockholders may have all the profit but will
turn over the management to the governing
board
21
- But unless the law provides the power may be
delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they
acted within the 5 classification page 150
 Ramirez vs. Orientalist co.
- What was the position of Fernandez in this
case? TREASURER
- Why did the court rule that actions of
Fernandez bound the corporation when he is
not even a board of director?
“if a man is found acting for a
corporation with the external indicia of
authority, any person not having notice of want
of authority, may usually rely upon those
appearances; and if it be found that the
directors had permitted the agent to exercise
that authority and thereby held him out as a
person competent to bind the corporation, or
had acquiesced in a contract and retained the
benefit supposed to have been conferred by it,
the corporation will be bound, notwithstanding
the actual authority may never have been
granted.”
- Contracts must be made by the director and
not the stockholders
- Actions of the stockholders in such matters is
only advisory and not in any way binding in the
corporation
 Barreto vs. La previsora Filipina
- Everything emanates from the board of
directors
- Stockholders action is merely advisory except
their approval or vote is necessary to prove a
valid corporate act
 Qualifications:
- No citizenship requirement, at least majority
must be residents
- Can have a governing board consisting solely
of foreigners
- But we have to take into consideration
partly nationalized industries and other laws
which prohibits or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources
60% must be owned by Filipino citizens,
therefore they only own 40%---10 members
they can only have 4 seats, but not entirely
correct because the law may provide
otherwise; educational institutions restricted
to Filipinos, but there are exceptions when
created by religious and charitable
institutions.
- By-laws may provide additional
qualifications and disqualifications
- To qualify as a director he must own at least
1 share
 Should the stockholder be the equitable or
beneficial owner in order to qualify as a
director?
- NO, it is not necessary, as long as you are
listed in the books as owner of one share
 Lee vs. CA
- As long as you are listed in the books as
owner of one share
- Under the old law he must be the beneficial
owner and legal owner thereof but in the
new law it is not required as long as it
stands in his name he is qualifies
1 A-100t/S B (own in the trust of X) is B
qualified to be a director?
2
3-10
2– transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the
voting rights
voting rights must be recorder in the books of the
corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
22
PNB will assign to PNB-IFL nominal shares and PNB- 5-100k
IFL now will be able to be nominated
6-100k
 Gen. Rule:
7-50k
- Term of one year who will serve as such until
there successors are elected and qualified 8-40k

 Exception: 9-5k

- Non-stock corporation can serve for a term of 10-5k

3 years
=1MS
- Educational non-stock- term of the governing
1&2 is absent, 3&4 ayaw tumakbo and hindi
board can be 5 years nagvote 6-10, tumakbo and ninominate nila yung
sarili nila and cast all their shares on themselves
 May this term exceed one year?
 Who wins? Or who gets elected?
- Yes, they may serve in a hold over capacity
until their successors have been duly elected - No vote requirement, the one who gets the
and qualified most number of votes gets elected,
section24.
 Detective and protective bureau vs.
Cloribel  What is cumulative voting?
- In the by-laws, managing director must be - Process of multiplying the number of shares
elected from among themselves to the number of director to be elected
- Must be duly elected and qualified - Matter of right granted to stockholders in a
stock corporation
How are the directors elected?
1 to 5 has 200k/s and members of the same family-
1-100T/S
majority 800k they have 4M votes they are
2-100T/S guaranteed 4 seats

3-100T/S 6 to 10 are not related- 1 seat 1M votes

to 10=1M/S  Cumulative to allow the minority to have a

rightful representation in the board
 Do you include the vote of 1 & 2 to have a
quorum to have a valid meeting?  Is it allowed in a non-stock corporation?

- NO, quorum requirements is 401,000 - Not generally available

Quorum requirement is 501k - Section 89 unless the articles or by-laws

allow cumulative voting
Holders of non-voting shares are only entitled to vote
in last par. Of section 6 Section 89. Right to vote. - The
right of the members of any class or classes
1-200k to vote may be limited, broadened or denied
to the extent specified in the articles of
2-200k incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
3-200k regardless of class, shall be entitled to one
vote.
4-100k

23
 Unless otherwise provided in the
articles of incorporation or the by-laws, a
member may vote by proxy in accordance with
the provisions of this Code. (n)
Voting by mail or other similar means
by members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and under
such conditions which may be prescribed by,
the Securities and Exchange Commission.
 Other corporate officers other than the
governing board section 25
Section 25. Corporate officers,
quorum. - Immediately after their election, the
directors of a corporation must formally
organize by the election of a president, who
shall be a director, a treasurer who may or
may not be a director, a secretary who shall be
a resident and citizen of the Philippines, and
such other officers as may be provided for in
the by-laws. Any two (2) or more positions may
be held concurrently by the same person,
except that no one shall act as president and
secretary or as president and treasurer at the
same time.
The directors or trustees and officers
to be elected shall perform the duties enjoined
on them by law and the by-laws of the
corporation. Unless the articles of
incorporation or the by-laws provide for a
greater majority, a majority of the number of
directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the
transaction of corporate business, and every
decision of at least a majority of the directors
or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act,
except for the election of officers which shall
require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a)
 Is the president required to be a stockholder?
YES
 The chairman may be another person
 The president may also be another person
 Prohibited is president to be secretary or
treasurer at the same time
 Board of director must sit and act as a body
to arrive at a corporate act
 What would constitute a quorum if 5 then 3
must be present
 May the vote of 2 members past a 5 man
governing board pass a valid corporate act?
- YES. Voting requirement is majority of
directors present at which there where a
quorum
1 1 and 2 present=valid voting requirement
2 1 and 2 voted yes
3 3 voted no
4
5
 Is it absolute?
- NO, except in the election because it
requires the majority of all the members of
the board
- If by-laws or articles provide a higher voting
requirement
 Artificial beings must act through its
members and act as a body to have a valid
corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed with
actual or apparent authority
- Otherwise it will not bind the corporation
 Yao Ka Sin Trading case “already asked in
the bar”
- Only bind the corporation to the extent of
authority confined to him or virtue of
customs, usage and policy
- Must pass first the controller and counsel
24
 What if the notice requirement is not complied
with?
 Lopez Realty vs. Fotencha
- Notice requirement must be complied with
hence it should have been with force and
effect, but according to the SC, it may be
ratified expressly if there is a subsequent
meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations
obligation
- There was implied ratification or she was
estopped
 Pua Casim & Co. vs. W. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan
which was endorsed and deposit in the
corporate account
- W. Neumark as president and also stockholder
 Yu Chuck vs. Kong Li Po
- General manager usually has the power to
hire but the SC said the contract must be
reasonable
- The contract here is so onerous that it would
throw the corporation into insolvency
 Francisco vs. GSIS
- GSIS cannot evade the binding effect of the
telegram
- Only 15 months later that the corporation said
there was a mistake
- The silence coupled with the unconditional
acceptance of the other subsequent
remittances is binding to the corporation
 Board of Liquidators vs. Kalaw
“Settled jurisprudence has it that
where similar acts have been approved by the
directors as a matter of general practice,
custom and policy, the general manager may
bind the company without formal
authorization of the board of directors. In
varying language, existence of such
authority is established, by proof of the
course of business, the usages and
practices of the company and by the
knowledge which the board of directors has,
or must be presumed to have, of acts and
doings of its subordinates in and about the
affairs of the corporation. So also, “xx
authority to act for and bind a corporation
may be presumed from acts of recognition
in other instances where the power was in
fact exercised.” “xx Thus, when, in the usual
course of business of a corporation, an
officer has been allowed in his official
capacity to manage its affairs, his authority
to represent the corporation may be implied
from the manner in which he has been
permitted by the directors to manage its
business.”
In the case at bar, the practice of
the corporation has been to allow its
general manager to negotiate and execute
contracts in its copra trading activities for
and in NACOCO’s behalf without prior
board approval. If the by-laws were to be
literally followed, the board should give its
stamp of prior approval on all corporate
contracts. But that Board itself, by its acts
and through acquiescence, practically laid
aside the by-law requirement of prior
approval.
- Kalaw signed alone and said contracts were
submitted to the board of directors after its
consummation and not before
 Buenaseda vs. Bowen
- Express ratification is made through a
formal board action
- Implied ratification is through: silence or
acquiescence, acceptance benefits and
lastly recognition or adoption
- An unauthorized act may nevertheless be
binding either by express or implied by
estoppels
- By virtue of silence the board had impliedly
accepted the act
25
 - By recognition or adoption
- By virtue of payment of obligations arising
therefore- Lopez realty
May directors or trustees be disqualified to act as
such?
- YES, crime, etc. disqualifications in book
- Possess or dispossess any of the
qualifications or disqualifications , cease to
hold at least one share
Section 29. Vacancies in the
office of director or trustee. - Any vacancy
occurring in the board of directors or
trustees other than by removal by the
stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
the stockholders in a regular or special
meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
be elected only or the unexpired term of his
predecessor in office.

May directors be ousted from office? Any directorship or trusteeship to

be filled by reason of an increase in the
- At least 2/3 of members representing number of directors or trustees shall be
outstanding capital stock. Again notice filled only by an election at a regular or at a
requirement must be complied with special meeting of stockholders or members
duly called for the purpose, or in the same
1-200 1-5 same family meeting authorizing the increase of
directors or trustees if so stated in the
2-200 notice of the meeting. (n)

3-200  Other than by removal or expiration of term

they do not have the power
4-100
 When will the vacancies be filled up?
5-100 electing
 Is notice required, to fill up vacancies due to
6-100 6 to 10 not related removal?
7-50  What if the vacancy is due to an increase,
can it be filled up in the same meeting
8-40
where in the number is increased?
9-5
 Election due to removal-in the same
10-5 outstanding director meeting notice is not required

Meetings called by the president or the  Election due to increase in number- it must
secretary ordered by the president be so stated in the meeting

 It depends if the removal is without cause they  Section 30

cannot do so because removal without cause
shall not deprive the minority stockholders or
members of the right of representative
 If with cause they can even if it will prejudice
the rights of the minority, provided of course
additional requirements by-laws and articles of
incorporation
 Who will fill up the vacancy created due to the
ouster of a member of the board of directors
<section 29>
Section 30.Compensation of
directors. - In the absence of any provision
in the by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such

26
 directors, exceed ten (10%) percent of the net
income before income tax of the corporation
during the preceding year. (n)
- Generally not entitled to receive compensation
because they render it gratuitously
- Unless the by-laws allows
- Stockholders may also grant pursuant to a
majority vote
- Must not exceed net income of 10% tax of the
preceding year
- Acting in special capacity
- In, sum directors may receive compensation
when
1. there is a provision in the by-laws to that
effect
2. When the stockholders, by a majority vote of
the outstanding capital stock grant the same;
and,
3. If the director renders extra-ordinary or unsual
service
 Central Cooperative Exchange vs. Tibe
- By-laws may allow, stockholders may also
allow such
 What do you understand by the phrase “as
such directors”
 Western Institute vs. Salas
- Compensation was granted without by-laws
authority
- Prohibition is not a sweeping rule
- Members of the board may receive when they
receive in a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other officers?
- NO. the phrase “as such director” was used
twice <Section 30>
- The SC ruled that the 10% ceiling will not
likewise apply if they acted in a capacity
other than “as such directors”
 Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who
can make or unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and
in behalf of the corporations are not there’s
BUT there are exceptions even if they are
acting for and in behalf of the corporation
 Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within the
scope of his authority
- Court laid down 4 instances when even if
acting within the scope of his authority he is
held solidarily liable
1. He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to
the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and
solidarily liable with the corporation;
4. He is made, by a specific provision of law,
to personally answer for his corporate
action.
- Watered stocks- issued, fully paid up when
in fact they have not been fully paid or
promised as such
 Llamado vs. CA
27
- The corporate entity theory cannot be used as
a defense to escape liability in violation of B.P.
22
- Where the check is drawn by a corporation the
persons who signed the check shall be liable.
 Uichico vs. NLRC
- Labor case corporate directors and officers are
solidarily liable with the corporation for the
termination of employment of corporate
employee done with malice and bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left
solely to the honest decision of the board of
directors and the courts are without authority
to substitute its judgment as against the
former. The directors are the business
managers of the corporation and as long as
they act in good faith, its actuations are not
subject to judicial review. Montelibano vs.
Bacolod Murcia Milling
- questions of policy and management are left
solely to the board of directors
- BOD, business manager of the corporation
and as long as they act in good faith, its
actuations are not subject to judicial review
- They are not insurer of the property of the
company, they were guarantors that the
enterprise undertaken by the corporation shall
be successful
 Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or
honest error of judgment
Director x co.
- Duty of loyalty of corporate directors
A-REALTY
- 31,32,33,34
B
- 31,32,33- specific instances when corporate
officers may violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the
position of a fiduciary and prohibits him form
seizing a business opportunity and/or
developing it at the expense and with the
facilities of the corporation. He cannot
appropriate to himself a business
opportunity which in fairness should belong
to the corporation.
 Last paragraph of section 31 and the
provision of section 34 make reference to
recovery of “forbidden profits”
 Distinction between section 31 and 34
relative to the ratification by the
stockholders
- The second paragraph of section 31 which
makes a director liable to account for profits
if he attempts to acquire or acquires any
interest adverse to the corporation in
respect to any matter reposed in him in
confidence as to which equity imposes a
disability upon him to deal in his own behalf
is not subject to ratification by the
stockholders. Whereas, in section 34 if a
director acquires for himself a business
opportunity which should belong to the
corporation, he is bound to account for such
profits unless his act is ratified by the
stockholders owning ore representing at
least 2/3 of the outstanding capital stock.
- If reposed in him in confidence, not subject
to ratification
- If the acquisition is merely that of a
business opportunity which has not been
reposed in him in confidence, the same may
be subject to ratification by the
stockholders.
28
C Z owns property and is going
abroad never to Return, he
wants to sell for 25M the fair
market value is 30M
D 2. That the vote of such director or trustee was
E contract;
E goes to Z and offers to pay the property for 26 M and
later he sells it for 30M making 4M profit, one of the
stockholders learned and complains that he should
submit the profits. E said that he will move for
ratification of his actuation. Can it be ratified?
- It can be ratified he merely acquired a
business owning to the corporation
- It would be different if it was entrusted in his
confidence
Another scenario:
Had A not attended the meeting he would not have
known of the sale it is then a matter reposed in him in
confidence
 A corporation cannot reaquire its share if it has
no restricted unretained earnings
 Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not
invalidated
- Self-dealing director and interlocking director
What is a self-dealing director?
- Director of a corporation dealing or transacting
business with his corporation
Are the contracts and dealing of a self-dealing director
valid?
 General rule: voidable
May the contracts of a self-dealing director be valid per
se.
- YES. If all the 4 conditions are present they
will be valid per se
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
not necessary for the approval of the
3. That the contract is fair and reasonable
under the circumstances; and
4. That in case of an officer, the contract has
been previously authorized by the board of
directors.
When do they become voidable?
- When any of the two requisites are absent it
is voidable, but subject to ratification by 2/3
of the outstanding capital stock or 2/3 of the
member
 Requisites for ratification (subject to
ratification by the stockholders holding or
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members.)
- it must be at a meeting called for the
purpose
- full disclosure of the adverse interest of the
director concerned must be made
- the contract is fair and reasonable under the
circumstances
 Problem if self-dealing director involved
owns all or substantially all of the shares of
stock of the corporation thereby making it
easily possible to have the contract ratified
- last sentence of section 32 should be made
to apply by determining the reasonableness
and fairness of the contract
Section 32. Dealings of directors,
trustees or officers with the corporation. - A
contract of the corporation with one or more
of its directors or trustees or officers is
voidable, at the option of such corporation,
unless all the following conditions are
present:
1. That the presence of such director or
trustee in the board meeting in which the
29
 contract was approved was not necessary to C-
constitute a quorum for such meeting;
D-
2. That the vote of such director or trustee was
not necessary for the approval of the contract; E-

3. That the contract is fair and reasonable  Both companies enter into a contract and A
under the circumstances; and sits, is the contract valid?

4. That in case of an officer, the contract has - Yes on the ground of fraud or if it is unfair
been previously authorized by the board of
directors. - May be subject to the provision of section
32
Where any of the first two conditions
set forth in the preceding paragraph is absent, - Section 32 contract may become voidable,
in the case of a contract with a director or hence it may also be ratified
trustee, such contract may be ratified by the
vote of the stockholders representing at least X Co. Y Co.
two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in A owe 20% A owe 20%
a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of Is it generally valid or voidable? VALID
the directors or trustees involved is made at
such meeting: Provided, however, That the 25% 25% VALID
contract is fair and reasonable under the
circumstances. (n) 15% 25% VOIDABLE SUBJECT TO
section 32
 Prime White Cement vs. IAC
More than 20 substantial
- a director of a corporation owes a position in
trust  BOD mismanages corporate officers. Who
may file a suit?
- in case of conflict between himself and that of
the corporation, he cannot sacrifice the - General rule: BOD which can institute a
interest of the corporation to his own case because it has all the powers. To allow
advantage stockholders to file would violate the
doctrine of corporate entity and may result
- as a director he should have acted in a to multiplicity of suits
manner as not to unduly prejudice the
corporation - Stockholders cannot therefore generally file
a case EXCEPT of course in a DERIVATIVE
- he cannot be allowed to enrich himself SUIT

 May corporate directors purchase the  Derivative suit

corporate property?
- An action based on injury to the
 Mead vs. Mccullogh corporation-to enforce a corporate right-
wherein the corporation itself is joined as a
- interlocking director- a director of one necessary party, and recovery is in favor of
corporation who deals and transacts business and for the corporation.
with another corporation who is himself a
director - Remedy granted by law to stockholders to
institute a case to remedy a wrong done
A- director of X company also a director of Y directly to the corporation and indirectly to
corporation the stockholders, if the board refuses to do
so. Otherwise if not they would be left
B-
without any recourse
30
  Available suits - The right of action is personal in nature. He
became a stockholder only in 1902
Individual or Personal
 Derivative suit
- Wrong done against his person as a
stockholder - By a stockholder to address a wrong done
against the corporation and the stockholder
 Class suit indirectly
- Filed by a stockholder in representation of - Essential requisite must have been a
other stockholders stockholder from the time the act
complained of took place
- A wrong or redress done, a derivative suit in
nature - Cannot institute an action from the years he
was still not a stockholder
 Intra-corporate remedies
 Everett vs. Asia Banking
- Demand to the BOD to institute such action
- Stockholders cannot ordinarily commence
- Negated by the BOD
suit in equity and such is in the hands of its
- The one who instituted must be a stockholder BOD however there are exceptions when
at the date when the act was done, must have the BOD will not sue since they are
been a stockholder by that time themselves principals to the fraud.

 Demand will not be required if the majority of  Republic vs. Cuaderno

the BOD are the one’s guilty of the wrong
- The facts constitute sufficient cause of
charged
action
 The corporation must be made a party in the
- It is not the corporate interest to shield one
case whatever side will not matter because
from criminal prosecution which is personal
under Philippine law misjoinder is not a ground
interest
for dismissal
- Perez is not suing in his behalf, but in behalf
 Non-joinder is a ground for dismissal
of the corporation
 Any benefit should inure to the corporation
 Western Institute vs. Salas
 Stockholder bringing the action is entitled to
- Assuming it was filed in the proper forum
reimbursement such as attorney’s fee ONLY IF
the case is SUCCESSFUL to avoid would there argument that it is a derivative
harassment suit to their management suit prosper? NO. it is people of the
Philippines vs. individual director, it must be
 Pascual vs. Orozco stated in the complaint that it is being
instituted as a derivative suit and for and in
- By virtue of the fact that he is a stockholder, behalf of the corporation
may maintain a derivative suit
- Granting arguendo, that this is a derivative
- Depend on how, when and what reason suit, the same is still outrightly dismissible
for having been wrongfully filed in the
- Seeking for the years 1898 all the way 1907 regular court devoid of any jurisdiction to
entertain the complaint. The case should
- Only became a stockholder in 1903
have been filed with the SEC which
- He can sue only in 1903 forward because he exercises original and exclusive jurisdiction
over derivative suits, they being intra-
must be a stockholder

31
 corporate disputes, per Section 5 (b) of P.D.
902-A
 San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the
board meeting, but still it was adopted
therefore it was useless
 Chase vs. Buencamino
- Argument that he should be in estoppels since
2. He has tried to exhaust intra-corporate
he filed in the U.S.
- Assuming the case prospered in the U.S.
would not estoppels apply as against him? NO
for estoppels to step in it must be a case by
the corporation
 Reyes vs. Tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to
remedy a wrong done
3. The stockholder bringing the suit must
- Fraud in the conduct of corporate affairs
 Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating
damage against him
4. The corporation should be made a party,
- Violation of their rights as individuals, hence
derivative suit is not the remedy
 Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation,
but rather his individual benefit
 From the cases above cited, these are the
requirements and the procedures that must be
followed in order that a derivative suit may
5. Any benefit or damages recovered shall
prosper
1. That the party bringing the suit should be a
stockholder as of the time the act or
transaction complained of took place, or
whose shares have evolved upon him since
by operation of law. This rule, however,
does not apply if such act or transaction
continues and is injurious to the stockholder
or affect him specifically in some other way.
The number of his hares is immaterial since
he is not suing in his own behalf or for the
protection or vindication of his own right, or
the redress of a wrong done against him,
individually, but in behalf and for the benefit
of the corporation.
remedies, he has made a demand on the
board of directors for the appropriate relief
but the latter had failed or refused to heed
his plea. Demand, however, is not required
if the company is under the complete
control of the directors who are the very
ones to be sued (or where it becomes
obvious that a demand upon them would
have been futile and useless) since the law
does not require a litigant to perform
useless acts;
allege in his complaint that he is suing on a
derivative cause of action on behalf of the
corporation and all other stockholders
similarly situated, otherwise, the case is
dismissible. This is because the cause of
action actually devolves on the corporation
and not to a particular stockholder.
either as party-plaintiff or defendant, in
order to make the court’s judgment binding
upon it, and thus, bar future litigation of the
same issues. On what side the corporation
appears loses importance when it is
considered that it lay within the power of the
court to direct the making of amendment of
the pleading, by adding or dropping parties,
as may be required in the interest of justice.
Misjoinder of parties is not a ground to
dismiss action; and,
pertain to the corporation. This is so
because in all instances, derivative suit is
instituted for and in behalf of the corporation
and not for the protection or vindication of a
right or rights of a particular stockholder,
32
 otherwise, the aggrieved stockholder should
institute, instead, an individual or personal suit
to vindicate his personal or individual right. Or,
for that matter, representative or class suit for
all other stockholders whose rights are
similarly situated, injured or violated,
personally or individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and
constituted?
- Section 35
Section 35. Executive committee. -
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board. Said committee may
act, by majority vote of all its members, on
such specific matters within the competence of
the board, as may be delegated to it in the by-
laws or on a majority vote of the board, except
with respect to: (1) approval of any action for
which shareholders' approval is also required;
(2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which
by its express terms is not so amendable or
repealable; and (5) a distribution of cash
dividends to the shareholders.
- Said committee may act and bind the
corporation by the majority vote of all its
members except with respect to those matters
provided for in sec. 35 these are:
1. Approval of any action for which shareholders’
approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of new by-laws;
4. Amendment or repeal of any resolution of the
board which by its express terms is not so
amenable or repealable; and,
5. Distribution of cash dividends to the
shareholders.
 May the board alone create an executive
committee without any authority provided
for the by-laws?
- NO board of directors must sit and act as a
body to have a valid transaction
 May a non-member of the board of directors
be a member of the executive committee?
- NO, all of them must be members of the
board of directors
- BOD cannot act by proxy it would be
abdication of powers
 Purpose clauses necessary because it
confers and also limits the actual authority
of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified into
three classes namely:
1. Those expressly granted or authorized by
law inclusive of the corporate charter or
articles of incorporation;
2. Those impliedly granted as are essential or
reasonably necessary to the carrying out of
the express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY
LAW
Section 36. Corporate powers and capacity. -
Every corporation incorporated under this Code has
the power and capacity:
1. To sue and be sued in its corporate
name;
2. Of succession by its corporate name for
the period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
33
 5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code;
and to admit members to the corporation if it
be a non-stock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject to
the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with
other corporations as provided in this Code;
9. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid
of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose
or purposes as stated in the articles of
incorporation. (13a)
Section 37. Power to extend or shorten
corporate term. - A private corporation may extend or
shorten its term as stated in the articles of
incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-
thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and
of the time and place of the meeting shall be
addressed to each stockholder or member at his place
of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved
by a majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock
or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of
the stockholder's meeting at which the proposed
increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness
is to be considered, must be addressed to each
stockholder at his place of residence as shown on
the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section
have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount paid
by each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no-par stock allotted to
each stock-holder if such increase is for the
purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
34
 (7) The vote authorizing the increase or
diminution of the capital stock, or the incurring,
creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in
the office of the corporation and the other shall be filed
with the Securities and Exchange Commission and
attached to the original articles of incorporation. From
and after approval by the Securities and Exchange
Commission and the issuance by the Commission of
its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as
the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept
for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at
least twenty-five (25%) percent of such increased
capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed
has been paid either in actual cash to the corporation
or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be
approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval
by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with
the Securities and Exchange Commission, which shall
have the authority to determine the sufficiency of the
terms thereof. (17a)
Section 39. Power to deny pre-emptive right. -
All stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith
with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.
Section 40. Sale or other disposition of
assets. - Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks,
bonds or other instruments for the payment of
money or other property or consideration, as its
board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3)
of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice
of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder
or member at his place of residence as shown on
the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets,
subject to the rights of third parties under any
contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the
power of any corporation, without the authorization
by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose
of any of its property and assets if the same is
necessary in the usual and regular course of
business of said corporation or if the proceeds of
the sale or other disposition of such property and
assets be appropriated for the conduct of its
remaining business.
35
In non-stock corporations where there are no members
with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by
this section.
Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (a)
Section 42. Power to invest corporate funds
in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a
private corporation may invest its funds in any other
corporation or business or for any purpose other than
the primary purpose for which it was organized when
approved by a majority of the board of directors or
trustees and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's
or member's meeting duly called for the purpose.
Written notice of the proposed investment and the time
and place of the meeting shall be addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where
the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17
1/2a)
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock
held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and
such consent has not yet been secured; or (3) when
it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for
special reserve for probable contingencies. (n)
Section 44. Power to enter into
management contract. - No corporation shall
conclude a management contract with another
corporation unless such contract shall have been
approved by the board of directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation,
of both the managing and the managed corporation,
at a meeting duly called for the purpose: Provided,
That (1) where a stockholder or stockholders
representing the same interest of both the managing
and the managed corporations own or control more
than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board
of directors of the managing corporation also
constitute a majority of the members of the board of
directors of the managed corporation, then the
management contract must be approved by the
stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock
corporation. No management contract shall be
entered into for a period longer than five years for
any one term.
The provisions of the next preceding paragraph
shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially
all of the business of another corporation, whether
such contracts are called service contracts,
operating agreements or otherwise: Provided,
however, That such service contracts or operating
agreements which relate to the exploration,
36
development, exploitation or utilization of natural
resources may be entered into for such periods as
may be provided by the pertinent laws or regulations.
(n)
Section 45. Ultra vires acts of corporations. -
No corporation under this Code shall possess or
exercise any corporate powers except those conferred
by this Code or by its articles of incorporation and
except such as are necessary or incidental to the
exercise of the powers so conferred. (n)
Section 36
 Where should the corporation be sued?
- principal office is important because it
establishes the residence of the corporation
and determining service of summons, venue of
action
- it can be sued in the city or municipality where
its principal office is found
 Principal office is also important for venue of
meetings
 Non-stock corporation may provide in its by-
laws that the venue of meeting be anywhere in
the Philippines
 Upon whom service of summons be made?
- Section 11. Service upon domestic private
juridical entity- when the defendant is a
corporation, partnership or association
organized under the laws of the Philippines
with a juridical personality, service may be
made upon the president, managing partner,
general manager, corporate secretary,
treasurer, or in house counsel.
 Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in the
statute
- secretary of a dep’t are not those included in
the statute
 E.B. Villarosa vs. Benito
- decision En Banc repeals all other
pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and
at all time illogical
 the particular revision under Section 11 of
Rule 14 was explained by retired Supreme
Court Justice Florenz Regalado, thus:
“xxx the then section 13 of this Rule
allowed service upon a defendant
corporation to “be made on the
president, manager, secretary,
cashier, agent or any of its
directors.” The aforesaid terms
were obviously ambiguous and
susceptible of broad and
sometimes illogical interpretations,
especially the word “agent” of the
corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared
to challenge the validity of service
of summons but whose very
appearance for that purpose was
seized upon to validate the
defective service, is an illustration
of the need for this revised section
with limited scope and specific
terminology. Thus the absurd result
in the Filoil case necessitated the
amendment permitting service only
on the in-house counsel of the
corporation who is in effect an
employee of the corporation, as
distinguished from an independent
practitioner.”
o notes: additional knowledge
- special appearance enter for that particular
appearance you are not the counsel in the
case
- would apply only if it does not involve an
intra-corporate controversy (controversy
between and among the stockholders)
- upon any of the statutory officers or officers
fixed in the by-laws any secretary, any of
the directors; any managers in the by-laws
 Seal
37
 - merely ministerial or permissive - Converts the property to a private land
automatically once converted it can now be
 Power to amend registered

- section 16  Power to make donation

- special 37,38,120 - Limitation Section 36 par.9

 Power to adopt by-laws Provided, That no corporation, domestic or foreign

shall give donations in aid of any political party or
- section 46-48
candidate or for purposes of partisan political
activity.
 Power to issue or sell stocks and to admit
members - These are circumstances, however, under
- stock of stockholders and provision governing which a donation by a corporation may be
to its benefit as a means of increasing its
non-stock
business or promoting patronage. Thus,
 Power to acquire or alienate real or personal paragraph 9 of section 36 expressly
property authorizes a corporation to make
donations. The only limitations imposed are
- is there any limitation? YES the following:

- Two specific limitation 1. The donation must be “reasonable”;

1. Section 36, as lawful transactions of business 2. It must be for public welfare, or for hospital,
of the corporation may reasonably and charitable, scientific, cultural or similar
necessarily require purpose; and,

2. Constitution and law 3. It shall not be in aid of political party or

candidate, or for purposes of partisan
 Luneta vs. A.D. Santos political activity.

- Importance of the purpose clause  Power to establish pension

It confers and determine the limits the actual authority
of the corporation.
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
 Gov’t vs. El Hogar
- As the lawful transaction of its business may
reasonably represent
 Director of Lands vs. CA
- Exception to the rule in the constitution
- Alienable public land
- Include any act to promote and improve the
convenience, welfare and benefit of the
employees or offices
 Republic vs. Acoje
- While as a rule an ultra-vires act is one
committed outside the object for which a
corporation is created as defined by law,
there are however certain corporate acts
that may be performed outside of the scope
of the powers expressly conferred if they
are necessary to promote the interest or
welfare of the corporation. Thus, it has
been held that “although not expressly
authorized to do so a corporation may
become a surety where the particular
transaction is reasonably necessary or
proper to the conduct of its business,”
and here it is undisputed that the
establishment local post office is a
38
 reasonable and proper adjunct to the conduct
of the business of appellant company. Indeed,
such post office is a vital improvement in the
living condition of its employees and laborers
who came to settle in its mining camp which is
far removed from the postal facilities or means
of communication accorded to people living in
a city or municipality.
 Power to exercise such other powers
essential or necessary to carry out its
purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid
employees; and,
5. Acts to increase business
 Teresa Electric and Power Co. vs. P.S.C.
- Examined the articles of incorporation to
arrive at its decision
 National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical
and necessary relation exists between the act
questioned and the corporate purpose
expressed in the NPC charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Powers vs. Marshall
 Power to extend its terms
- Once its term expires, already dissolved
automatically, thus can no longer ask for
extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital
stock?
1. Increasing the par value of the existing
number of shares without increasing the
number of shares;
2. Increasing the number of existing shares
without increasing the par value thereof;
and,
3. Increasing the number of existing shares
and at the same time increasing the par
value of the shares.
 Why a corporation increases it capital
stock?
- Generate funds, business expansion, or
payment of liabilities, purposes of acquiring
other business. (example: to buy cars for
the officers, purpose of acquiring other
business, expansion, other valid reasons)
 How do you decrease capital stock and
why a corporation decreases?
- Reduce or wipeout existing deficit where no
creditors would thereby be effected
- When capital is more than necessary to
procreate the business or reduction of
capital surplus
- To write down the value of its fixed assets to
reflect those present and actual
o NOTE: any increase or decrease of capital
stock requires approval of government
agency like SEC it can never take place
unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where
no creditors would thereby be affected;
2. When the capital is more than what is
necessary to procreate the business or
reduction of capital surplus; or,
3. To write down the value of its fixed assets to
reflect there present actual value in case
where there is a decline in the value of the
fixed assets of the corporation.
39
- Examples: Php 10M capital for grocery
business, mayor didn’t want to issue
license/permit because mayor has 3 other
grocery stores, only allowed sari-sari store
permit, reduce capital for sari-sari so that the
money will not sleep in bank
- Example: car rental agencies-Php 10M capital
for 20 taxi’s, after some time each taxi is only
250K, nagmura ang taxi, to reduce capital is to
show actual assets
 Limitation imposed by law
- Decrease shall not in any way affect the rights
of the creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in
capital stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation
constitute a fund to which the creditors have a
right to look upon for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts.
 Madrigal vs. Zamora
- Decrease in capital has a subterfuge to evade
payment
- Thus not valid and effective
- Must not prejudice creditors which includes the
employees
 Bond
- Commonly understood as an obligation of a
state, its subdivision or a private corporation,
represented by a certificate or an instrument
for the principal and by detachable coupons
for the payment of interests. In its simplest
term, it is one where an obligor obliges himself
to pay a certain sum of money to another at a
day named.
- There are different kinds of bond but before
they may be issued or floated by the
corporation, the same must be registered
and approved by the SEC subject to the
rules and regulations that may be adopted
by that agency. The procedure and
requirements set forth in section 38 is the
same as in increasing or decreasing the
capital stock except that the certificate does
not have to state the matters required in
sub-section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing
stockholders of a stock corporation to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective stockholdings, subject only to the
limitations imposed under section 39 of the
Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may
maintain their proportionate right as not to
dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such right
is denied by the articles of incorporation or
an amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt.
 May it be denied? How?
- Yes, if provided by articles of incorporation
or by an amendment
- However, pre-emptive rights is unavailable
to shares in trading in stock exchange
40
 otherwise stockholders must waive first their
right before they may sell such.
 Exceptions
1. When the shares to be issued is in
compliance with laws requiring stock
offerings or minimum stock ownership by
the public
2. Shares to be issued in good faith with the
approval of the stockholders representing
2/3 of the outstanding capital stock either
a. In exchange for property needed for
corporate purpose or,
b. In payment of a previously contracted
debt
- The exceptions, however will not apply to
stockholders of a close corporation by virtue of
a subsequent and specific provision of the
Code which provides that the “pre-emptive
right of a stockholder in a close corporation
shall extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services or in
payment of a corporate debt, unless the
articles of incorporation provide otherwise, if
not entirely absolute, in that it extends to all
issuance and disposition of shares
- Such right of pre-emption may be lost by
waiver of the stockholder, expressly or
impliedly by his inability or failure to exercise it
after having been notified of the proposed
issuance or disposition of shares
 When is it unavailable?
- In shares traded openly in stock
exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must
provide it first on its articles of incorporation,
that its articles does not really deny such pre-
emptive rights.
 Section 102, will not apply to close
corporations
The right of pre-emptive rights is absolute in close
corporations
“All issues or depositing shares of any class” form
part of ACS
 Certain instances when a stockholder
may nevertheless be unable to exercise
this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in
exchange for property needed or b) for
payment of a previously contracted debt
 Pre- emptive rights of stockholders in
ordinary stock corporations may be
denied
- if the shares are to be issued in compliance
with laws requiring stock offering or
minimum stock ownership by the pubic
- In exchange for property needed for
corporate purposes
- In payment of previously contracted debts
 This rule, however, does not apply in a
close corporation as the pre-emptive
rights of the stockholders thereof is
broadened to include all issues without
exceptions unless, of course, denied or
limited by the articles of incorporations.
Section 102 provides:
Section 102. Pre-emptive right in
close corporations. - The pre-emptive
right of stockholders in close corporations
shall extend to all stock to be issued,
including reissuance of treasury shares,
whether for money, property or personal
services, or in payment of corporate debts,
unless the articles of incorporation
provide otherwise.
 Denial will not apply to a close
corporation, ABSOLUTE
- section 96 - Definition and Applicability of
Close Corporation.
41
 May a stock holder in a close corporation
insist in the exercise of his pre-emptive
rights?
- Yes, section 102
 What type or shares are covered by pre-
emptive rights?
 Does it include those originally
unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise
their pre-emptive right with respect to the
old unissued shares? No.
- Pre-emptive rights is applicable only to new
issued shares and not to the old unissued
shares because it is presumed that the original
subscribers is deemed to have taken his
shares knowing that they form a definite
proportionate part of the whole number of
authorized shares
- When the shares, left unsubscribed are re-
offered, he cannot therefore claim. DILUTION
OF INTEREST
 Will the acquiring purchaser be liable for
debts of the former corporation?
- Generally no, corporate entity theory because
there may be instances when purchasing
corporation may be held liable
 May a corporation acquire its own shares?
- Yes
 Is there any restriction provided for by law
in reacquiring its own shares?
- Yes, it must have been unrestricted retained
earnings appearing in the books of corporation
 A corporation can never acquire its own
shares if it has no unrestricted retained
earnings
- False, exception close corporation and
redeemable shares
EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M
1 100K
2 100K
TO
10 100K
 If 1-5 became 200K each, may 6-10
demand the exercise their pre-emptive
right?
- YES
 May 1-5 subscribe to the unsubscribed
capital stock to the exclusion of 6-10?
- If a corporation makes 2M unrestricted
retained earnings, it is the shares and not
the number of persons that matters
 May 6-10 complain for a dilution of their
interest?
- YES, it’s an internationally recognized right
because it includes “all issues and
disposition of shares of any class” and all
kinds of shares new or old
- If the remaining unsubscribed shares are
issued, it’s an issuance of any class
 May a corporation sell/dispose all or
substantially all of its corporate assets
and liabilities?
- YES
- 1) RESOLUTION 2) AUTHORIZATION 3)
RATIFICATION 4) PRIOR WRITTEN
NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6)
DISSENTING STOCKHOLDERS HAVE
THE RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT
 If a corporation sells substantially all of
it assets and properties, will the buyer
assume liability?
42
 - NO, EXCEPT  Will it need the approval of the
stockholders?
1) Express or implied agreement to the purchase
- NO, if the same is necessary in the usual
2) Where the transaction amounts to and regular course of business of said
consolidation or merger of the corporations corporation or if the proceeds of the sale or
other disposition of such property and
3) When purchasing corporation is merely a
assets be appropriated for the conduct of its
continuation of the selling corporation
remaining business
4) Where the transaction is entered into
- If X is a manufacturing company, then it can
fraudulently in order to escape liability for such
sell its only property upon approval of the
debt
stockholders because it will render itself
 Legitimate purpose: for a corporation to capable of continuing its business, BUT if
reacquire its own shares the proceeds will be used to purchase a
better one for the continuance of its
- Limitation: it must have surplus/unrestricted business, then it does not need the
retained earnings approval of the stockholders

- Exception: may redeem irrespective of  Conditions for the valid exercise of this
unrestricted retained earnings power are the following

1) Exercise of stockholders’ right to compel 1. Resolution by the majority vote of the board
“close corporation” to purchase his shares of directors/trustees

2) Where corporation has sufficient assets in its 2. Authorization from the stockholders
books to cover its debts and liabilities representing at least 2/3 of the outstanding
exclusive of capital stock capital stock or 2/3 of the members;

ACS 1M 3. The ratification of the stockholders or

members must be made at a meeting duly
SUBSRIBED 1M called for that purpose

PAID-UP 1M 4. Prior written notice of the proposed action

and of the time and place of meeting must
ASSETS 500K be made addressed to all stockholders of
record, either by mail or personal service;
1M PROFITS
5. The sale of the assets shall be subject to
- 500K LIABILITIES
the provisions of existing laws on illegal
____________________ combinations and monopolies

500K RESERVES IN A CLOSE 6. Any dissenting stockholder shall have the

CORPORATION IT CAN USE THIS TO REACQUIRE option to exercise his appraisal right
ISSUED STOCKS
 IDP vs. CA
X – REALTY CORPORATION
- Consent of the members was not secured
 THE ONLY PROPERTY OF THE
 Edward Nell Co. vs. Pacific Farms
CORPORATION
- Generally where one corporation sells or
 BOARD OF DIRECTORS DECIDED TO SELL
otherwise transfers all of its assets to
IT
another corporation, the latter is not liable

43
 for the debts and liabilities of the transferor,
except:
1. Where the purchaser expressly or
impliedly agrees to assume such debts;
2. Where the transaction amounts to a
consolidation or merger of the
corporations;
3. Where the purchasing corporation is
merely a continuation of the selling
corporation;
4. Where the transaction is entered into
fraudulently in order to escape liability for
such debts.
 Power to acquire own shares
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own shares
for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained earnings
in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of
stock dividends;
2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code. (a)
 The corporation must at all times have
“unrestricted retained earnings” to
exercise this corporate power
 Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares
(subject to exceptions)
- Creditors of a corporation have the right to
assume that so long as there are outstanding
debts and liabilities, the board of directors will
not use the assets of the corporation to
purchase its own stock, and that it will not
declare dividends to stockholders when the
corporation is insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest
corporate funds in another corporation
or business or for any other purpose. -
Subject to the provisions of this Code, a
private corporation may invest its funds in
any other corporation or business or for any
purpose other than the primary purpose for
which it was organized when approved by a
majority of the board of directors or trustees
and ratified by the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of
non-stock corporations, at a stockholder's or
member's meeting duly called for the
purpose. Written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
the stockholders or members shall not be
necessary. (17 1/2a)
- For any other purpose other than the
primary purpose, stockholder’s consent or
approval is necessary
- Thus, if it’s for the secondary purpose, it is
necessary
- If it’s in connection with the primary
purpose, only board resolution is necessary
 Requirements and steps to be followed
for a valid investment of corporate funds
are:
1. Resolution by the majority of the board of
directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the outstanding
44
 capital stock or 2/3 of the members in case of
non-stock corporations;
3. The ratification must be made at a meeting
duly called for that purpose;
4. Prior written notice of the proposed investment
and the time and place of the meeting shall be
made, addressed to each stockholder or
member by mail or by personal service, and;
5. Any dissenting stockholder shall have the
option to exercise his appraisal right
 Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote
connection between the sugar bags and the
sugar manufacture, thus stockholder’s
approval is not necessary for validity
- A private corporation, in order to accomplish
its purpose as stated in its articles of
incorporation, and imposed by the Corporation
Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds,
securities and other evidences of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance
of the corporate purpose, does not need the
approval of the stockholders; but when the
purchase of shares of another corporation is
done solely for investment and not to
accomplish the purpose of its incorporation,
the vote of approval of the stockholders is
necessary.
 Gokongwei vs. SEC
- Investments made by SMC is necessarily
connected with its primary purpose and this
was ratified in a meeting
- Submission of previous action is a sound
corporate practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of shares
“withdrawal shares” provided corporation has
sufficient funds to cover its debts and liabilities
Section 105. Withdrawal of
stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this Title,
any stockholder of a close corporation may,
for any reason, compel the said corporation
to purchase his shares at their fair value,
which shall not be less than their par or
issued value, when the corporation has
sufficient assets in its books to cover its
debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a
close corporation may, by written petition to
the Securities and Exchange Commission,
compel the dissolution of such corporation
whenever any of acts of the directors,
officers or those in control of the corporation
is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever
corporate assets are being misapplied or
wasted.
 If shares are reacquired, what happens?
- It becomes treasury shares
- Stockholder’s consent/ approval is not
necessary and mere board action is
sufficient if in accordance with primary
purpose
- The logical relation of act done and primary
purpose of corporation and between the
board of directors to undertake submission
of acts is a sound corporate practice
 Dividends
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends out
of the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock
45
 at a regular or special meeting duly called for
the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite
corporate expansion projects or programs
approved by the board of directors; or (2)
when the corporation is prohibited under any
loan agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured;
or (3) when it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared and
ordered by the Board of Directors to be paid to
the stockholders.
 Board decides to declare 1M, how much
will each receive? May the board declare
stock dividend
- NO. that would be over issuance of shares,
violation of securities regulation code
- It must have a free portion
- The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of X Co.
Stockholders reacquired?
- No, because in property 2/3 is not required
 What is the effect of declaration of
dividends with regards to the assets of a
company?
- As compared to stock dividends, the
declaration of cash or property dividends
have the effect of reducing corporate assets
to the extent of dividends declared.

 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and
chairs make surplus profits?
- No, they do not make surplus, bonds, etc.
 Where should dividends come from?
- Stock dividends are declared as stocks
coming from corporation
 Who declares dividends to be declared? Do
stockholders have any say?
- Board of Directors, if stock approval of 2/3
outstanding capital stock
ACS-1M SUB-1M P.U.-1M
U.R.E. (surplus profits of the corporation)
1-100k
2-100k
To
10-100k
- Neither would stock dividends increase the
proportionate interest of the stockholders of
the corporation although it will have the
effect of increasing the subscribed and
paid-up capital of the corporation. It gives
the stockholders nothing in the way of
distribution of assets but merely divides his
existing shares into smaller units.
- Earnings belong to the corporation until
declared or given
 Revocation
- No revocation of dividend may be has
unless it has not been officially
communicated to the stockholders or is in
the form of stock dividends which is
revocable at any time prior to distribution.
1M-
 Stock dividends- no reduction, you
capitalize your restricted retained
earnings, what is issued is a piece of
paper. The restricted earnings remain in
the corporation
 Cash and property- reduces corporate
assets

1M

46
  Stock dividends increase corporate SUB 1M
assets? No, it will only have the effect of
increasing the subscribed and paid-up capital PU 800K
of the corporation
1-100K 50K PU
 Will there be a corresponding increase in
2-100K 50K
their proportionate interest?
TO
- REMAINS THE SAME
10-100K
Exception: when stock dividends will result in a
fractional share 1M

ACS-2M 1-100K 200 (10%)  Will 1 and 2 receive full amount of

*VOTING AND DIVIDEND RIGHTS STILL dividends?
THE SAME
- YES. They are entitled however if they are
SUB-1M TO 10% declared delinquent, the amount due them
shall first be applied to his delinquency plus
PU-1M 10-100K
expenses.
ACS 2M
 Delinquency occurs, you are called to
SUB 1M pay, but you failed to pay. In case of
stock dividend, the delinquent stock
PU 1M holder will not be entitled thereto until he
has paid his subscription in full.
1M RE
 Are non-stockholders entitled to receive
1 100K dividends?

2 100K - No, tock dividends are civil fruits of the

original investment, and to the owners of
TO
the shares belong the civil fruits.
10 100K
 How did the court decide dividends in
1M the case of Neilsen

 May they be compelled? - Stock dividends cannot be issued to a

person who is not a stockholder in payment
- NO. You cannot declare if it does not come of services rendered.
from unrestricted retained earnings.
- Whether cash, property or stock, only
1. 1M-U.R.E. (is it true there is no way to stockholders may receive dividends.
compel?) Dividends are fruits of investments. They
come from the U.R.E. or surplus profits of
2. 2M-U.R.E. the corporation.
 May they be compelled to declare dividends ACS 2M 1M U.R.E.
- Mandatory if earned, the board may be SUB 1M JULY 24 DECLARATION
compelled to declare dividends JULY 31

- if exceeds 100% of the paid-up capital the PU 1M

boards may be compelled

ACS 2M 1M U.R.E.
47
 1 100K 100T JULY 26-Y
(NEW ONE WAS DECLARED TO Y) JULY
30- 100K
2 least the majority of the outstanding capital
TO HAVE THE TRANSFER RECORDED
10 100K
1M
 Insofar as 1 and Y who has a better right?
Already declared, but not yet paid?
- Right to receive vest upon declaration. Who
ever owns at the time of declaration owns the
dividends
- Unless there is a stipulation to the contrary
 TRUST FUND DOCTRINE
- The power to declare it if paid-up capital is not
maintained or is impaired
- Trust fund must be kept intact for the
protection of creditors who have the right to
rely on such subscription and the paid-up
capital for the satisfaction of their claims
- Cannot accumulate surplus unreasonably
- Basis is the paid-up capital
- Entitled to dividends
- Irrespective of whether the subscription is full
- Illegally declared
- Declare dividend with the belief that it formed
part of the U.R.E., but yun pala sa capital
 Directors are not liable, unless sec31 acted in
bad faith or gross negligence in the conduct of
corporate affairs
 Directors even if acting in behalf of the
corporation, may still be held solidarily liable
 Power to enter into management contract
- New provision
Section 44. Power to enter into
management contract. - No corporation shall
conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
where a stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own or control more than one-third (1/3) of
the total outstanding capital stock entitled to
vote of the managing corporation; or (2)
where a majority of the members of the
board of directors of the managing
corporation also constitute a majority of the
members of the board of directors of the
managed corporation, then the
management contract must be approved by
the stockholders of the managed
corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled
to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock
corporation. No management contract shall
be entered into for a period longer than five
years for any one term.
The provisions of the next
preceding paragraph shall apply to any
contract whereby a corporation undertakes
to manage or operate all or substantially all
of the business of another corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations. (n)
 The requirement for a valid management
contract are as follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or
representing a majority of the outstanding
capital stock or majority of the members in
case of non-stock corporation of both the
managing and the managed corporation
3. The approval of the stockholders or
members must be made at the meeting
called for that purpose
4. The contract shall not be for a period longer
than 5 years for any one term, except those
48
 which relate to exploration, development or
utilization of natural resources which may be
entered into for such periods as may be
provided by pertinent laws and regulations
 Every corporate act emanates from the
BOARD
 Is the voting requirements of a majority
stockholder ABSOLUTE?
- Not only a majority but 2/3 of the outstanding
capital stock or 2/3 of the members in a non-
stock corporation would be required for the
approval of a management contract in the
following instances:
1. Where the stockholders representing the same
interest of both the managing and managed
corporation own or control more than 1/3 of
the total outstanding capital stock of the
managing corporation; and
2. Where a majority of the members of the board
of directors of the managing corporation also
constitute a majority of the directors of the
managed corporation
3. Where the contract would constitute the
management or operation of all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the
business of another corporation the first
paragraph of section 44 will apply and not that
of the second, that is, only the vote of the
stockholders holding or representing at least a
majority of the outstanding capital stock or
majority of the members in the case of non-
stock corporation will be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or
utilization of natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can
do such acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a
collateral attack
- If not illegal per se merely voidable. Can be
ratified expressly or impliedly or even
stopped as equitable grounds
- Ultra-vires acts which are not illegal per se
may become binding and enforceable either
by satisfaction, estoppels or equitable
grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the
provisions of PD 902-A, as amended and
R.A. No. 8799 may suspend or revoke, after
proper notice and hearing, the franchise or
certificate of registration of the corporation
for serious misrepresentation as to what the
corporation can do or is doing to the great
damage or prejudice of the general public
2. On the rights of the stockholders
- A stockholder may bring either an individual
or derivative suit to enjoin a threatened
ultra-vires act or contract. If the act or
contract has already been performed, a
derivative suit for damages against the
directors may be filed, but their liability will
depend on whether they acted in good faith
and with reasonable diligence in entering
into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal
effect of a corporate contract outside of its
authorized business but Ballatine gives the
following summary of the doctrines evolved:
a. If the contract is fully executed on both
sides, the contract is effective and the
courts will no interfere to deprive either
party of what has been acquired under
it
b. If the contract is executory on both
sides, as a rule, neither party can
maintain an action for its non-
performance
c. Where the contract is executor on one
side only, and has been fully performed
on the other, the courts differ as to
49
 whether an action will lie on the contract
against the party who has received
benefits of performance under it. Majority
of the courts, however, hold that the party
who has received benefits from the
performance is estopped to set up that the
contract is ultra-vires to defeat an action
on the contract. This is more in conformity
with the doctrine that no person shall be
allowed to enrich himself at the expense of
another
 Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal with
any of its money
- “deal” broad enough to cover the donation it is
not then ultra-vires
- Not illegal per se hence (law of agency)
excess powers are subject to ratification
- Ratified by passing the resolution in question
 Carlos vs. Mindoro sugar Co.
BY-LAWS
- PTC- trust company as such, it also has
implied powers as to make them more
attractable
- Not ultra-vires in pursuance of its legitimate
business
 Japanese war notes vs. SEC
- Non-stock corporations cannot make profits
and distribute profits to its shareholders
- Ultra-vires because Japanese war notes is a
non-stock corporation
 Crisologo-Jose vs. CA (ALWAYS ASKED
BY DEAN SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument
to a holder for value, although such holder at
the time of taking the instrument knew him to
be only an accommodation party, does not
include nor apply to corporations which are
accommodation parties. This is because the
issue or indorsement of negotiable paper by
a corporation without consideration and for
the accommodation of another is ultra-vires
- Corporate officers may guarantee or
endorse an accommodation only if
specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the
agreement of the stockholders rather
than any director
- It may sell and it may guarantee, contract
not necessarily illegal, it will in the absence
of proof to the contrary presumed within its
power. Corporations are presumed to
contract with in its powers- CARLOS CASE
- Purpose clause may be stretched to cover
PLDT internet. It may be within its business.
- May it sell computers? NO! other line of
business. Its trading!
 By-Laws
- Rule adopted by the corporation for its
internal governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or
filed? Can it not be adopted earlier?
- After incorporation- within 1 month
(emanates from the BOARD)
- Prior-more convenient (signed by the
incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or members
attested to by the corporate secretary
 What happens if the corporation fails to
adopt the by-laws from the tie provided
50
 by the law? Would there be an automatic
revocation or suspension?
- Proper notice and hearing, must first be
complied with
 Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must – not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper notice
and hearing
- Not affect the status of the corporation as a
juridical person
- Subject the corporation to a fine, as may be
issued by the SEC
 When do by-laws become effective?
- Until and unless the SEC gives it stamped of
approval
- Suspension of any government agency. The
permission must first be secured- section 46
 Elements of a valid by-law
1. It must not be contrary to law, public policy or
morals;
2. It must not be inconsistent with the articles of
incorporation;
3. It must be general and uniform in its effect or
applicable to all alike or those similarly
situated;
4. It must not impair obligations and contracts or
vested rights; and’
5. It must be reasonable.
- Must not be inconsistent with existing laws.
Not be inconsistent with articles of
incorporation
 By-laws
- None filing would not affect the status of the
corporation, Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to
know the provisions of the by-laws
 How about 3rd persons?
- NO. unless there is actual knowledge of the
same they are not presumed to know of the
provisions of the by-laws
 Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom ever
he wishes
- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among
the parties and corporation
 Gov’t vs. El Hogar
- Did the court categorically ruled here that
the provision in the 5th cause of action is
valid?
- Rules governing equity, considering the fact
that there was always lack of quorum
- Section 29 BOD if still constituting a quorum
may fill up a vacancy other than by removal,
etc.
 Gokongwei vs. SEC
- Section 48 allows a corporation to amend it
by-laws
- Section 47 of the code, the by-laws may
provide for the qualification and
disqualification
- It cannot be said Gokongwei has a vested
rights
51
- Prevent directors from taking advantage of
position to promote his individual interest to
the damage of others
- The validity or reasonableness of a by-laws is
a question of law
- Subject to the limitations that reasonableness
of a by-law is a mere matter of judgment
- Rule of the majority and not the tyranny of the
minority
 May the by-laws be amended altered or
appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or trustees
and the majority vote of the outstanding capital
stock or members in a non-stock corporation,
at a regular or special meeting called for that
purpose;
2. By the board of directors alone when
delegated by 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation.
- This delegated power, however, is considered
revoked whenever a majority of the
outstanding capital stock or members shall so
vote at a regular or special meeting.
 If it is to be amended what is the
proceeding?
- Section 48 2nd paragraph provides:
Section 48. Amendments to by-
laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at
least a majority of the outstanding capital
stock, or at least a majority of the members of
a non-stock corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of
the members in a non-stock corporation may
delegate to the board of directors or trustees
the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked
whenever stockholders owning or representing
a majority of the outstanding capital stock or
a majority of the members in non-stock
corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new
by-laws are adopted, such amendment or
new by-laws shall be attached to the
original by-laws in the office of the
corporation, and a copy thereof, duly
certified under oath by the corporate
secretary and a majority of the directors or
trustees, shall be filed with the Securities
and Exchange Commission the same to be
attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall
only be effective upon the issuance by the
Securities and Exchange Commission of a
certification that the same are not
inconsistent with this Code. (22a and 23a)
 Baretto vs. La Previsora
- Any corporate act emanates from the board
- Directors themselves cannot amend the by-
laws if they were not granted the same
 Section 48
 The power granted is not subject to
revocation T or F?
- FALSE
 If the by-laws are amended when will
they become valid?
- Upon issuance of the SEC that they are not
inconsistent
 What if the SEC failed to act within 10
months without fault attributable to the
corporation?
 T or F any amendment of the by-laws will
never become valid until it gives its
stamp of approval even after 1 year
- TRUE. Articles of incorporation and by-laws
are different
MEETINGS
 Meetings
52
- Meetings of stockholders 1.
Date fixed in the by-laws or by-law
- Meetings of director or trustees
- Meetings are regular and special
- Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of
stockholders held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial statement
have been prepared
 What if in the date specified in the by-laws
or by the law itself the meeting was not
convened, for instance lack of quorum or
force majeure?
- It may be postponed on a reasonable date
 Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
 May the notice requirement be lessened?
- By-laws may provide a longer or a shorter
duration
 What if the notice requirement is not
complied with?
 What happened to any act passed in a
meeting when notice requirement was not
required with?
- Voidable, subject to ratification
 Board of directors vs. Tan
- Notice requirement is the by-laws is a
mandatory requirement
- Improperly served, any action will be
invalidated at the objection of any
stockholder or member
 Must be held in the proper place
 Where should it be held?
- Apparent from the foregoing provision is
that meetings of stockholders must, at all
times, be held in the city or municipality
the where the principal office of the corporation
is located and, as far as practicable, in the
principal office of the corporation.
 May the by-laws of a corporation provide
that meetings be held anywhere in the
Philippines?
- While there is no provision authorizing a
stock corporation to hold stockholders’
meetings outside of the City of Municipality
where the principal office is located, the law
allows a non-stock corporation to provide in
its by-laws any place of members’ meeting
provided that proper notice is sent to all
members indicating the date, time and
place of the meeting which shall be within
the Philippines.
 T or F the by-laws of a stock corporation
may validly provide that meetings shall
be held anywhere in the Philippines?
- FALSE. Non-stock corporations lang
pwede provided nakalagay sa by-laws and
provided proper notice is given
 Corporation can do only such things as
the law allows it to do, DOCTRINE OF
LIMITED CAPACITY
 San Miguel office located in Ortigas
Center. May stockholders meeting be
held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a
provision , secretary on order of the
president
53
 What if there is nobody who can call? without cause may not be used to deprive
minority stockholders or members of the
- The petitioner, stockholder may petition the right of representation to which they may be
court entitled under Section 24 of this Code. (n)

 What if there is a person who can call, but  Cases of removal or ouster of a director
he fails or neglects to call the meeting?
May a stockholder petition to authorize a  Mandamus would be appropriate remedy if
meeting? there is a person authorized but refuses

- Ponce case only applies when there is NO  Quorum and voting requirement
person authorized to call the meeting. If there
- Majority stockholders or members constitute
is a person, but neglects his duty. Ponce will
a quorum
not apply.
 Is the presence of the majority owners of
 Writ of injunction may never be issued ex
the outstanding capital stock ABSOLUTE
parte
to have a quorum?
 Is there any exception?
- NO. when the code requires a higher
- Section 28 only instance quorum it must also be equivalent to the
vote required
Section 28. Removal of directors or
 Do you include non-voting shares in
trustees. - Any director or trustee of a
corporation may be removed from office by a arriving at the voting requirement to
vote of the stockholders holding or have a valid corporate act?
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation - It depends.
be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled - Section 6 last par. If it falls within the
to vote: Provided, That such removal shall penultimate par. Of section 6
take place either at a regular meeting of the
corporation or at a special meeting called for  Five requisites of a valid meeting
the purpose, and in either case, after previous
notice to stockholders or members of the 1. It must be held on the date fixed in the by-
corporation of the intention to propose such laws or in accordance with law
removal at the meeting. A special meeting of
the stockholders or members of a corporation 2. Prior notice must be given
for the purpose of removal of directors or
trustees, or any of them, must be called by the 3. It must be held at he proper place
secretary on order of the president or on the
written demand of the stockholders 4. It must be called by the proper party
representing or holding at least a majority of
the outstanding capital stock, or, if it be a non- 5. Quorum and voting requirements must be
stock corporation, on the written demand of a
met
majority of the members entitled to vote.
Should the secretary fail or refuse to call the
 Date not complied with, notice, place,
special meeting upon such demand or fail or
refuse to give the notice, or if there is no not complied with and the person who
secretary, the call for the meeting may be called not authorized, what happens to
addressed directly to the stockholders or any resolution called?
members by any stockholder or member of the
corporation signing the demand. Notice of the - Section 51, any meeting shall be valid
time and place of such meeting, as well as of provided all the stockholders are present or
the intention to propose such removal, must duly represented and provided it is within
be given by publication or by written notice
the power of the corporation. 3RD paragraph
prescribed in this Code. Removal may be with
or without cause: Provided, That removal of 324

54
- If the voting requirement is met, any resolution
passed in the meeting, even if improperly held
or called will be valid if all the stockholders or
members are present or duly represented
thereat. The last paragraph of section 51 is
clear on the matter when it provides:
“all proceedings had and any business
transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation,
shall be valid even if the meeting be
improperly held or called, provided all
the stockholders or members of the
corporation are present or duly
represented at the meeting.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the
Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by the
by-laws
 What happens if notice is not complied
with?
- If the notice requirement is not complied with
the meeting is illegal and will not bind the
corporation except when subsequently ratified
or in the case of a close corporation where the
act of any one director may bind the
corporation even without a meeting under the
special provision of Section 101 of the Code.
 Can notice be waived? <sec.53>
Section 53. Regular and special
meetings of directors or trustees. - Regular
meetings of the board of directors or trustees
of every corporation shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board of
directors or trustees may be held at any time
upon the call of the president or as provided in
the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-
laws provide otherwise. Notice of regular or
special meetings stating the date, time and
place of the meeting must be sent to every
director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise
provided by the by-laws. A director or
trustee may waive this requirement, either
expressly or impliedly. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without
notice where the directors are all
present or where they consent to
the meeting. Presence at the
meeting waives the want of notice.
Moreover, it has been ruled that the
meeting of the directors without a
formal call first being had, and
notice thereof given to the
members, did not operate to
invalidate it or to render the
proceedings which were taken at it
void, for every member of the board
were present, and their joint action
had completely bound the
corporation as if the meeting has
been called with due formality, and
everyone of the directors had
received proper notice.
 What is the quorum and voting
requirement in the directors meeting?
- Majority of the members of the board of
directors (entire membership)
 Vote required to pass a valid corporate
act?
- Majority of those present at which there is a
quorum (3 present, vote of 2 sufficient)
- Exception, majority of all the members of
the board in case of election of corporate
officers, unless the articles provide for a
greater quorum or voting requirement
 Should the director or trustees be
physically present?
55
 - General rule, must sit and act as a body to
have a valid corporate act
 Five man member board, a meeting was
called today, should the physical presence
or warm bodies requires to constitute a
quorum?
- NO. it is not required. Teleconference or video
conference is allowed, E- commerce law
Membership subject to laws
Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for
the purpose of electing a new set of BOD
can A vote by proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent,
because it may be denied:
1. Redeemable and preferred shares,
however if founders shares are issued
others may be denied the right to vote.
2. May be denied by the articles of
incorporation or contracts
- When not denied they may do so in person or
by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy
voting is not allowed?
- NO
 Only non-stock may be denied proxy
voting (may be broaden, limited or denied)
 Proxy voting is a matter of right granted
by law
 Requirements of a valid proxy?
- Section 58
Section 58. Proxies. -
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members. Proxies shall in
writing, signed by the stockholder or
member and filed before the scheduled
meeting with the corporate secretary.
Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which
it is intended. No proxy shall be valid and
effective for a period longer than five (5)
years at any one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with
interest
 Revocation
- A proxy, like agency in general is revocable
unless coupled with an interest and
revocation need not be made by formal
notice in writing. Revocation may be
expressed to the proxy holder, to the
election committee, by a subsequent proxy
to another or by sale of the shares. Thus it
may be revoke orally by conduct such that
appearing and asserting the right to vote at
a meeting by the registered owner of the
shares revokes a proxy previously given.
 Must be submitted to a validation
committee
 By-laws of non-stock corporations may
deny proxy voting
 What is voting trust agreement?
- One created by an agreement between a
group of stockholders of a corporation and a
trustee, or a group of identical agreements
56
 between individual stockholders and a
common trustee, whereby it is provided that
for a term o years or for a period contingent
upon a certain event, or until the agreement is
terminated, control over the stock owned by
such stockholders, shall be lodged in the
trustee, either with or without reservation to
the owners or persons designated by them the
power to direct how such control shall be
issued.
- It is a devise of binding stockholders to vote as
a unit and thus assuring a desirable stability
and continuity in management in situations
where it is needed.
 What is the effect of a voting trust
agreement relative to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are
separated from the other attributes of
ownership;
2. That the voting rights granted are intended to
be irrevocable for a definite period of time;
and,
3. That the principal purpose of the grant of
voting rights is to acquire voting control of the
corporation.
 During the duration of the trust they are
irrevocable unless there is a violation
either by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One or
more stockholders of a stock corporation may
create a voting trust for the purpose of
conferring upon a trustee or trustees the right
to vote and other rights pertaining to the
shares for a period not exceeding five (5)
years at any time: Provided, That in the case
of a voting trust specifically required as a
condition in a loan agreement, said voting trust
may be for a period exceeding five (5) years
but shall automatically expire upon full
payment of the loan. A voting trust agreement
must be in writing and notarized, and shall
specify the terms and conditions thereof. A
certified copy of such agreement shall be filed
with the corporation and with the Securities
and Exchange Commission; otherwise, said
agreement is ineffective and unenforceable.
The certificate or certificates of stock
covered by the voting trust agreement shall
be cancelled and new ones shall be issued
in the name of the trustee or trustees stating
that they are issued pursuant to said
agreement. In the books of the corporation,
it shall be noted that the transfer in the
name of the trustee or trustees is made
pursuant to said voting trust agreement.
The trustee or trustees shall
execute and deliver to the transferors voting
trust certificates, which shall be transferable
in the same manner and with the same
effect as certificates of stock.
The voting trust agreement filed
with the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as any
other corporate book or record: Provided,
That both the transferor and the trustee or
trustees may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of this Code.
Any other stockholder may transfer
his shares to the same trustee or trustees
upon the terms and conditions stated in the
voting trust agreement, and thereupon shall
be bound by all the provisions of said
agreement.
No voting trust agreement shall be
entered into for the purpose of
circumventing the law against monopolies
and illegal combinations in restraint of trade
or used for purposes of fraud.
Unless expressly renewed, all rights
granted in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates of
stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors.
The voting trustee or trustees may
vote by proxy unless the agreement
provides otherwise. (36a)
 Does it need to be notarized?
57
- Yes, otherwise it is ineffective and
unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they may
transfer these rights
 Is the right granted to a voting trust
agreement absolute? (to inspect)
- NO.
- The voting trust agreement filed with the
corporation shall be subject to examination by
any stockholder of the corporation in the same
manner as any other corporate book or record.
Provided, that both the transfer and the trustee
or trustees may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of this Code.
 Legal title is transferred to the voting
trustee
 May the voting trustee vote by proxy?
- Yes, legal owner may vote by proxy
 May the proxy holder vote by proxy?
- NO, (AGENT) an agent can have no other
agent unless specifically allowed by the
principal
 Stockholder executing as a proxy, is he
qualified to be voted as a director?
 Why is he qualified to act as a director if
the stockholder executes as a director?
- The beneficial owner of the shares in a voting
trust is disqualified to be a director in a voting
trust whereas in a proxy, the owner of the
shares may be elected as such since legal title
thereof remains with him
- YES he remains to be the owner
 Is the stockholder executing in a voting
trust agreement, is he qualified to act as a
director?
- NO. ceases to be stockholder of record, no
longer the legal owner of shares
 May the corporation enforce the voting
trust agreements executed by its
stockholders?
- NO. NIDC vs. AQUINO
- Not a privy to the contract
- Rights liabilities of a stockholder are there in
their individual capacity- corporate entity
theory
 Voting trust agreements
- Normally executed in favor of banking and
financial institutions
- So that they can vote a certain set of
directors
- They will be more secured
 Voting pull agreement
- Enters into an agreement
- Pull all their shares to cast one vote
- Covered by rules governing contracts
- By pulling their votes they can decline the
resolution passed by the board
 END OF MIDTERMS
STOCKS AND STOCKHOLDERS
 3 modes
1. By a contract of subscription with the
corporation;
2. By purchase of treasury shares from the
corporation; and,
3. By purchase or acquisition of shares from
existing stockholders.
 Section 60 subscription
- Any contract
- Whether existing or still to be formed
58
 Section 60. Subscription contract. - Any  Corporation paid 100T/S therefore the
contract for the acquisition of unissued stock in an corporation reacquired the shares again,
existing corporation or a corporation still to be what are they called?
formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that - Treasury shares
the parties refer to it as a purchase or some other
contract. (n) Y- 80T/S DECEMBER 08

 Under the old law the 4th mode is PURCHASE 40 % (AUGUST) WAS DESTROYED BY FIRE, IS
HE STILL LIABLE TO PAY THE UNPAID
 Purchase
PORTION?
- Reciprocal in nature
 IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
- Purchaser can neither require the issuance
STOCKHOLDER ONLY IF PAID IN FULL IS
X Co. Inc. HE LIABLE?

- NO, because that was a purchase

P - First example galing sa unissued stock

Authorized capital 1M - 2nd example galling sa treasury shares hindi

sa unissued share
500 SUBSCRIBED
 NO such thing as purchase of unissued
500 UNISSUED STOCKS (AS LONG AS GALING stocks
DITO)
 A subscription contract can be conditional
Z wants to acquire 100K provided there is nothing in the charter or
statute prohibiting it and not against public
Entered in June 50% shall be down payment
order, law, etc.
remainder December 08
 Must it be in writing?
o he will not be considered a stockholder unless
he has paid in full - NO, it may be oral

August 08 property is ravaged by fire all are turned into  5M should it be in writing to be valid and
shares binding as a subscription?

 Is Z liable to pay the balance of his - NO, statutes of frauds only applies to
acquisitions? SALES

- YES, no matter how the party refer to it, it is
considered subscription
- Once you subscribe, you become a
stockholder which is entitled to all the liabilities
of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
 Trillana vs. Quezon College
- Counter proposal, therefore there was a
need for an acceptance
- Facultative because it is in his own free will,
it is void
 What may be used as a consideration and
how much should be the consideration?

Z did not pay on the date called and was declared a - Section 62 provides:
delinquent share

59
 Section 62. Consideration for stocks.
- Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may
be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value
of the stock issued;
3. Labor performed for or services actually
rendered to the corporation;
4. Previously incurred indebtedness of the
corporation;
5. Amounts transferred from unrestricted
retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in
the event of reclassification or conversion.
Where the consideration is other than
actual cash, or consists of intangible property
such as patents of copyrights, the valuation
thereof shall initially be determined by the
incorporators or the board of directors, subject
to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in
exchange for promissory notes or future
service.
The same considerations provided for
in this section, insofar as they may be
applicable, may be used for the issuance of
bonds by the corporation.
The issued price of no-par value
shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
called for the purpose. (5 and 16)
 “Amounts transferred from unrestricted
retained earnings to stated capital” what does
it mean?
- Stock dividends will in effect capitalize the
unrestricted retained earnings
 After 5 years the founders shares may be
converted into common shares or other
kinds of shares
 May shares of stocks be issued without
consideration? Why?
- NO, two reasons by the SC, discriminatory
against other stockholders and second
unlawful, it prejudices the right of the
creditors “Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as
watered stocks
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par
or issued value or for a consideration in any
form other than cash, valued in excess of its
fair value, or who, having knowledge
thereof, does not forthwith express his
objection in writing and file the same with
the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the
corporation and its creditors for the
difference between the fair value received
at the time of issuance of the stock and the
par or issued value of the same. (n)
- Subscribers may be compelled to pay the
value
 Issuance of a certificate of stock is another
thing
 What are the requisites for the issuance of a
valid certificate of stock?
1. It must be signed by the president or vice-
president and countersigned by the
secretary or assistant secretary;
2. It must be sealed with the corporate seal;
and the entire value thereof (together with
interest or expenses, if any) should have
been paid.
While it appears, that a subscriber to shares
of stock cannot be entitled to the issuance
of a certificate of stock until the full amount
60
 of his subscription together with interest and
expenses (in case of delinquent shares) if any
is due, has been paid, a subscriber to shares
of stock, even if not yet fully paid, is entitled to
exercise all the rights of a stockholder and the
corresponding liability that attach thereunder.
Thus, the Code provides:
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
 Is the issuance of a certificate of stock
necessary to consider the subscriber a
stockholder?
- NO, shall be considered a stockholder even
without a certificate of stock
 Instances when he may not be able to
exercise his rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered
negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable
when it may be transferred through
endorsement and delivery?
100t/s 001 10/s
Abc co.
B stole and forged the signature
C is purchaser in good faith and for value will C
acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is
negotiable, even if it is endorsed in blank. Thus,
while it may be transferred by endorsement coupled
with delivery thereof, and therefore merely quasi-
negotiable, it is nonetheless non-negotiable in that
the transferees takes it without prejudice to all the
rights and defenses which the true and lawful owner
may have except in so far as the principles
governing estoppels may apply.
He acquired it by virtue of a forged instrument; no
matter how innocent the purchaser is because it is
subject to all the rights and defenses
 What if A endorsed it?
- He is estopped, unless there are other
available defenses
 Transfer is required to be recorded in the
books of the corporation, however even if
not recorded, it will be valid between the
parties. Non-registration will not however,
affect the validity thereof at least in so far as
the contracting parties are concerned.
Section 63. Certificate of stock and
transfer of shares. - The capital stock of
stock corporations shall be divided into
shares for which certificates signed by the
president or vice president, countersigned
by the secretary or assistant secretary, and
sealed with the seal of the corporation shall
be issued in accordance with the by-laws.
Shares of stock so issued are personal
property and may be transferred by delivery
of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other
person legally authorized to make the
transfer. No transfer, however, shall be
valid, except as between the parties, until
the transfer is recorded in the books of the
corporation showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred.
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 No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation.
(35)
 “Until registration is accomplished, the
transfer, though valid between the parties,
cannot be effective as against the corporation.
Thus the, unrecorded transfer cannot enjoy
the status of a stockholder; he cannot vote nor
be voted for, and he will not be entitled to
dividends. The corporation will be protected
when it pays dividend to the registered owner
despite a previous transfer of which it had no
knowledge. The purpose of registration
therefore is twofold: to enable the transferee to
exercise all the rights of a stockholder and to
inform the corporation of any change in shares
ownership so that it can ascertain the persons
entitled to the rights and subject to the
liabilities of a stockholder.”
Thus, it was also ruled by the High
Court in Nautica Canning Corp. vs.
Yumul that “A transfer of shares not
recorded in the stock and transfer
book of the corporation is non-existent
in so far as the corporation is
concerned.” This is so because “the
corporation looks only through its
books for the purpose of determining
who its stockholders are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its
stockholders are;
2. To enable the transferee to exercise his rights
a s stockholders;
3. To afford the corporation an opportunity to
object or refuse registration of the transfer in
case allowed by law;
4. To avoid fictitious and fraudulent transfers;
and,
5. To protect creditors who have the right to look
upon stockholders, in case of no-payment or
watered shares, for the satisfaction of their
claims.
 Duty of the secretary is ministerial, hence
mandamus will lie if the secretary refuses to
record the transfer, but he cannot be
compelled when the transferee’s title to the
said shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional
transfer to warrant registration in the books
of the corporation in order to bind the latter
and other third persons.
 Other restrictions on the right to transfer
shares would include:
1. It is not valid, except as between the
parties, until recorded in the books of the
corporation;
2. Shares of stock against which the
corporation holds any unpaid claim shall not
be transferable in the books of the
corporation; unpaid claims, refer to claims
arising from unpaid subscription and not to
any indebtedness which a stockholder may
owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the
articles of incorporation, by-laws and stock
certificates of a close corporation;
4. Restrictions imposed by special law, such
as the Public Service Act requiring the
approval of the government agency
concerned if it will vest unto the transferee
40% of the capital of the public service
company;
5. Sale to aliens in violation of maximum
ownership of shares under the
Nationalization Laws;
6. Those covered by reasonable agreement of
the parties.
 Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of
the ownership of the title to a share need be
entered and noted upon the books of the
62
 corporation in order that such transfer may be
valid, therefore, inasmuch as a chattel
mortgage of the aforesaid title is not a
complete and absolute alienation of the
dominion and ownership thereof, its entry and
notation upon the books of the corporation is
not necessary requisite to its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as
against subsequent third parties
- Register of deeds where the corporation
resides and if different in the register of deeds
of owner’s domicile
 Unson vs. Dinamito
- All transferred not register will not have a valid
force and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central Bank
 Lambert vs. Fox
- Valid , may be reasonably regulated, restricted
by agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
 Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its
shares
- Valid restrictions shares are applicable
- Any restriction on a stockholder’s right to
dispose of his shares must be construed
strictly; and any attempt to restrain a transfer
of shares is regarded as being in restraint of
trade, in the absence of a valid lien upon its
shares, and except to the extent that valid
restrictive regulations and agreements exist
and are applicable. Subject only to such
restrictions, a stockholder cannot be controlled
in or restrained from exercising his right to
transfer by the corporation or its officers or
by other stockholders, even though the sale
is to a competitor of the company, or to an
insolvent person, or even though a
controlling interest is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock
certificate to the transferee
 In order to be valid, must be registered in
the books. If not, will only be binding among
parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner
or attorney-in-fact with delivery
 Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-
fact coupled with delivery
- Endorsed not delivered
- Proper mode and manner must be complied
with
 Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor
delivery without endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring
stock?
- Notarized deed
- Deed of assignment
 Rural bank of Salinas vs. CA
- If denied or refused without good cause,
mandamus will lie
 Tay vs. CA
- Mandamus may issue if petition has a clear
legal right
63
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right
and alleged ownership is without merit
- Did not acquire ownership by virtue of the
contract of pledge
- In a contract of pledge there must be
foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
 Nava vs. Peers Marketing
- A stock subscription is a subsisting liability
from the time the subscription is made
- The subscriber is as much bound to pay his
subscription as he would be to pay any other
debt
- No stock certificate was issued. Without stock
certificate, which is the evidence of ownership
of corporate stock, the assignment of
corporate shares is effective only between the
parties to the transaction
 Exception to the general rule
 Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be
coupled with delivery, exception (TAN vs.
SEC)
 Stock certificate has already been issued it
must be coupled with the delivery
 After certificate of stock is issued, may it be
effectively transferred even without
endorsement or delivery of the stock
certificate?
- Person sought to be a stockholder is an officer
and has custody
 Endorsement and delivery is not necessary
(TAN vs. SEC)
 Tan vs. SEC (FULL KNOWLEDGE, HE IS
ESTOPPED)
- Persons sought to be stockholder is officer
and has custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by
owner or attorney-in-fact coupled with
delivery
 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other modes of
transferring shares
 Is there a time frame or fixed period as
when transfer can be made?
- NO, (WON vs. WACK WACK)
 Won vs. Wack Wack
- Valid between contracting parties even if not
recorded in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in
registration of shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they
may be transferred?
- Transferees pays it without prejudice to all
the rights and defenses as the true and
lawful owner may have under the law
except insofar as such rights and defenses
are subject to the limitations imposed by the
principles governing estoppels
 Delos Santos vs. Republic
- Why is he, not considered as the owner of
shares? When it has been said that when
endorsed by the owner it is considered as
strict certificate? Because certificate of
stocks are non-negotiable
- Although a stock-certificate is sometimes
regarded as quasi-negotiable, in the sense
that it may be transferred by endorsement,
coupled with delivery, it is well settled that
the instrument is non-negotiable, because
64
 the holder thereof takes it without prejudice to
such rights or defenses as the registered
owner or creditor may have under the law,
except insofar as such rights or defenses are
subject to the limitations imposes by the
principles governing estoppels.
 Unauthorized issuance of stock certificates
100/s 100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form certificate,
sold to D (innocent purchaser for value), will D
acquire title?
- NO, subject to such rights and defenses as the
true and lawful owner may have
 What if C now goes to the corporation and
presents the form?
- Then the corporation shall cancel the old
certificate and issues a new one, now in the
name of C, now registered in the name of C,
will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?
- A, A cannot be deprived of his right by virtue of
an unauthorized transfer
 Corporation can compel C to deliver the new
stock certificate because he made a
representation that the certificate where good.
 Armed with the new certificate issued to C, C
delivers to D a purchaser in good faith and for
value will D acquire title?
- D will acquire title took the shares not by
virtue of a forged or unauthorized transfer,
but on the reliance that the stock certificate
is valid and owned by C
 Stock certificate now in possession of D. A
knew of what happened and went to the
corporation and complains. Who will have a
better title?
- the corporation may be compelled to
recognize both, A as stockholder (non-
negotiable) D, reliance that the stock
certificate is valid and existing and owned
by C
 Forged transfers
- If the corporation should issue a new
certificate in pursuance of a forged transfer,
the corporation incurs no liability to the
person in whose favor it is issued and it
may demand its return for cancellation. The
corporation in such case has been guilty of
no misrepresentation. On the other hand, it
is the duty of the purchaser to determine
that the indorsement of the owner is
genuine. However, if the new certificate
issued to the purchaser comes into the
hands of a bona fide purchaser for value,
the corporation will be stopped from
denying validity thereof, since by issuing
such new certificate it represents that the
person named therein is a stockholder of
the corporation. The corporation is thus
forced to recognize both the original
certificate and new certificate-the original,
because the true owner could not be
deprived of his title by a forged transfer, and
the new, because of its representation that
the person named therein is the owner of
shares in the corporation. But if the
recognition of both stockholders would
result in an over issue of shares, then only
the original and true owner can be
recognized as a stockholder. The bona fide
purchaser of the new certificate will
however have a right of damages against
the corporation. The corporation, in turn,
would have a right of action against the
person who made false representations and
in whose favor it issued a new certificate.
The true owner of the shares which were
65
 wrongfully transferred would of course have a
right to compel the corporation to issue him a
certificate in lieu of the original one which was
wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation
recognize as rightful owner A or D? if both will
be recognized there will be over issuance
- only A citing citizens national bank vs. state (but
if recognition of both stockholders would result
in an over issue of shares, then only the
original and true owner can be recognized as
a stockholder)
- by virtue of the doctrine of non-negotiability of
certificate of stocks
 The true and lawful owner will never be
deprived of his rights
 What happens to D?
- D will have a cause of action against the
corporation for the value of his acquisition cost
inclusive of damages, attorney’s fees and cost
of suit
 D sues the corporation for the value of his
acquisition cost, inclusive of damages,
attorney’s fees and cost of suit. What may the
corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the certificate
of stocks is valid, subsisting, etc.
 2nd situation, what cause of action may the
corporation have? Remedy?
- Third party complaint against C, but what if he is
a purchaser for value? 4th party claim against
B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock
certificates. - No certificate of stock shall be
issued to a subscriber until the full amount of
his subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid. (37)
 A certificate of stock cannot be issued
unless he fully paid the amount subscribed
 Subscription to the capital stocks of the
corporation are indivisible
 Clear mandate of section 148 of the code is
that the ruling of the court in Baltazar vs.
Lingayen Gulf, no longer holds true
Section 148. Applicability to
existing corporations. - All corporations
lawfully existing and doing business in the
Philippines on the date of the effectivity of
this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to
have been authorized, licensed or
registered under the provisions of this
Code, subject to the terms and conditions of
its license, and shall be governed by the
provisions hereof: Provided, That if any
such corporation is affected by the new
requirements of this Code, said corporation
shall, unless otherwise herein provided, be
given a period of not more than two (2)
years from the effectivity of this Code within
which to comply with the same. (n)
 Subscription to shares of stocks are
indivisible
 Also apparent is that once a subscriber has
paid his subscription in full, he becomes
entitled to be issued a stock certificate and
in the event that the corporation refuses to
do so, the stockholder my institute a case
for mandamus with damages. Thus, it has
been said that the duty of the corporate
officers to issue stock certificates to those
entitled thereto is a ministerial duty
enforceable by mandamus.
 Fua Cun vs. Summers and China Banking
Corp.
- The court erred in holding the plaintiff as the
owner of 250 shares of stock; “the plaintiff’s
rights consist in equity in 500 shares and
upon payment of the unpaid portion of the
subscription price he becomes entitled to
the issuance of certificate for said 500
shares in his favor.”
- No certificate of stock until the full amount
has been paid.
66
 Watered stock
- One which is issued by the corporation as fully
paid-up shares, when in fact the whole amount
of the value thereof has not been paid.
- Basis is par value and not the fair market
value
 Section 62 states that stocks shall not be
issued for a consideration less than par or
issued price thereof, while section 13 states
that in no case shall be paid-up capital be less
than five thousand [P5000] pesos.
 If issued below par, issued value considered
as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par
or issued value;
2. For a consideration in property, tangible or
intangible, valued in excess of its fair market
value;
3. Gratuitously or under an agreement that
nothing shall be paid at all; or
4. In the guise of stock dividends when there are
no surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital
thereby hurting its business prospects,
financial capability and responsibility;
2. Stockholders who paid their subscriptions in
full, or promised to pay the same, are injured
and prejudiced by the reduction of their
proportionate interest in the corporation; and,
3. Present and future creditors are deprived of
the corporate assets for the protection of their
interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look
upon corporations properties for the
satisfaction of their claims
 What is the effect of issuance of watered
stocks
1. As to the corporation - when a corporation
is guilty of ultra-vires or illegal acts which
constitute an injury to or fraud upon the
public, or which will tend to injure or defraud
the public, the State may institute a quo-
warranto proceeding to forfeit its charter for
the misuse or abuse of its franchise.
2. As between the corporation and the
subscriber- The subscription is void. Such
being the case, the subscriber is liable to
pay the full par or issued value thereof, to
render it valid and effective.
3. As to the consenting stockholders - They
are stopped from raising any objection
thereto;
4. As to dissenting stockholders - In view of
the dilution of their proportionate interest in
the corporation, they may compel the
payment of the “water” in the stock solidarily
against the responsible and consenting
directors and officers inclusive of the holder
of the watered stocks;
5. As to creditors - They may enforce payment
of the difference in the price, or the water in
the stock, solidarily against the responsible
directors/officers and the stockholders
concerned; and’
6. As against transferees of the watered stock
– His right is the same as that of his
transferor. If, however, a certificate of stock
has been issued and duly indorsed to a
bona fide purchaser, without knowledge,
actual or constructive, the latter cannot be
held liable, at least as against the
corporation, since he took the shares on
reliance of the misrepresentation made by
the corporation that the stock certificate is
valid and subsisting. This is because a
corporation is prohibited from issuing
certificates of stock until the full value of the
subscriptions have been paid and could not,
therefore, deny the validity of the stock
certificate it issued as against a purchaser
in good faith. Thus, Ballentine states that
whether there is any liability on the part of
the transferee of watered stock is made to
67
 depend upon whether he acquired the same
without notice, either as purchaser or donee. If
he had knowledge thereof, he is subject to the
same liability as his transferor.
 What is the nature of the liability of the
corporate directors consenting to the issuance
of watered stocks and the extent of their
liabilities?
- Solidarily liable with the holder of the watered
stocks to the extent of the water from said
shares of stocks
 Will all the directors be liable? What if you
objected will you also be liable?
- If you do not issue a written objection, you are
still liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not
interpose their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par or
issued value or for a consideration in any form
other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does
not forthwith express his objection in writing
and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors
for the difference between the fair value
received at the time of issuance of the stock
and the par or issued value of the same. (n)
 ACS-100M 100M/S PAR VALUE-
1.00
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A directors of any stock corporation may at
B corporation unpaid subscriptions to the
C such percentage thereof, in either case with
D
E
There is a denial of pre-emptive rights and
directors A,B,C,D,E decided to issue the
remaining 50M and subscribed for 10M each at
2 per share.
 Is there stock watering if the fair market
value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the
par value indicated in the articles of
incorporation
3 days later they sold their 10M share for
P11.00 each, therefore making a profit.
 Can you question there actuations? What
would be the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such
directors
- They cannot advance their own motives to
the damage prejudice of the corporation
which they represents and stockholders as
a whole instead of it being sold outside
- 500M would have gone to the coffers of the
corporation, 500M should be there for the
protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and
payable?
- Section 67. Payment of balance of
subscription. - Subject to the provisions of
the contract of subscription, the board of
any time declare due and payable to the
capital stock and may collect the same or
accrued interest, if any, as it may deem
necessary.
68
 Payment of any unpaid subscription or any
percentage thereof, together with the interest
accrued, if any, shall be made on the date
specified in the contract of subscription or on
the date stated in the call made by the board.
Failure to pay on such date shall render the
entire balance due and payable and shall
make the stockholder liable for interest at the
legal rate on such balance, unless a different
rate of interest is provided in the by-laws,
computed from such date until full payment. If
within thirty (30) days from the said date no
payment is made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale as
hereinafter provided, unless the board of
directors orders otherwise. (38)
 Remedies of the corporation to enforce
payment of unpaid subscription
1. By board action in accordance with the
procedure laid down in sections 67 to 69 of the
code
2. By a collection case in court as provided for in
section 70
 Are subscribers of shares of stocks not fully
paid, liable to pay interest?
- General rule is they are not liable to pay
interest because the code says unless
requires in the by-laws
- Aside from the mandate of the law that
subscribers to shares of stock must pay the
full value of their subscription, they may
likewise be required to pay interest on all
unpaid subscriptions if so imposed in the
contract or in the corporate by-laws at such
rate as may be indicated thereat or the legal
rate if not so fixed. Unless so required or
provided, however, subscribers to shares of
stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The
code thus provides:
Section 66. Interest on unpaid
subscriptions. - Subscribers for stock shall pay
to the corporation interest on all unpaid
subscriptions from the date of subscription, if
so required by, and at the rate of interest fixed
in the by-laws. If no rate of interest is fixed in
the by-laws, such rate shall be deemed to be
the legal rate. (37)
 Until a call is made, they are not due and
payable, but still subject to the provisions of
the contracts
 Procedures in case of sale of delinquent
stocks
Section 68. Delinquency sale. - The board of
directors may, by resolution, order the sale of
delinquent stock and shall specifically state the
amount due on each subscription plus all accrued
interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks
become delinquent.
Notice of said sale, with a copy of
the resolution, shall be sent to every
delinquent stockholder either personally or
by registered mail. The same shall
furthermore be published once a week for
two (2) consecutive weeks in a newspaper
of general circulation in the province or city
where the principal office of the corporation
is located.
Unless the delinquent stockholder
pays to the corporation, on or before the
date specified for the sale of the delinquent
stock, the balance due on his subscription,
plus accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be sold
at public auction to such bidder who shall
offer to pay the full amount of the balance
on the subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest number
of shares or fraction of a share. The stock
so purchased shall be transferred to such
purchaser in the books of the corporation
and a certificate for such stock shall be
issued in his favor. The remaining shares, if
any, shall be credited in favor of the
delinquent stockholder who shall likewise
be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested
in the corporation as treasury shares and
may be disposed of by said corporation in
69
 accordance with the provisions of this Code.
(39a-46a)
 Who is the winning bidder in a delinquency
sale?
- Bidder who shall “offer to pay the full amount
of the balance on the subscription together
with accrued interest, cost of advertisement
and expenses of sale, for the smallest number
of shares or fraction of a share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50
thousand is already paid leaving 50 thousand
unpaid
The corporation is at a loss of 250 thousand,
the board decides to make a call for the
payment of the unpaid subscriptions, however
A could not paid, hence declared delinquent
and decides to sell his share at a public
auction
55 thousand is to be paid, remaining balance
plus cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
 Assume there is no bidder, may the
corporation bid?
- NO. It cannot bid because the law says,
subject to the provisions of this CODE. Section
68 and 41 should be reconciled. Section 68
states that:
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited as
paid in full in the books of the corporation. Title
to all the shares of stock covered by the
subscription shall be vested in the
corporation as treasury shares and may be
disposed of by said corporation in
accordance with the provisions of this Code.
(39a-46a)
- There was no unrestricted retained earnings
in the example given therefore the
corporation cannot bid , section 41, it states
that:
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own
shares for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out
of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
(a)
 What if the shares of A were sold without
compliance of the requirements? May A
question the sale?
- The law prescribes two conditions before an
action to recover delinquent stocks
irregularly sold may be allowed. These are:
1. The party seeking to maintain such action
first pays or tenders to the party holding the
stock the sum for which the same was sold,
with interest from the date of the sale at the
legal rate; and,
2. The action shall be commenced by the filing
of a complaint within six months from the
date of the sale.
- The reason for such is the stability of
transactions of the shares of stock
 Suppose in the example, since there are no
unrestricted retained earnings, hence the
70
 corporation cannot bid, is the corporation left
without any recourse?
Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall prevent the
corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and
expenses. (49a)
 Velasco vs. Poizat
- The subscriber is as much bound to pay the
amount of the share subscribed by him as he
would be to pay any other debt, and the right
of the company to demand payment is no less
incontestable.
- Two available remedies: the first and most
special remedy given by the statute consist in
permitting the corporation to put up the unpaid
stock and dispose of it for the account of the
delinquent subscriber. The other remedy is by
action in court.
 De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of
directors to do whatever is provided in the said
article relative to the application of the part of
the 70 percent of the profit distributable in
equal parts on the payment of the shares
subscribed to and fully paid
 Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide
compromise or to set off a debt due from the
corporation, a release supported by
consideration, will be effectual as against
dissenting stockholders and subsequent and
existing creditors. A release which might
originally have been held invalid may be
sustained after a considerable lapse of time
 Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and
payable only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it
will not be demandable or payable at all
 Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the
capital of a corporation constitute a fund to
which the creditors have a right to look for
satisfaction of their claims and that the
assignee in insolvency can maintain an
action upon any unpaid stock subscription
in order to realize assets for the payment of
its debts.
 PNB vs. Bitulak
- Where it not for the promise, the defendants
would have not subscribed
- Trust Fund Doctrine, it is established
doctrine that subscriptions to the capital of a
corporation constitute a fund to which
creditors have a right to look for satisfaction
of their claims and that the assignee in
insolvency can maintain an action upon any
unpaid stock subscription in order to realize
assets for the payment of its debts.
- A corporation has no power to release an
original subscriber to its capital stock from
the obligation of paying for his shares,
without a valuable consideration for such
release; and as against creditors a
reduction of the capital stock can take place
only in the manner and under the conditions
prescribed by the statute or the charter or
the articles of incorporation.
 Edward Keller and Co. vs. COB
- May the stockholder be held liable for the
debts of the corporation? YES. To the
extent of their unpaid subscription
- As to the liability of the stockholders, it is
settled that a stockholder is personally liable
for the financial obligations of a corporation
to the extent of his unpaid subscriptions
 Is there a prescriptive period wherein a
demand for unpaid subscription should be
made?
- NO. Garcia vs. Suarez case
 Garcia vs. Suarez
- Never became due and payable until there
is a call made
- Prescription will not run until and unless
there is demand
71
 - Prescription should be determined from the
time demand has been made and not from the
time of subscription
 If declared delinquent, what would be the
effect as to the owner of said shares?
Section 71. Effect of delinquency. - No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor shall
the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance
with the provisions of this Code, until and unless he
pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement,
if any. (50a)
- However if the shares are not delinquent,
subscribers to the capital of a corporation,
though not fully paid, are entitled to all the
rights of a stockholder, according to section 72
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
 May the rules governing delinquency sale
apply to a non-stock corporation? Are there
unpaid shares in a non-stock corporation?
- Rules governing stock corporations, when
applicable, also applies to a non-stock
corporation
- There are delinquent shareholders also in a
non-stock corporation. Example is
membership dues
 A corporation paid 50% of subscription and
was later on declared delinquent when he
could not pay upon call; A is also a director of
the corporation. Will A, upon declaration of
delinquency , still be able to exercise his right
as a director?
- Yes, he loses all his right as a stockholder
except his right to receive dividends
- He remains to be a director, only qualification
to be a director is he must own at least 1 share
and since it still stands in his name pending
the sale, he remains to be and act as a
director
- Even if there is sale, he may still be director
because the winning bidder may not bid or pay
for all the shares or there might be remaining
shares, which would be credited in favor of the
delinquent stockholder
- Section 43 provides:
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends out
of the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited
from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it can
be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
 When a certificate of stock is loss or
destroyed, what must be done by the owner
thereof?
Section 73. Lost or destroyed certificates. - The
following procedure shall be followed for the
issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen or
destroyed:
1. The registered owner of a
certificate of stock in a corporation or his
legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to
how the certificate was lost, stolen or
destroyed, the number of shares
represented by such certificate, the serial
number of the certificate and the name of
the corporation which issued the same. He
72
 shall also submit such other information and
evidence which he may deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a
notice in a newspaper of general circulation
published in the place where the corporation
has its principal office, once a week for three
(3) consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,
the name of the registered owner and the
serial number of said certificate, and the
number of shares represented by such
certificate, and that after the expiration of one
(1) year from the date of the last publication, if
no contest has been presented to said
corporation regarding said certificate of stock,
the right to make such contest shall be barred
and said corporation shall cancel in its books
the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the registered
owner files a bond or other security in lieu
thereof as may be required, effective for a
period of one (1) year, for such amount and in
such form and with such sureties as may be
satisfactory to the board of directors, in which
case a new certificate may be issued even
before the expiration of the one (1) year period
provided herein: Provided, That if a contest
has been presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock which
has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final
decision by the court regarding the ownership
of said certificate of stock which has been lost,
stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
any corporation which shall have issued
certificate of stock in lieu of those lost, stolen
or destroyed pursuant to the procedure above-
described. (R.A. 201a)
- The rationale of the above-quoted law is to
avoid duplication of certificates of stock and
the avoidance of fictitious and fraudulent
transfers.
 When will the replacement certificate be
issued?
- The code provides that:
after the expiration of one (1) year
from the date of the last publication, if no
contest has been presented to said
corporation regarding said certificate of
stock, the right to make such contest shall
be barred and said corporation shall cancel
in its books the certificate of stock which
has been lost, stolen or destroyed and issue
in lieu thereof new certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files a
bond or other security in lieu thereof as may
be required, effective for a period of one (1)
year, for such amount and in such form and
with such sureties as may be satisfactory to
the board of directors, in which case a new
certificate may be issued even before the
expiration of the one (1) year period
provided herein: Provided, That if a
contest has been presented to said
corporation or if an action is pending in
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
suspended until the final decision by the
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed.
 May corporate officers be held liable for the
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith,
or negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have
issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
 Assuming the last paragraph is not there;
would it be not the same, that they should
be held liable due to fraud, bad faith or
negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors,
trustees or officers. - Directors or trustees
73
 who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting there from suffered by
the corporation, its stockholders or members
and other persons.
When a director, trustee or officer
attempts to acquire or acquires, in violation of
his duty, any interest adverse to the
corporation in respect of any matter which has
been reposed in him in confidence, as to
which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a
trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation. (n)
 Certificate of stock was lost, the owner
transfers his shares by way of a notarized
deed will it be valid?
- He cannot do so, if a certificate of stock is
issued by a corporation, a mere notarized
deed will not suffice
- Deed of assignment was not sufficient since
there was no endorsement (Rural Bank of
Lipa vs. CA)
7. To exercise their appraisal right in
accordance with the provision of section 81
and in those instance allowed by law such
as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold
for delinquency as may be allowed under
section 69;
10. To inspect the books of the corporation
subject only to the limitations imposed by
section 73;
11. To be furnished by the most recent financial
statement of the corporation as by section
75;
12. To be issued a new stock certificate in lieu
of the lost or destroyed one subject to the
procedure laid down in section 73;
13. To have the corporation dissolved under
section 118 to 121, and section 105 in a
close corporation;
14. To participate in the distribution of the
assets of the corporation upon dissolution
under section 122;
15. In the case of a close corporation, to
petition the SEC to arbitrate in the event of
a deadlock as allowed under section 104;
and,
16. Also in the case of a close corporation, to
withdraw therefrom, for my reason, and
compel the corporation to purchase his
shares as provided for under section 105.

 Rights and liabilities of stockholders

- RIGHTS

1. Participation in the management of the

corporate affairs by exercising their right to
vote and be voted upon either personally or by
proxy as provided for under sections 50 and
58 of the code;
2. To enter into a voting trust agreement subject
to the procedure, requirements and limitations
imposed under section 50;
3. To receive dividends and to compel their
declaration if warranted under section 43;
4. To transfer shares of stock subject only to
reasonable restrictions such as options and
preferences as may be allowed by law
inclusive of the right of the transferee to
compel the registration of the transfer in the
books of the corporation as provided for in
section 63;
5. To be issued a certificate of stock for fully paid-
up shares in accordance with 64;
6. To exercise pre-emptive rights as provided for
in section 39;

74
LIABILITIES
1. To pay to the corporation the balance of his
unpaid subscriptions subject to the provision of
section 67 to 70;
2. To pay interest on his unpaid subscription if
required by the by-laws or by the contract of
subscription in accordance with section 66;
3. To answer to the creditors for the unpaid
portion of his subscription under the TRUST
FUND DOCTRINE;
4. To answer the “water” in his stocks as
provided for in section 65;
5. To be liable, as general partners, for all debts,
liabilities and damages of a determinable
corporation as envisioned under section 21
(corporation by estoppel); and,
6. To be personally liable for torts, in the event
that a stockholder in a close corporation
actively participates in the management of the
corporate affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are
required to be kept?
Section 74. Books to be kept; stock transfer agent. -
Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all meetings
of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting,
how authorized, the notice given, whether the
meeting was regular or special, if special its
object, those present and absent, and every act
done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or
member, the time when any director, trustee,
stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any
motion or proposition, and a record thereof
carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed
action must be recorded in full on his demand.
The records of all business
transactions of the corporation and the
minutes of any meetings shall be open to
inspection by any director, trustee, stockholder
or member of the corporation at reasonable
hours on business days and he may demand,
in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation
who shall refuse to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from its records
or minutes, in accordance with the
provisions of this Code, shall be liable to
such director, trustee, stockholder or
member for damages, and in addition, shall
be guilty of an offense which shall be
punishable under Section 144 of this Code:
Provided, That if such refusal is made
pursuant to a resolution or order of the
board of directors or trustees, the liability
under this section for such action shall be
imposed upon the directors or trustees who
voted for such refusal: and Provided,
further, That it shall be a defense to any
action under this section that the person
demanding to examine and copy excerpts
from the corporation's records and minutes
has improperly used any information
secured through any prior examination of
the records or minutes of such corporation
or of any other corporation, or was not
acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep
a book to be known as the "stock and
transfer book", in which must be kept a
record of all stocks in the names of the
stockholders alphabetically arranged; the
installments paid and unpaid on all stock for
which subscription has been made, and the
date of payment of any installment; a
statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and such other
entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the
principal office of the corporation or in the
office of its stock transfer agent and shall be
open for inspection by any director or
stockholder of the corporation at reasonable
hours on business days.
No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf of a
stock corporation shall be allowed to
operate in the Philippines unless he secures
a license from the Securities and Exchange
Commission and pays a fee as may be
fixed by the Commission, which shall be
renewable annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable. (51a
and 32a; P.B. No. 268.)
75
 To summarize:
1. Records of all business transactions which
include, among others, journals, ledger,
contracts, vouchers and receipts, financial
statements and other books of accounts,
income tax returns, and voting trust
agreements which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders or
members and of the directors or trustees
setting forth in detail the date, time, and place
of meeting, how authorized, the notice given
whether the same be regular or special, and if
special, the purpose thereof shall be specified,
those present and absent, and every act done
or ordered done there at which ,must likewise
be kept at the principal office of the
corporation; and,
3. Stock and transfer book showing the names of
the stockholders, the amount paid or unpaid
on all stocks for which subscription has been
made, a statement of every alienation, sale or
transfer of stock made, if any the date thereof,
and by whom and to whom made which must
also be kept at the principal office of the
corporation or in the office of its stock transfer
agent.
These corporate books and records, inclusive
of all business transactions and minutes of
meetings, are subject to inspection by any of
the directors, trustees, stockholders or
members of the corporation at reasonable
hours on business days and a copy of
excerpts of said records may be demanded. In
fact, in so far as financial statement is
concerned, the Code clearly provides:
Section 75. Right to financial
statements. - Within ten (10) days from receipt
of a written request of any stockholder or
member, the corporation shall furnish to him its
most recent financial statement, which shall
include a balance sheet as of the end of the
last taxable year and a profit or loss statement
for said taxable year, showing in reasonable
detail its assets and liabilities and the result of
its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees
shall present to such stockholders or members
a financial report of the operations of the
corporation for the preceding year, which shall
include financial statements, duly signed and
certified by an independent certified public
accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible
officer of the corporation. (n)
 May books and records be examined? Who
may examine? Can they copy them? In
whose expense?
- Yes, according to the code:
“The records of all business
transactions of the corporation and the
minutes of any meetings shall be open
to inspection by any director, trustee,
stockholder or member of the
corporation at reasonable hours on
business days and he may demand, in
writing, for a copy of excerpts from said
records or minutes, at his expense. “
 Is there any defense available that could be
raised? By the corporate officers to justify
the refusal?
- Yes, the code provides that:
“and Provided, further, That it shall
be a defense to any action under this
section that the person demanding to
examine and copy excerpts from the
corporation's records and minutes has
improperly used any information
secured through any prior examination
of the records or minutes of such
corporation or of any other corporation,
or was not acting in good faith or for a
legitimate purpose in making his
demand.”
 What is the stock and transfer? Where
should stock and transfer be kept? Can it be
kept elsewhere?
“Stock corporations must also keep
a book to be known as the "stock and
transfer book", in which must be kept a
record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment; a statement of every
alienation, sale or transfer of stock
made, the date thereof, and by and to
whom made; and such other entries as
the by-laws may prescribe. The stock and
76
 transfer book shall be kept in the principal
office of the corporation or in the office of
its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on
business days. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the
minutes or by the hours
- Non-stock corporation- stock and transfer
books
- Club share- membership
 Are stockholders entitled to financial
statements?
- Yes, they are entitled to a copy, the code
provides that:
Section 75. Right to financial
statements. - Within ten (10) days from receipt
of a written request of any stockholder or
member, the corporation shall furnish to him its
most recent financial statement, which shall
include a balance sheet as of the end of the
last taxable year and a profit or loss statement
for said taxable year, showing in reasonable
detail its assets and liabilities and the result of
its operations.
At the regular meeting of stockholders
or members, the board of directors or trustees
shall present to such stockholders or members
a financial report of the operations of the
corporation for the preceding year, which shall
include financial statements, duly signed and
certified by an independent certified public
accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible officer
of the corporation. (n)
- Audited financial statement filed in the SEC,
120 days from the end of the final year, or
must be filed on or before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with
increasing and decreasing
- If not “kulong” violation of securities and
regulation act
 Why is this right of inspection granted to a
stockholder?
- The basis of the right of the stockholder to
inspect the books and records of the
corporation for a proper purpose is to
protect his interest as a stockholder. Thus, it
has been said that:
“The right of the shareholders to
ascertain how the affairs of his
company are being conducted by
its directors and officers is founded
by his beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers of some corporations
deliberately keep the shareholders
in ignorance or under
misapprehension as to the true
condition of its affairs. Business
prudence demands that the investor
keep a watchful eye on the
management and the condition of
the business. Those in charge of
the company may be guilty of gross
incompetence or dishonesty for
years and escape liability if the
shareholders cannot inspect the
records and obtain information.”
 Is there any distinction of the right of
inspection of a stockholder and that of a
director?
- Yes, as compared to a stockholder or
member, the right of a director or trustee to
inspect and examine corporate books and
records is considered absolute and
unqualified and without regard to motive.
This is because a director supervises,
directs and manages corporate business
and it is necessary that he be equipped with
all the information and data with regard to
the affairs of the company in order that he
may manage and direct its operations
intelligently and according to his best
judgment in the interest of all the
stockholders he represents. Thus, while
stockholders and members are entitled to
inspect and examine the books and records
as provided in sections 74 and 75 they may
not gain access to highly sensitive and
confidential information. In the case of
directors. “it is not denied” that they have
77
 such access. This would include, among
others,
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
c. Research and development;
d. Sources of funding, availability of
personnel, proposals of mergers or tie-ups
with other firms
 May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock
ownership thus personal in nature it may be
made by the stockholder’s agent or
representative since it may be unavailing in
many instances
 What if the right of the stockholder to inspect is
denied? What is his remedy?
1. Mandamus
2. Damages either against the corporation or
responsible officer who refused the inspection
3. Criminal complaint for violation of his right to
inspect and copy excerpts of all business
transactions and minutes of meeting. Section
74 provides that Any officer or agent of the
corporation who shall refuse to allow any
director, trustees, stockholder or member of
the corporation to examine and copy excerpts
from its records or minutes, in accordance with
the provisions of this Code, shall be liable to
such director, trustee, stockholder or member
for damages, and in addition, shall be guilty of
an offense which shall be punishable under
Section 144 of this Code. The latter provision
imposes a penalty of a fine of not less than
P1,000 but not more than P10,000 or an
imprisonment for not less than 30 days but not
more than 5 years, or both, at the discretion of
the court. If the refusal is pursuant to a
resolution or order of the board, the liability
shall be imposed upon the directors or
trustees who voted for such refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly
used any information secured through any
prior examination of the records or minutes of
such corporation or of any other corporation;
2. That he was not acting in good faith or for a
legitimate purpose in making his demand;
3. The right is limited or restricted by special law
or the law of it creation.
 W.G. Philpotts vs. Philippine Manufacturing
Co.
- The right of inspection given to a
stockholder can be exercised either by
himself or by any proper representative or
attorney-in-fact, and either with or without
the attendance of the stockholder
- The right may be regarded as personal, in
the sense that only a stockholder may enjoy
it; but the inspection and examination may
be made by another. Otherwise it would be
unavailing in many instances.
o Note: Usually hires an auditor or
accountant to safeguard his interest
 Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised during
reasonable hours on any business days, the
by-laws cannot deny this right all together
- The general right given by the statute may
not be lawfully abridged to the extent
attempted in this resolution. It may be
admitted that the officials in charge of a
corporation may deny inspection when
sought at unusual hours or under other
improper conditions; but neither the
executive officers nor the board of directors
have the power to deprive a stockholder of
the right altogether.
- The corporation, or its responsible directors
and officers cannot unduly restrict this right
of inspection and may not arbitrarily set a
few days of the year within which the
stockholder may make the inspection.
- A by-law unduly restricting the right of
inspection is undoubtedly invalid
 Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the
unqualified right to inspect the books and
records of the corporation at all reasonable
hours.
- We do not conceive, however, that a
director or stockholder has any absolute
right to secure certified copies of the
minutes of the corporation until these
minutes have been written up and approved
by the directors.
 May a stockholder of a holding company
inspect the books and records of a
subsidiary?
- It depends
78
- The right of the stockholders to examine
corporate books extends to wholly-owned
subsidiary which is completely under the
control and management of the parent
company where he is such a stockholder. But
if the two entities (subsidiary and parent) are
legally being operated as separate and distinct
entities, there is no such right of inspection on
the part of the stockholder of the parent
company.
AYALA- HOLDING COMPANY/PARENT
COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND
(not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to
be a PARENT COMPANY
 A, is a stockholder of Ayala, does he have a
right to inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are
not wholly owned kaya hindi pwede
 Gokongwei vs. SEC
- San Miguel corporation owns all of the shares
of stock of San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith
and fair dealing to construe the statutory right
of petitioner as stockholder to inspect the
books and records of such wholly-owned
subsidiary which are in respondent
corporation’s possession and control
 If being operated as separate and distinct
corporations, there is no such right
 Telecommunications- special franchise, it is a
legislative grant
 Gonzales vs. PNB
- Provisions of the old law was unqualified,
when it granted stockholders the right to
inspect
- However, whole seemingly enlarging the right
of inspection, the new code has prescribed
limitations to the same. It is now expressly
required as a condition for such examination
that the one requesting it must not have been
guilty of using improperly any information
secured through a prior examination and that
the person asking for such examination must
be acting in good faith and for a legitimate
purpose in making his demand
- Admittedly, he sought to be a stockholder in
order to pry into transactions entered into by
the respondent bank even before he
became a stockholder. His obvious purpose
was to arm himself with materials he can
use against the respondent bank for acts
done by the latter when the petitioner was a
total stranger to the same.
- Bank was created by a special law, it has its
own charter and primarily governed by the
law creating them
- The bank is only subject to the inspection of
the Central Bank and any information
pertaining to the bank is confidential and
shall not be revealed to any person other
than the President of the Philippines, the
Secretary of Finance and the Board of
Directors, nor shall any information relative
to the funds in its custody, its current
accounts or deposits belonging to private
individuals, corporations or other entities
except by order of a Court of Competent
Jurisdiction, hence inspection sought to by
the petitioner is violative of the provisions of
its charter and is even subject to penal
sanctions
 Assuming you are a stockholder of PNB,
and then it was privatized, may you already
have the right to inspect?
- No, unless its charter has been altered or
repealed it is still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the
corporation
- The last would be its death or dissolution
MERGER AND CONSOLIDATION
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its
brewery business
- San Miguel Corporation is now a full time
holding company; it can later on absorb the
company
- Corporations are granted by the code to
merge or consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or
insolvent condition, aim is to bring it back to
its financial capability
79
 - also a method of recapitalization
o purchase and sale of corporate assets is
another form of corporate reorganization
 How do you value the assets of the merging
corporation, do you consider goodwill?
 First secure favorably recommendation of
government agency
Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue
a certificate of merger or of consolidation, at which
time the merger or consolidation shall be effective.
If, upon investigation, the Securities
and Exchange Commission has reason to
believe that the proposed merger or
consolidation is contrary to or inconsistent with
the provisions of this Code or existing laws, it
shall set a hearing to give the corporations
concerned the opportunity to be heard. Written
notice of the date, time and place of hearing
shall be given to each constituent corporation
at least two (2) weeks before said hearing.
The Commission shall thereafter proceed as
provided in this Code. (n)
 Merger
- A union effected by absorbing one or more
existing corporations by another which
survives and continues the combined business
- It is the uniting of two or more corporations by
the transfer of property to one of them which
continue in existence, the other or the others
being dissolved and merged therein.
A B
A transfers all assets, properties, rights,
obligations, liabilities to B
B issues shares of stocks in exchange of
the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called
constituent corporation
 Consolidation
- The uniting or amalgamation of two or more
existing corporations to form a new
corporation
- In merger there is a surviving corporation,
the others are dissolved, while in
consolidation, all constituent are dissolved
and a new one organized
A B
C
 Like all other corporate acts, it emanates
from the board
1. The board of directors or trustees of each
constituent corporations shall approve a
plan of merger or consolidation setting forth
the matters required in section 76;
2. Approval of the plan by the stockholders
representing 2/3 of the outstanding
capital stock or 2/3 of the member in
non-stock corporations of each of such
corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a copy
or summary of the plan of merger or
consolidation shall be given to all
stockholders or members at least two (2)
weeks prior to the scheduled meeting,
either personally or registered mail
stating the purpose thereof;
4. Execution of the articles of merger or
consolidation by each constituent
corporations to be signed by the president
or vice-president and certified by the
corporate secretary or assistant
secretary setting forth the matters
required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the
SEC subject to the requirement of section
79 that if it involve corporations under the
direct supervision of any other government
agency or governed by special laws the
favorable recommendation of the
80
 government agency concerned shall first be
secured and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the
merger or consolidation shall be effective. If
the plan, however, is believed to be contrary to
law, the SEC shall set a hearing to give the
corporations concerned an opportunity to be
heard upon proper notice and thereafter, the
Commission shall proceed as provided in the
Code.
 Although merger and consolidation is an
express power granted to corporation, it is
subject to limitations, as maybe proscribed by
law
 What would be the effect of merger or
consolidation? <sec. 80>
1. There will only be a single corporation. In case
of merger, the surviving corporation or the
consolidated corporation in case of
consolidation;
2. The termination of the corporate existence of
the constituent corporations, except that of the
surviving corporation or the consolidated
corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights,
privileges, immunities and powers and shall be
subject to all the duties and liabilities of a
corporation organized under the Code;
4. The surviving or consolidated corporation shall
possess all the rights, privileges, immunities
and franchises of the constituent corporations,
and all property and all receivables due,
including subscriptions to shares and other
choses in action, and every other interest of,
or belonging to or due to the constituent
corporations shall be deemed transferred to
and vested in such surviving or consolidated
corporation without further act and deed; and,
5. The rights of creditors or any lien on the
property of the constituent corporations shall
not be impaired by the merger or
consolidation.
 Is there a liquidation process in case of merger
or consolidation?
- None, there is nothing to distribute
 Associated Bank vs. CA
- By virtue of a specific provision in the merger
agreement
- Although the subject promissory note names
CBTC as the payee, the reference to CBTC in
the note shall be construed, under the very
provision of the merger agreement, as a
reference to petitioner bank, “as if such
reference (was a) direct reference to the
latter for all intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated
corporation shall thereupon and thereafter
possess all the rights, privileges, immunities
and franchises of each of the constituent
corporations; and all property, real or
personal, and all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and all
and every other interest of, or belonging to,
or due to each constituent corporation, shall
be deemed transferred to and vested in
such surviving or consolidated corporation
without further act or deed; and
- Without further acts, meaning it is automatic
 When do merger and consolidation become
effective? What if the SEC fails to act on it
without fault attributable to the corporation
involved?
- It will never become valid until and unless
the SEC gives its stamp of approval
- It will be up to the constituent corporation to
follow it up
- It will never take effect until the SEC gives
its approval and issues the articles of
merger
o Granted 3 years to wing up unless there
is a trustee to wing up its affairs
 Could there be liquidators and winding up
with respect to the corporation in
consolidation and merger?
- No, there is none
- No assets properties or rights to collect,
they are transferred
- No debts and liabilities to pay because they
become the liabilities of the surviving
corporations
- No properties transferred because they will
be the properties of the surviving
corporations
o Hardest part is the financial act,
regarding how many shares would be
issued, probability of collection and the
like
81
 o In merger and consolidation, there is due
diligence and an economist is usually
hired
APPRAISAL RIGHT
 Define appraisal
- Right 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
corporate structure <sec. 81>
 What property? When may this right be
exercises?
- Section 81 provides:
Section 81. Instances of appraisal
right. - Any stockholder of a corporation shall
have the right to dissent and demand payment
of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing preferences
in any respect superior to those of outstanding
shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
 May it be exercised by a stockholder who
dissents to the act of a business other than a
primary purpose?
X Co. inc
Principal office is in Quezon city, it was
changed to Paranaque
A objects and makes a written demand. May
he exercise his right of appraisal?
- It is not available in all amendments of the
corporation
- It must be changing or restricting the rights of
any stockholder
 What if the principal office is changed from
QC to TAWI-TAWI, will it change or affect
the rights of A?
- To some it may change or restrict the rights
to others it may not
 How is the right exercised?
- According to section 82 of the code:
Section 82. How right is exercised.
- The appraisal right may be exercised by
any stockholder who shall have voted
against the proposed corporate action, by
making a written demand on the corporation
within thirty (30) days after the date on
which the vote was taken for payment of the
fair value of his shares: Provided, That
failure to make the demand within such
period shall be deemed a waiver of the
appraisal right. If the proposed corporate
action is implemented or affected, the
corporation shall pay to such stockholder,
upon surrender of the certificate or
certificates of stock representing his shares,
the fair value thereof as of the day prior to
the date on which the vote was taken,
excluding any appreciation or depreciation
in anticipation of such corporate action.
If within a period of sixty (60) days
from the date the corporate action was
approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares,
it shall be determined and appraised by
three (3) disinterested persons, one of
whom shall be named by the stockholder,
another by the corporation, and the third by
the two thus chosen. The findings of the
majority of the appraisers shall be final, and
their award shall be paid by the corporation
within thirty (30) days after such award is
made: Provided, That no payment shall be
made to any dissenting stockholder unless
the corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation. (n)
X Co.
Principal Office- QC, it was changed to
Manila
82
 A objects and makes a written demand for
payment of fair value of shares. Can he make
a demand of payment of shares?
 True or False, no stockholder in a stock
corporation can ever demand if the principal
office is amended, changing it from QC to
Manila
- False, a stockholder in a close corporation
may for any reason compel the close
corporation that he be paid the fair value of his
shares
Can he exercise his appraisal rights in the first
place? He hasn’t even paid his subscription in
full.
 May a stockholder who hasn’t paid his
subscription in full exercise his appraisal
rights?
- Yes, he can exercise his appraisal rights, by
reconciling the provisions of section 72,
section 82 and section 86
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
Section 82. How right is exercised. -
The appraisal right may be exercised by any
stockholder who shall have voted against the
proposed corporate action, by making a
written demand on the corporation within thirty
(30) days after the date on which the vote was
taken for payment of the fair value of his
shares: Provided, That failure to make the
demand within such period shall be deemed a
waiver of the appraisal right. If the proposed
corporate action is implemented or affected,
the corporation shall pay to such
stockholder, upon surrender of the
certificate or certificates of stock
representing his shares, the fair value
thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days
from the date the corporate action was
approved by the stockholders, the withdrawing
stockholder and the corporation cannot agree
on the fair value of the shares, it shall be
determined and appraised by three (3)
disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus
chosen. The findings of the majority of the
appraisers shall be final, and their award
shall be paid by the corporation within thirty
(30) days after such award is made:
Provided, That no payment shall be made
to any dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation. (n)
Section 86. Notation on
certificates; rights of transferee. - Within ten
(10) days after demanding payment for his
shares, a dissenting stockholder shall
submit the certificates of stock representing
his shares to the corporation for notation
thereon that such shares are dissenting
shares. His failure to do so shall, at the
option of the corporation, terminate his
rights under this Title. If shares represented
by the certificates bearing such notation are
transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder under
this Title shall cease and the transferee
shall have all the rights of a regular
stockholder; and all dividend distributions
which would have accrued on such shares
shall be paid to the transferee. (n)
- Notation is not mandatory, it is even
discretionary because the code provides “at
the option of the corporation” because it
never issued one for that matter since the
subscriptions are not yet fully paid
 May the corporation be compelled to pay
the interest of A
300 T, 150T, 150T and 0 unrestricted
retained earnings
 No stockholder may be able to compel the
corporation to pay the value of his shares if
the corporation has no unrestricted retained
earnings
- False, a stockholder of a close corporation
may for any reason, provided only that the
corporation has sufficient assets to cover its
debts and liabilities
83
 o General rule: there should be unrestricted
retained earnings
o Exception: section 105 “close corporation”
 The procedure and requirements for the valid
exercise of this rights are:
1. The stockholder must have voted against the
proposed corporate action in any of the
instances allowed by law for the exercise of
the right of appraisal;
2. The written demand for payment must be
made by the dissenting stockholder within
thirty (30) days after the date on which the
vote was taken thereon. Failure to make the
demand within the said period shall be
deemed a waiver on the part of the
stockholder concerned to exercise his
appraisal right;
3. Surrender of the certificate of stock by the
dissenting stockholder for notation in the
corporate books and the payment by the
corporation of the fair market value of the said
shares as of the day prior to the date on which
the vote was taken. If the stockholder and the
corporation cannot agree on the fair market
value thereof, the same shall be determined in
accordance with the provision of paragraph 2
of section 82;
4. The fair value of the shares of the dissenting
stockholder must be paid by the corporation
only if it has “unrestricted retained earnings” in
its books to cover such payment. If the
corporation has no unrestricted retained
earnings, the dissenting stockholder may not,
therefore, be able to effectively exercise his
appraisal rights;
5. Upon payment of the shares by the
corporation, the dissenting stockholder shall
transfer his shares to the corporation.
 What would be the effect if the stockholder
exercises his appraisal rights? What happens
to his voting and dividend rights if he exercises
his appraisal rights?
- It will be suspended, with a limitation of 30
days, as provided for by section 83 of the
code:
Section 83. Effect of demand and
termination of right. - From the time of demand
for payment of the fair value of a stockholder's
shares until either the abandonment of the
corporate action involved or the purchase of
the said shares by the corporation, all rights
accruing to such shares, including voting
and dividend rights, shall be suspended in
accordance with the provisions of this
Code, except the right of such
stockholder to receive payment of the
fair value thereof: Provided, That if the
dissenting stockholder is not paid the
value of his shares within 30 days after
the award, his voting and dividend rights
shall immediately be restored. (n)
 How do you compare the rights of a
stockholder, declared delinquent compared
to a dissenting stockholder exercising his
appraisal rights
 What if a stockholder exercising his
appraisal rights is also a director, will he
also lose his rights as a stockholder?
- The shares remain to stand in his name
until he is paid, unless there is a stipulation
in the by-laws
 When may the right to be paid the value of
his shares cease? Can he withdraw his right
of appraisal?
- Yes, he may withdraw, but there must be
consent by the corporation as provided for
by section 83 of the code:
Section 84. When right to payment
ceases. - No demand for payment under
this Title may be withdrawn unless the
corporation consents thereto. If, however,
such demand for payment is withdrawn with
the consent of the corporation, or if the
proposed corporate action is abandoned or
rescinded by the corporation or disapproved
by the Securities and Exchange
Commission where such approval is
necessary, or if the Securities and
Exchange Commission determines that
such stockholder is not entitled to the
appraisal right, then the right of said
stockholder to be paid the fair value of his
shares shall cease, his status as a
stockholder shall thereupon be restored,
and all dividend distributions which would
have accrued on his shares shall be paid to
him. (n)
 Instances when the right of a dissenting
stockholder to be paid the fair value of his
shares ceases.
1. When he withdraws his demand for
payment and the corporation consents
thereto;
84
2. When the proposed action is abandoned or
rescinded by the corporation;
3. When the proposed action is disapproved by
the SEC where such approval is necessary;
4. When the SEC determines that he is not
entitled to exercise his appraisal right;
5. When he fails to submit the stock certificate
within ten (10) days from demand to the
corporation for notation that such shares are
dissenting shares; and,
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is
lower than the fair value of the shares of
the dissenting stockholder as determined
by the appraisers;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
- Dissenting stockholder will be liable for the
cost and expenses of appraisal when
a. When the price offered by the corporation
is approximately the same as the fair value
ascertained by the appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept
payment is found by the court to be
unjustified.
 The dissenting stockholder may also sell,
transfer or assign his shares
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a
dissenting stockholder shall submit the
certificates of stock representing his shares to
the corporation for notation thereon that such
shares are dissenting shares. His failure to do
so shall, at the option of the corporation,
terminate his rights under this Title. If shares
represented by the certificates bearing
such notation are transferred, and the
certificates consequently cancelled, the
rights of the transferor as a dissenting
stockholder under this Title shall cease
and the transferee shall have all the rights
of a regular stockholder; and all dividend
distributions which would have accrued on
such shares shall be paid to the
transferee. (n)
NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where no
part of its income is distributable as
dividends to its members, trustees, or
officers, subject to the provisions of this
code on dissolution
 What provision of the code will govern non-
stock corporations? Would the provision
governing stock corporations also apply to
non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock
corporation, when pertinent, shall be
applicable to non-stock corporations, except
as may be covered by specific provisions of
this Title. (n)
 How is the right to vote exercised in a non-
stock corporation compared to a stock
corporation
 May a member in a non-stock corporation
vote cumulatively?
- General rule is NO
 May it be granted or allowed by the by-
laws?
- Yes
 May the right to cumulative voting be denied
in a stock corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation
vote by proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in the
articles of incorporation or the by-laws, a
member may vote by proxy in accordance
with the provisions of this Code. (n) “
85
 May the right to vote by proxy be validly
denied in a stock corporation?
- No, it is a matter of right in a stock corporation
 May member of a non-stock corporation cast
their vote by text?
- Yes, subject to the approval and terms and
conditions of the SEC <sec. 89>
“Voting by mail or other similar means
by members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and under
such conditions which may be prescribed by,
the Securities and Exchange Commission. “
 How about in stock?
- Voting by mail or other similar means may also
be authorized and allowed by the by-laws of
non-stock corporations. Generally, in stock
corporations, the vote must be cast at a duly
constituted meeting. The only exception, in
case of the latter, is in the matter of general
amendment of the articles of incorporation
where the written assent of the stockholder
may be sufficient.
 How is the governing board constituted in a
non-stock corporation? How many members?
- It may exceed 15 in a non-stock corporation
unless the AOI or by-laws provide otherwise,
as provided for by section 92 of the code:
Section 92. Election and term of
trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the
board of trustees of non-stock corporations,
which may be more than fifteen (15) in number
as may be fixed in their articles of
incorporation or by-laws, shall, as soon as
organized, so classify themselves that the
term of office of one-third (1/3) of their number
shall expire every year; and subsequent
elections of trustees comprising one-third (1/3)
of the board of trustees shall be held annually
and trustees so elected shall have a term of
three (3) years. Trustees thereafter elected to
fill vacancies occurring before the expiration of
a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee
unless he is a member of the corporation.
Unless otherwise provided in the
articles of incorporation or the by-laws,
officers of a non-stock corporation may be
directly elected by the members. (n)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of the
Philippines; and,
3. Other qualifications as may be provided for
in the by-laws.
 Governing board in a non-stock
- Board of Trustees, however section 138
provides that:
Section 138. Designation of
governing boards. - The provisions of
specific provisions of this Code to the
contrary notwithstanding, non-stock or
special corporations may, through their
articles of incorporation or their by-laws,
designate their governing boards by any
name other than as board of trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock
corporation, same holds true to the manner
of removal <sec. 29 ad 30>
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
Section 29. Vacancies in the office
of director or trustee. - Any vacancy
occurring in the board of directors or
trustees other than by removal by the
stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
the stockholders in a regular or special
meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
be elected only or the unexpired term of his
predecessor in office.
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 Any directorship or trusteeship to be
filled by reason of an increase in the number
of directors or trustees shall be filled only by
an election at a regular or at a special meeting
of stockholders or members duly called for the
purpose, or in the same meeting authorizing
the increase of directors or trustees if so
stated in the notice of the meeting. (n)
Section 30. Compensation of
directors. - In the absence of any provision in
the by-laws fixing their compensation, the
directors shall not receive any compensation,
as such directors, except for reasonable per
diems: Provided, however, That any such
compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority of
the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall
the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of
the net income before income tax of the
corporation during the preceding year. (n)
 Who elects the other officers?
- Directly by the general members unless the
by-laws or articles provide otherwise.
<sec.92>
“Unless otherwise provided in the
articles of incorporation or the by-laws, officers
of a non-stock corporation may be directly
elected by the members. (n) “
 In stock corporations who elect officers?
- Directors
 The provision that stock corporations cannot
validly provide that members cannot be voted
by stockholders is only a general rule because
there is an exception section 97 of the code
states that:
The articles of incorporation of a
close corporation may provide that the
business of the corporation shall be managed
by the stockholders of the corporation
rather than by a board of directors. So long
as this provision continues in effect:
1. No meeting of stockholders need be called
to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the corporation
shall be deemed to be directors for the
purpose of applying the provisions of this
Code; and
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
The articles of incorporation may
likewise provide that all officers or
employees or that specified officers or
employees shall be elected or appointed
by the stockholders, instead of by the
board of directors.
 Nature of membership is non-transferrable
and personal in nature unless the articles of
incorporation or by-laws provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock
corporation and all rights arising there from
are personal and non-transferable, unless
the articles of incorporation or the by-laws
otherwise provide. (n)
 How is a membership requirement in a non-
stock corporation
A holds a membership certificate
B goes to the corporation and compels the
corporation to record the transfer in his
name
- Membership in non-stock corporations may
be acquired by complying with the
provisions of its rules prescribed in the by-
laws. This is in consonance with the
express power granted by law under section
36, paragraph 6 of the code, authorizing
them to admit members thereof and that
authority carries with it the power to
prescribe rules on membership. It has thus
been stated that in the absence of charter
or statutory restrictions, non-stock
corporations may determine who shall be
admitted to membership and how they shall
be admitted.
Section 36. Corporate powers and
capacity. - Every corporation incorporated
under this Code has the power and
capacity:
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in
accordance with the provisions of this Code;
87
 and to admit members to the corporation if it
be a non-stock corporation;
- They can provide the manner in which to admit
depending on their own rules
 The power or authority to terminate members
in non-stock corporations is said to be inherent
but strict compliance with the manner and
procedure laid down in the by-laws must be
observed, otherwise it may render the
expulsion ineffective and invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the causes
provided in the articles of incorporation or the
by-laws. Termination of membership shall
have the effect of extinguishing all rights of a
member in the corporation or in its property,
unless otherwise provided in the articles of
incorporation or the by-laws. (n)
 Power is inherent and may be exercised in
certain situations:
1. When an offense is committed which,
although it has no immediate relation to a
member’s duty as such, it is so infamous
as to render him unfit for society of honest
men, which is indictable at common law;
2. When the offense is a violation of his duty
as member of the corporation; and,
3. When the offense is of a mixed nature,
being both against his duty as a member
of the corporation, and also indictable at
common law.
If the conduct of the member comes within any
of this cases, it is a ground for valid expulsion
although it may not be expressly made so by
the by-laws
 Chinese YMCA vs. Ching
- Right of the corporation to choose who the
members are, cannot be inquired or
intervened by the court
- The appealed decision thus contravened the
establish principle that the courts cannot strip
a member of a non-stock corporation of his
membership therein without cause.
 Lions Club International vs. CA
- Courts will not generally interfere on matters
involving the internal affairs of an
unincorporated association such as election
contest unless the acts complained of are
arbitrary, oppressive, fraudulent, violative of
civil rights and the like
- General rule is that the courts will not
interfere with the internal affairs of an
unincorporated association so as to settle
disputes between the members, or
questions of policy, discipline, or internal
government, so long as the government of
the society is fairly and honestly
administered in conformity with its by-laws
and the law of the land, and no property or
civil rights are involved.
- Exceptions are the following:
a. Where law and justice so require, and
the proceedings of the association are
subject to judicial review where there is
fraud, oppression, or bad faith, or where
the action complained of is capricious,
arbitrary, or unjustly discriminatory
b. To grant relief in case property or civil
rights are invaded, although it has also
been held that the involvement of
property rights does not necessarily
authorize judicial intervention, in the
absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the society,
or the law of the land, as by depriving
the person of due process of law
d. There is lack of jurisdiction on the part
of the tribunal conducting the
proceedings, where the organization
exceeds its powers, or where the
proceedings are otherwise illegal
 Corporations, stock and non-stock, may be
dissolved in accordance and pursuant to the
provisions of Sections 118 to 121 of the
Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If
such be the case, the assets of the
corporation are to be distributed in
accordance with law and established
jurisprudence.
 If a non-stock corporation is dissolved how
will its properties be distributed?
Section 94. Rules of distribution. -
In case dissolution of a non-stock
corporation in accordance with the
provisions of this Code, its assets shall
be applied and distributed as follows:
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 1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefore;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs
by reason of the dissolution, shall be
returned, transferred or conveyed in
accordance with such requirements;
3. Assets received and held by the
corporation subject to limitations permitting
their use only for charitable, religious,
benevolent, educational or similar
purposes, but not held upon a condition
requiring return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or more
corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the
dissolving corporation according to a plan
of distribution adopted pursuant to this
Chapter;
4. Assets other than those mentioned in
the preceding paragraphs, if any, shall be
distributed in accordance with the
provisions of the articles of incorporation
or the by-laws, to the extent that the
articles of incorporation or the by-laws,
determine the distributive rights of
members, or any class or classes of
members, or provide for distribution; and
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether or
not organized for profit, as may be
specified in a plan of distribution adopted
pursuant to this Chapter. (n)
 Non-stock corporations with 4Billion funds,
may it be distributed for and among its
members?
Section 94 number 3 provides:
3. Assets received and held by the
corporation subject to limitations permitting
their use only for charitable, religious,
benevolent, educational or similar purposes,
but not held upon a condition requiring return,
transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to
one or more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those of
the dissolving corporation according to a
plan of distribution adopted pursuant to this
Chapter;
- If there is no distributive agreement then
they may do so through a plan of
distribution under section 95
Section 95. Plan of distribution of
assets. - A plan providing for the distribution
of assets, not inconsistent with the
provisions of this Title, may be adopted by a
non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by
majority vote, adopt a resolution
recommending a plan of distribution and
directing the submission thereof to a vote at
a regular or special meeting of members
having voting rights. Written notice setting
forth the proposed plan of distribution or a
summary thereof and the date, time and
place of such meeting shall be given to
each member entitled to vote, within the
time and in the manner provided in this
Code for the giving of notice of meetings to
members. Such plan of distribution shall be
adopted upon approval of at least two-thirds
(2/3) of the members having voting rights
present or represented by proxy at such
meeting. (n)
CLOSE CORPORATIONS
 Section 96. Definition and applicability of
Title. - A close corporation, within the
meaning of this Code, is one whose articles
of incorporation provide that: (1) All the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be
held of record by not more than a
specified number of persons, not
exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to
one or more specified restrictions on
transfer permitted by this Title; and (3)
The corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any class.
Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is
not a close corporation within the meaning
of this Code.
89
- Between and among themselves, they feel
and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you
cannot be a stockholder
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not
publicly offered
- 3 qualifying conditions must be contained in
the articles of incorporation, to be considered
as a close corporation, if not, it will not be
considered as such and will be governed by
the general provisions of the code
- Even if 100 % is owned by one person it will
not be considered a close corporation without
the 3 qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or
partners in management
- Combination of the corporation and
partnership type of business
 May any type of corporation, be organized as
such close corporation?
- No, the 3 qualifying conditions must be
present
 What if 2/3 of the outstanding capital stock is
owned by another corporation which is also a
close corporation, will it be a close
corporation?
- No, it will only be a closed corporation if 2/3 of
the voting stocks of a close corporation is also
owned by a close corporation. It must be
“voting” stocks
- Even if another corporation owns or controls
2/3 of the voting stocks of a close corporation,
the latter may still be considered as such close
corporation if the corporation owning or
controlling the shares is also a close
corporation.
“Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.”
 What kind of corporations cannot be a close
corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of
incorporation. - The articles of incorporation
of a close corporation may provide:
1. For a classification of shares or rights
and the qualifications for owning or holding
the same and restrictions on their transfers
as may be stated therein, subject to the
provisions of the following section;
2. For a classification of directors into one
or more classes, each of whom may be
voted for and elected solely by a particular
class of stock; and
3. For a greater quorum or voting
requirements in meetings of stockholders or
directors than those provided in this Code.
 After classification what then?
- After classification, qualification and then
restriction as provided for under the 3
qualifying conditions in section 96
 Cumulative voting is restricted in close
corporations if will be elected solely by a
particular class
 In a close corporation, the articles of
incorporation may provide for a greater
quorum and voting requirement in meetings
of both stockholders or directors to increase
the veto power of minority stockholders,
unlike in a stock corporation wherein only
directors meetings may provide for greater
quorum requirement and in stockholders
meeting which may not be altered or
increased, as provide for in section 25,
following the doctrine of limited capacity
 The articles of a close corporation may
likewise provide that the business of the
corporation shall be managed by the
stockholders rather than by the board of
90
 directors. However the same must contain the
continuing provisions required in paragraph 2
of section 97, that is:
1. No meeting of stockholders need be called
to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors; and;
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
 Liability of stockholders acting as directors in a
close corporation are more extensive since
they are personally liable for corporate torts
unless the corporation has obtained a
reasonable adequate liability insurance, unlike
a ordinary stock corporation, wherein directors
thereof are only liable for corporate torts only if
they have been negligent or acted fraudulently
in the performance of their functions.
 Restrictions
- In ordinary stock corporations, the restrictions
must appear in the articles of incorporation as
well as the certificate of stocks
- In a close corporation, the restrictions must
appear in the articles of incorporation, the by-
laws and the certificate of stocks. Otherwise,
the same shall not be binding on any
purchaser thereof in good faith
 What if the stockholders do not want to
exercise their right or option to purchase may
it be sold to any person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on
transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be
more onerous than granting the existing
stockholders or the corporation the option to
purchase the shares of the transferring
stockholder with such reasonable terms,
conditions or period stated therein. If upon the
expiration of said period, the existing
stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell his
shares to any third person.
o ordinary stock corporations are
liable only if acted in Bad faith,
fraud or negligence in performance
of duty
 What if there are already 20 stockholders
and they want to add 2 more, may it
compel?
- In ordinary stock corporations, they may
compel by mandamus
- In close corporations, may not be compelled
to admit because it breaches the qualifying
conditions
 Since they cannot be compelled, may they
admit?
- Yes, provided all the stockholders
consented or instead of consenting they
decide to amend their articles of
incorporation
- Will have to amend the articles of
incorporation to accommodate other
purchasers of share
- Will cease to be a close corporation if it
amends and becomes in excess of 20
o Unless all the stockholders consent
they “may”
 What if the other stockholders object to
register? What will be the remedy of the
transferee?
- His remedy is rescission. The effect of
rescission is mutual restitution
 How about the stockholder, what is his
recourse?
- He may compel the close corporation to
purchase his shares at their fair value for
any reason, provided the corporation has
sufficient assets in its books to cover the
debts and liabilities exclusive of capital
- In a close corporation, there is a
withdrawing stockholder, unlike in an
ordinary stockholder where there is none,
they may only do so in the exercise of
appraisal rights
Section 105. Withdrawal of
stockholder or dissolution of corporation. -
In addition and without prejudice to other
rights and remedies available to a
stockholder under this Title, any
91
 stockholder of a close corporation may, for
any reason, compel the said corporation to
purchase his shares at their fair value,
which shall not be less than their par or
issued value, when the corporation has
sufficient assets in its books to cover its
debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a
close corporation may, by written petition to
the Securities and Exchange Commission,
compel the dissolution of such corporation
whenever any of acts of the directors, officers
or those in control of the corporation is illegal,
or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are
being misapplied or wasted.
 Agreements may also be entered in a close
corporation <sec.100>
- They can even agree to be partners in
management
- Pre-incorporation
- Manner in which the business of the
corporation shall be managed
 Board resolution
- Ordinary stock corporations- sit and act as a
body at a duly constituted meeting, they may
do so by virtue of the E-Commerce Act
through teleconference or video conference
 Exception to the rule: other officers may be
directly appointed and hired by the
stockholders
 Close corporations may validly act even
without a meeting provided the conditions are
obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the
by-laws provide otherwise, any action by the
directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors;
or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
 Pre-emptive rights in a close corporation is
absolute
Section 102. Pre-emptive right in
close corporations. - The pre-emptive right
of stockholders in close corporations shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a
close corporation, otherwise it will not be
considered as close
 In a close corporation the pre-emptive rights
is broadened to include all issues without
exception unless denied or limited by the
articles of incorporation
 Section 39 is the governing provision
concerning rights of the stockholder in an
ordinary stock corporation and it may be
denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues
of shares whether money, property or
previously incurred indebtedness.
Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such right
is denied by the articles of incorporation or
an amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt.
 Are treasury shares covered in the exercise
of pre-emptive rights in ordinary stock
corporations?
92

 As regards amendments
Section 103. Amendment of articles
of incorporation. - Any amendment to the
articles of incorporation which seeks to delete
or remove any provision required by this Title
to be contained in the articles of incorporation
or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not
be valid or effective unless approved by the
affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the articles of incorporation for
amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called
for the purpose.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. - commercial courts
Notwithstanding any contrary provision in the
articles of incorporation or by-laws or
agreement of stockholders of a close
corporation, if the directors or stockholders are
so divided respecting the management of the
corporation's business and affairs that the
votes required for any corporate action cannot
be obtained, with the consequence that the
business and affairs of the corporation can no
longer be conducted to the advantage of the
stockholders generally, the Securities and
Exchange Commission, upon written petition
by any stockholder, shall have the power to
arbitrate the dispute. In the exercise of such
power, the Commission shall have authority to
make such order as it deems appropriate,
including an order: (1) canceling or altering
any provision contained in the articles of
incorporation, by-laws, or any stockholder's
agreement; (2) canceling, altering or enjoining
any resolution or act of the corporation or its
board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons party
to the action; (4) requiring the purchase at
their fair value of shares of any stockholder,
either by the corporation regardless of the
availability of unrestricted retained earnings in
its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving
the corporation; or (7) granting such other
relief as the circumstances may warrant.
A provisional director shall be an
impartial person who is neither a
stockholder nor a creditor of the corporation
or of any subsidiary or affiliate of the
corporation, and whose further
qualifications, if any, may be determined by
the Commission. A provisional director is
not a receiver of the corporation and does
not have the title and powers of a custodian
or receiver. A provisional director shall have
all the rights and powers of a duly elected
director of the corporation, including the
right to notice of and to vote at meetings of
directors, until such time as he shall be
removed by order of the Commission or by
all the stockholders. His compensation shall
be determined by agreement between him
and the corporation subject to approval of
the Commission, which may fix his
compensation in the absence of agreement
or in the event of disagreement between the
provisional director and the corporation.
- Powers of the SEC in intra-corporate
concerns has been transferred to the proper
- Prohibit, even if acting in good faith
- Provisional director appointed by the court
- Requiring the purchase, irrespective of
unrestricted retained earnings
- The provision of the law above-quoted gives
the SEC a very wide discretion in respect to
management of a close corporation in the
event of a deadlock. It may:
1. Cancel or alter any provision in the
articles of incorporation, by-laws or any
stockholders agreement
2. Cancel, alter or enjoin any resolution or
other act of the corporation or its board
of directors, stockholders or officers
3. Prohibit any act of the corporation or its
board of directors, stockholders or
officers or other persons party to the
action;
4. Requiring the purchase of the par value
of the shares of any stockholders, either
by the corporation regardless of
availability of unrestricted earnings, or
by the other shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may
warrant.
 Section 105
- Dishonesty is a ground for dissolution of a
close corporation
93
 - Even one stockholder may petition for regarding the the discretion of the
dissolution operations of the Board to manage
business can corporate affairs
o when there is a relief available, validly be made
dissolution would not be available in 9.To the extent Ordinarily, no such
an ordinary corporation that directors classification and no
may be restrictions on
classified into cumulative voting
CLOSE ORDINARY STOCK
one or more
CORPORATION CORPORATION
classes and to
1.The number of No limitation as to be voted solely
stockholders number of shareholder by a particular
cannot exceed class of stock,
20 cumulative
2.To the extent Maximum number of voting may, in
that all directors is 15 effect, be
stockholders can restricted
be deemed 10. The Officers are elected by
directors, the articles of the Board of Directors
number of incorporation
directors can may provide that
effectively be all officers shall
more than 15 be elected or
3.Shares of stock Generally no restriction appointed by the
are subject to on transfer of shares stockholders
specified 11.It may provide Although the articles of
restrictions for greater incorporation or by-
4.Shares of stock No prohibition quorum and laws may provide for
are prohibited voting greater quorum and
from being listed requirements in voting requirements in
in the stock meetings of directors’ meeting
exchange or stockholders and under section 25,
offered for sale directors those for stockholders’
to the public meeting cannot
5.Stockholders Management is lodged generally be altered
may take an in the Board of 12. Restriction Valid and binding if
active part in Directors on transfer of indicated in the articles
corporate shares should of incorporation and
management by be indicated in stock certificates
vesting the articles of
management to incorporation,
them rather than by-laws and
a Board of stock certificates
Director 13. Pre- Pre-emptive rights may
6.Those active in Directors are liable for emptive rights of be denied as provided
management are torts only if they have stockholders is for in section 39
personally liable acted negligently or broader as it
for corporate fraudulently include all issues
torts unless the without
corporation has exception
obtained an 14. A Unless he sells his
adequate liability stockholder may shares, a stockholder
insurance withdraw and cannot get back his
7.Directors can Directors must, as a compel the investment nor compel
validly act even rule, act as a body at a corporation to the corporation to buy
without a duly constituted purchase his his shares except in
meeting meeting shares for any the exercise of his
8.Agreements Not valid and binding reason with the appraisal right
between since stockholders’ limitation only
stockholders agreement cannot limit that the
94
 corporation has - Section 100 par. 5. To the extent that the
sufficient assets stockholders are actively engaged in the
to cover its management or operation of the business
liabilities and affairs of a close corporation, the
exclusive of stockholders shall be held to strict fiduciary
capital stock duties to each other and among
15. The proper Courts cannot interfere themselves. Said stockholders shall be
forum may I the business personally liable for corporate torts unless
interfere in the judgment of the the corporation has obtained reasonably
management of directors/stockholders adequate liability insurance.
a close “BUSINESS
corporation in JUDGMENT RULE”  Family corporations is not automatically a
case of close corporation the 3 qualifying conditions
deadlocks under must be present.
Section 104,
even of the SPECIAL CORPORATIONS
directors/stockho
lders are acting
in good faith  2 types of special corporations
16. Any Dissolution may be
stockholder may had only on the 1. Educational corporations
petition the SEC grounds provided by 2. Religious corporations
for corporate the provisions of the 2.1 Corporation Sole
dissolution on Code on dissolution 2.2 Religious Societies
grounds among and P.D. 902-A, as
others, provides amended  What provision governs educational
for in section corporations?
105
Section 106. Incorporation. -
Educational corporations shall be governed
 Manuel Dulay Enterprises vs. CA by special laws and by the general
provisions of this Code. (n)
- What was the position of Manuel Dulay here?
President, General Manager and Treasurer - Special laws like they Education Act of the
Philippines
- Cannot act both as president and treasurer at - These institutions of learning, once
the same time recognized by the government as such are
- Since it is a close corporation owned by the mandated by law to be incorporated within
family of Manuel Dulay, save and except the ninety (90) days under the provisions of the
secretary, it should be governed by Title XII Corporation Code and must, perforce,
- Petitioner is classified as a close corporation comply with the requirements and
and consequently a board resolution procedure laid down there under. Their
authorizing the sale or mortgage of the subject failure to so will not immune the educational
property is not necessary to bind the institution from suit as a corporation.
corporation for the action of its president. At (Chiang Kai Siek Case)
any rate, a corporate action taken at a board - Favorable recommendation of government
meeting without proper call or notice in a close agency involved
corporation is deemed ratified by the absent
director unless the latter promptly files his  Two types of educational corporations
written objection with the secretary of the
corporation after having knowledge of the
meeting which, in this case, petitioner Virgilio - Certificate of completion in the academic
Dulay failed to do. field
- Virgilio Dulay is a signatory witness, he knows - Vocational and technical one’s
very well about the deed of absolute sale, he
is estopped o Recommendation of DECS if
certificate of completion in the
 Naguiat vs. NLRC academic field

95
 How is the governing board of an educational
institution instituted?
- Non-stock- multiples of 5 only (example:
5,10,15)
- Stock- can be anywhere between 5 to 15
 Can they consist of 7 or 9 members?
- Yes, if stock
 Can they be incorporated also as non-stock?
- Yes
- B.P. 232 allows the organization of an
educational institution that is stock corporation,
only if they do not issue a certificate of
completion in the academic field
 Qualifications and disqualifications of the
membership in the board of an educational
corporation
- Educational corporations are governed by
special laws and general provisions, hence if
there is no provision in the special law, you go
back to section 25 and 27 of the general
provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional
qualifications and disqualifications
Section 25. Corporate officers,
quorum. - Immediately after their election, the
directors of a corporation must formally
organize by the election of a president, who
shall be a director, a treasurer who may or
may not be a director, a secretary who shall be
a resident and citizen of the Philippines, and
such other officers as may be provided for in
the by-laws. Any two (2) or more positions may
be held concurrently by the same person,
except that no one shall act as president and
secretary or as president and treasurer at the
same time.
The directors or trustees and officers
to be elected shall perform the duties enjoined
on them by law and the by-laws of the
corporation. Unless the articles of
incorporation or the by-laws provide for a
greater majority, a majority of the number of
directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the
transaction of corporate business, and every
decision of at least a majority of the directors
or trustees present at a meeting at which there
is a quorum shall be valid as a corporate
act, except for the election of officers which
shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote
by proxy at board meetings. (33a)
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as
a director, trustee or officer of any corporation. (n)
 Article 14 section 4 par. 2 of the
Constitutions
Educational institutions, other than
those established by religious groups and
mission boards, shall be owned solely by
citizens of the Philippines or corporations or
associations at least sixty per centum of the
capital of which is owned by such citizens.
The Congress may, however, require
increased Filipino equity participation in all
educational institutions. The control and
administration of educational institutions
shall be vested in citizens of the Philippines.
No educational institution shall be
established exclusively for aliens and no
group of aliens shall comprise more than
one-third of the enrollment in any school.
The provisions of this sub section shall not
apply to schools established for foreign
diplomatic personnel and their dependents
and, unless otherwise provided by law, for
other foreign temporary residents.
- Management is left solely to citizens of the
Philippines
- Board of Directors manages the corporate
affairs, foreigners cannot therefore be
elected in the board
- Exceptions are, mission boards and
religious orders, which may have a
governing board consisting of foreigners
 Term of office of governing board in an
educational institutions
- Can serve a term of 5 years. If that be the
case, 1/5 of their number shall expire every
year
96
 Non-stock or stock, can they serve for a 1 year
term only?
- Yes, the articles of incorporation may provide
that it be 1 year only
 What are these religious corporations spoken
off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor
in some particular station, who are
incorporated by law in order to give them
some legal capacities and advantages,
particularly that of perpetuity, which in their
natural persons they could not have had
 May a corporation be organized by less than 5
natural persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily
organized to hold equities in rural banks and
may rightfully become incorporators thereof)
- Exception, corporation sole, consist of only
one person
 May any person form or organize
corporation sole?
- No, not any person can form a corporation
sole, section 110 provides:
Section 110. Corporation sole. - For
the purpose of administering and managing,
as trustee, the affairs, property and
temporalities of any religious denomination,
sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
 Is it required to file the articles of incorporation
in the SEC?
- Yes
 What should be contained in the articles of
incorporation?
- Section 111 and section 112 provides for the
contents and procedures
Section 111. Articles of
incorporation. - In order to become a
corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or
church must file with the Securities and
Exchange Commission articles of
incorporation setting forth the following:
1. That he is the chief archbishop, bishop,
priest, minister, rabbi or presiding elder of
his religious denomination, sect or church
and that he desires to become a corporation
sole;
2. That the rules, regulations and discipline
of his religious denomination, sect or church
are not inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, he
is charged with the administration of the
temporalities and the management of the
affairs, estate and properties of his religious
denomination, sect or church within his
territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief archbishop,
a bishop, priest, minister, rabbi of presiding
elder is required to be filled, according to
the rules, regulations or discipline of the
religious denomination, sect or church to
which he belongs; and
5. The place where the principal office of the
corporation sole is to be established and
located, which place must be within the
Philippines.
The articles of incorporation may
include any other provision not contrary to
law for the regulation of the affairs of the
corporation. (n)
Section 112. Submission of the
articles of incorporation. - The articles of
incorporation must be verified, before filing,
by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
97
 From and after the filing with the
Securities and Exchange Commission of the
said articles of incorporation, verified by
affidavit or affirmation, and accompanied by
the documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by him
as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held
in trust by him as a corporation sole, for the
use, purpose, behalf and sole benefit of his
religious denomination, sect or church,
including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
(n)
 Is it required to indicate its terms of execution?
Why not?
- Not required because they are supposed to
exist in perpetuity
- However, it does not mean that it shall
continue to exist forever, it merely means that
it has the capacity of continuous existence
during a particular period until dissolved in
accordance with law
 When will it acquire judicial personality? How
do you compare this to other types of
corporation?
- After the filing the verified articles of
incorporation along with the documents
required in Section 112 with the SEC,
immediately becomes endowed with corporate
personality, this serves as an exception to the
rule that a corporation acquires juridical
personality only upon the issuance of a
certificate of incorporation by the said
government agency.
- Upon filing of verified articles of incorporation
with the SEC, will not require the approval of
SEC
 A corporation sole is possessed with the same
power, rights and privileges, to own, acquire
and hold or convey properties like any other
corporation? True or False
- False, they have the same power rights and
privileges, but when it comes to alienation and
acquisition, it must possess a court order,
however when there is a regulated method, a
court order may be dispensed with <sec. 113>
Section 113. Acquisition and
alienation of property. - Any corporation sole
may purchase and hold real estate and
personal property for its church, charitable,
benevolent or educational purposes, and
may receive bequests or gifts for such
purposes. Such corporation may sell or
mortgage real property held by it by
obtaining an order for that purpose from the
Court of First Instance of the province
where the property is situated upon proof
made to the satisfaction of the court that
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise in such manner and for such time
as said court may have directed, and that it
is to the interest of the corporation that
leave to sell or mortgage should be granted.
The application for leave to sell or mortgage
must be made by petition, duly verified, by
the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by
any member of the religious denomination,
sect or church represented by the
corporation sole: Provided, That in cases
where the rules, regulations and discipline
of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole
regulate the method of acquiring, holding,
selling and mortgaging real estate and
personal property, such rules, regulations
and discipline shall control, and the
intervention of the courts shall not be
necessary. (159a)
 Since a corporation sole is consists only of
one person, will the registration of the
property in the name of the corporation sole
vest unto the head thereof the ownership of
the property?
- No, it will not vest unto the head, the head
is acting merely as a guardian
 Roman Catholic Apostolic Adm. Of Davao,
inc. vs. Land Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the congregation
or religious denomination
- A corporation consists of one person only
and his successors (who will always be one
at a time, in some particular station), who
are incorporated by law in order to give
them some legal capacities and
advantages, particularly that of perpetuity,
98
 which in their natural persons they could not
have had
- Roman Catholic Church has no nationality and
that the framers of the Constitution, as will be
hereunder explained, did not have in mind the
religious corporations sole when they provided
that 60 percent of the capital thereof be owned
by Filipino citizens.
 Director of Lands vs. CA
- Alienable public land is converted into private
land when the same has been openly,
continuously and exclusively in possession of
the property as concept of an owner for 30
years, automatically that is
 Republic of the Philippines vs. IAC
- Determination of the character of the land
should be in mind
- If they still form part of public domain they
cannot be owned, but if they are converted
into private land, the constitutional prohibition
will not apply
 If there is vacancy who will fill up the same?
What if there is none, what must the successor
do?
- According to section 114:
Section 114. Filling of vacancies. -
The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or
presiding elder in a corporation sole shall
become the corporation sole on their
accession to office and shall be permitted to
transact business as such on the filing with the
Securities and Exchange Commission of a
copy of their commission, certificate of
election, or letters of appointment, duly
certified by any notary public.
During any vacancy in the office of
chief archbishop, bishop, priest, minister, rabbi
or presiding elder of any religious
denomination, sect or church incorporated as
a corporation sole, the person or persons
authorized and empowered by the rules,
regulations or discipline of the religious
denomination, sect or church represented by
the corporation sole to administer the
temporalities and manage the affairs, estate
and properties of the corporation sole during
the vacancy shall exercise all the powers and
authority of the corporation sole during such
vacancy. (158a)
 If a corporation exists in equity may it not be
dissolved?
Section 115. Dissolution. - A
corporation sole may be dissolved and its
affairs settled voluntarily by submitting to
the Securities and Exchange Commission a
verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding
up;
3. The authorization for the dissolution of
the corporation by the particular religious
denomination, sect or church;
4. The names and addresses of the persons
who are to supervise the winding up of the
affairs of the corporation.
Upon approval of such declaration
of dissolution by the Securities and
Exchange Commission, the corporation
shall cease to carry on its operations except
for the purpose of winding up its affairs. (n)
- While section 115 of the code provides for
the process and procedure for the
dissolution of a corporate sole, there is
nothing in the law itself which would prohibit
it from amending its articles of incorporation
- It is believed that authorization for the
dissolution by the particular religious
denomination, sect or church, as required in
sub-paragraph 3 of section 115 would still
be necessary in the case of amending the
articles of incorporation to affect dissolution.
o Expiration of a corporate term will
not apply to a religious corporation
 May a corporation sole be dissolved by
judicial decree?
- General rule: No, because a corporation
sole, is by its very nature ecclesiastical and
religious (doctrine of separation of church
and state)
- Exception: police power of the state, if its
purpose is being carried out and is instead
being used for illegal purpose, it may be so
dissolved
99
 What are religious societies?
- Under common law, a religious society is a
body of persons associated together for the
purpose of maintaining religious worship.
 Is it also required to file its articles of
incorporation to the SEC?
- No <sec. 116> “may”
 What should be contained in the articles of
incorporation?
- Section 116 provides:
Section 116. Religious societies. -
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church, unless
forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative vote at
a meeting called for the purpose of at least
two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for
the management of its affairs, properties and
estate by filing with the Securities and
Exchange Commission, articles of
incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other
member of such religious society or religious
order, or diocese, synod, or district
organization of the religious denomination,
sect or church, setting forth the following:
1. That the religious society or religious order,
or diocese, synod, or district organization is a
religious organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its
membership have given their written consent
or have voted to incorporate, at a duly
convened meeting of the body;
DISSOLUTION
3. That the incorporation of the religious
society or religious order, or diocese, synod, or
district organization desiring to incorporate is
not forbidden by competent authority or by the
constitution, rules, regulations or discipline of
the religious denomination, sect, or church of
which it forms a part;
4. That the religious society or religious order,
or diocese, synod, or district organization
desires to incorporate for the administration
of its affairs, properties and estate;
5. The place where the principal office of the
corporation is to be established and located,
which place must be within the Philippines;
and
6. The names, nationalities, and residences
of the trustees elected by the religious
society or religious order, or the diocese,
synod, or district organization to serve for
the first year or such other period as may be
prescribed by the laws of the religious
society or religious order, or of the diocese,
synod, or district organization, the board of
trustees to be not less than five (5) nor
more than fifteen (15). (160a)
 Is it required to indicate its term of
existence?
- Likewise to exist in perpetuity, the law does
not require to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into
existence without SEC approval, section 19
will thus govern, Vested with judicial
capacity upon issuance of the certificate by
the SEC
o However it is not accurate
according to atty. Ladia because
there are those that can issue for
example cooperatives- BUREAU
OF COOPERATIVES which
register, home insurance guaranty
corporation- HOME OWNERS
 How may religious societies be dissolved?
- Go to the general rules governing
dissolution, because the rules under special
corporations do not provide for such rule
 What is dissolution?
- Extinguishment of the corporate franchise
and the termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
100
2. By voluntary surrender of its primary franchise
(voluntary dissolution);
3. By revocation of its corporate franchise
(involuntary dissolution)
 Philippine National Bank vs. CFI
- When the period of corporate life expires, the
corporation ceases to be a body corporate for
purposes of continuing the business for which
it is organized. But it shall nevertheless be
continued as a body corporate for three years
after the time when it would have be dissolved,
for the purpose of prosecuting and defending
suits by or against it and for enabling it
gradually to settle and close its affairs to
dispose of and convey its property and to
divide its assets. There is no need for the
institution of a proceeding for quo warranto to
determine the time and date of the dissolution
of a corporation because the period of
corporate existence is provided in the articles
of incorporation. When such period expires
and without any extension having been made
pursuant to law, the corporation is dissolved
automatically insofar as the continuation of its
business is concerned.
- The rights of the lessor and the lessee over
the improvements which the latter constructed
on the leased premises are governed by
Article 1678 of the Civil Code. The provision
gives the lessee the right to remove the
improvements if the lessor chooses not to pay
one half of the value thereof. However, in the
case at bar the law will not apply because the
parties herein have stipulated in the contract
their own terms and conditions concerning the
improvements before the termination of the
lease. Petitioner PNB as assignee of PBM
succeeded to the obligation of the latter under
the contract of lease. It could not possess
rights more than what PBM had as lessee
under the contract. Hence, petitioner was duly
bound to remove the improvements before the
expiration of the period of lease. Its failure to
do so when the lease was terminated was
tantamount to a waiver of its rights and interest
over the improvements on the leased premise.
o 3 modes of dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up-
FREQUENTLY ASKED IN THE
FINALS
 What are the 3 modes of voluntary
dissolution?
1. Voluntary dissolution where no creditors are
affected; <sec.118>
2. Voluntary dissolution where creditors are
affected; <sec. 119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are
affected <sec.118>
- The formal and procedural requirements
necessary are the following:
1. Majority vote of the board of directors or
trustees;
2. Sending of notice of each stockholders or
member either by registered mail or
personal delivery at least thirty (30) days
prior to the meeting (scheduled by the
board for the purpose of submitting the
board action to dissolve the corporation for
approval of the stockholder or members.);
3. Publication of the notice of time, place and
subject of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the principal
office of said corporation is located or in a
newspaper of general circulation in the
Philippines;
4. Resolution adopted by the affirmative vote
of the stockholders owning at least 2/3 of
the outstanding capital stock or 2/3 of the
members at the meeting duly called for the
purpose;
5. A copy of the resolution authorizing the
dissolution must be certified by a majority of
the board of directors or trustees and
countersigned by the corporate secretary;
6. Issuance of a certificate of dissolution by
the SEC.
 Should this be strictly complied with?
- Yes, compliance with the requirements and
formalities prescribed above is mandatory
such that failure to comply therewith will
have no effect on the legal existence of the
corporation.
 Will dissolution be effective and valid by a
mere resolution of the BOD and
stockholders?
- No, a mere resolution by the stockholders
or the BOD of a corporation to dissolve the
same does not affect the dissolution but that
some other steps, administrative or judicial
is necessary. (Daguhoy Enterprises vs.
Ponce)
101
- Since it is the State which grants its right to
exist, it is only through the State which can
allow the termination of its existence; without
consent of the State, it will not be dissolved.
 Voluntary dissolution where creditors are
affected <sec.119>
- By virtue of a petition, when there are creditors
affected
- The following formalities would thus be
required:
1. Affirmative vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members at
a meeting duly called for that purpose;
2. Petition for dissolution shall be filed with the
SEC signed by a majority of its board of
directors or trustees or other officers having
the management of its affairs, verified by the
president or secretary or one of its directors or
trustees, setting forth all claims and demands
against it.
3. Issuance of an order by the SEC reciting the
purpose of the petition and fixing the date on
or before which objections thereto may be filed
by any person, which date shall not be less
than thirty days nor more than sixty days after
entry of the order.
4. Before such date, a copy of the order must be
published once a week for three (3)
consecutive weeks in a newspaper of general
circulation published in the city or municipality
where the principal office is situated or in a
newspaper of general circulation in the
Philippines.
5. Posting of the same order for three (3)
consecutive weeks in three (3) public places in
such city or municipality.
6. Upon five (5) days’ notice, given after the date
on which the right to file objections has
expired, the SEC shall hear the petition and try
any issue made by the objections filed.
7. Judgment dissolving the corporation and
directing of its assets as justice requires and
the appointment of a receiver (if necessary in
its discretion) to collect such assets and pay
the debts of the corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on
the part of the court. The code uses the word
“may”; the law intended to let the shareholders
have the control of the assets of the
corporation upon dissolution and winding
up.
- The directors may also undertake
liquidation and winding up of its corporate
affairs, and sound business judgment, on
how they will wind up
 Dissolution by shortening of corporate term
<sec.120>
- Will be valid upon approval of the SEC,
unlike general amendments, which will be
deemed approved if not acted upon by the
SEC within 6 months from the date of filing
for a cause not attributable to the
corporation.
- Shortening of the corporate term partakes
the nature of an amendment of the articles
of incorporation. Section 16 under general
amendments allows “written assent” section
37 mandates that the vote must be cast at a
duly constituted meeting.
Section 120. Dissolution by
shortening corporate term. - A voluntary
dissolution may be effected by amending
the articles of incorporation to shorten the
corporate term pursuant to the provisions of
this Code. A copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval
of the amended articles of incorporation of
the expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation. (n)
o Intra-corporate- special commercial
courts
 Another way of dissolving a corporation is
through involuntary dissolution
Section 121. Involuntary
dissolution. - A corporation may be
dissolved by the Securities and Exchange
Commission upon filing of a verified
complaint and after proper notice and
hearing on the grounds provided by existing
laws, rules and regulations. (n)
- Dissolution is tantamount to the imposition
of death penalty
- Instead of dissolving the corporation, courts
normally enjoin the further commission of
the questioned act
102
- The relief of dissolution will be awarded only
where no other remedy is available and it will
not be allowed where the rights of the
stockholders can be, or are, protected in some
other way (Republic vs. Bisaya Land Trans.
Co. Inc.)
 What are the grounds for involuntary
dissolution?
- It is commenced through a verified complaint
or motu proprio by the proper courts
- Section 6 of PD 902-A provides for the
grounds for involuntary dissolution as follows:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful
order of the Commission restraining
commission of acts which would amount to a
grave violation of its franchise;
4. Continuous inoperation for a period of at least
five (5) years;
5. Failure to file by-laws within the required
period;
6. Failure to file required reports in appropriate
forms as determined by the Commission within
the prescribed period.
- Other grounds are provided for in the
corporation code itself: among them are:
1. Violation of any provision of the Code under
section 144;
2. In case of deadlock in a close corporation as
provided for in section 105;
3. In a close corporation, any acts of directors,
officers or those in control of the corporation
which is illegal or fraudulent or dishonest or
oppressive or unfairly prejudicial to the
corporation or any stockholder or whenever
corporate assets are being misapplied or
wasted under section 105.
- Mere dishonesty is also a ground in a close
corporation
- Other grounds can be found in other special
laws like the Securities Regulation Code and
the General Banking Act as well as the
Insurance Code.
 Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial
foreclosure of respondent’s charter to show a
mis-user of its franchise justifying such a
forfeiture
- Object is to protect the public, and not to
redress private grievances, the mis-user
must be such as to work or threaten a
substantial injury to the public, or such as to
amount to a violation of the fundamental
condition of the contract by which the
franchise was granted and thus defeat the
purpose of the grant
- Courts proceed with extreme caution which
has for their object the forfeiture of
corporate franchise, and forfeiture will not
be allowed, except under express limitation,
or for plain abuse of power by which the
corporation fails to fulfill the design and
purpose of its organization. But when the
abuse or violation constitutes or threatens a
substantial injury to the public or such as to
amount to a violation of the fundamental
conditions of its charter, or its conduct is
characterized by obduracy or pertinacity in
contempt of law, dissolution will be granted
- Did the court dissolve the corporation? No,
it did not, it granted the corporation 6
months to cease and desist the
performance of the questioned act
otherwise it will be dissolved
 Government vs. El Hogar
- 3 causes of action, the first is that the
corporation violated the law by holding on
the property beyond that provide for by law,
the second is that the corporation undertook
the management f petitioners belonging to
delinquent shareholders of the association,
and lastly that the by-law provision, which
empowers the BD to cancel shares and to
return to the owners thereof the balance
returning from the liquidation
 Compare to Philippine Sugar Estate,
wherein the court ruled conditional
dissolution. Why decree conditional
dissolution in one and not in the other case?
- Because in El Hogar the government was at
fault, the government wasn’t able to issue
the certificate of title on time
- When the case was instituted, El Hogar was
already able to dispose the properties in
question, in Philippine Sugar Estate it was
still the holding the properties in order to
enrich itself at the expense of the taxpayers
 Republic vs. Security Credit and
Acceptance Corp. et al.
103
- The corporation here is a lending institution
and not a banking institution
- Defendant corporation violated the law
because before a corporation may engage into
a banking activity it must first obtain a
secondary franchise from the Central Bank
- Defendant corporation threatens substantial
injury to the general public, dissolution is
warrant
- If there is a bank run kawawa naman yung
depositors
 Republic vs. Bisaya Land Transportation Co.
Inc
- The relief of dissolution will be awarded only
where no other remedy is available and it will
not be allowed where the rights of the
stockholders can be, or are, protected in some
other way
- Misuse and misapplication of the funds and
assets of the respondent were committed
particularly by the corporate officers, where
they can instead be held personally liable
- Since there is another remedy available
dissolution is not warranted
 Assuming the above stated corporation is a
close corporation, would the court decree
otherwise?
- Yes, because in a close corporation, mere
dishonesty is a ground for the dissolution
- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code
< sec. 105>
 Financing Corporation of the Philippines vs.
Teodoro
- Minority stockholders may not ask for the
dissolution of a corporation in private suits and
that such actions should be brought by the
Government through its legal officers, except
in cases where the intervention of the
State, for one reason or another, cannot be
obtained, as when the State is not
interested because the complaint is strictly
a matter between the stockholders and
does not involve, in the opinion of the legal
officer of the Government, any of the acts
or omissions warranting quo warranto
proceeding , in which minority
stockholders are entitled to have such
dissolution. It should be exercised if
necessary in order not to entirely ignore and
disregard the rights of said minority
stockholders, especially when said minority
stockholders are unable to obtain redress
and protection of their rights within the
corporation itself. Stockholders should not
be left without recourse
 Present set up
- Any stockholder or member of a corporation
can institute a dissolution proceeding
against his own corporation before the
proper forum
- Special Commercial Courts, shall hear and
decide intra-corporate disputes
 May a corporation ask for dissolution of the
corporation when there is no prejudice to
the general public?
- Yes, in a close corporation, a petition for the
dissolution of the corporation may be
instituted by any one individual shareholder
on the ground, even by mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only
terminates its primary franchise to be a
corporation, but generally prevents it from
further exercising other or secondary
franchises which have been conferred to its.
It terminates its power to enter into
contracts or t o continue the business as a
going concern.
- Based on this general rule, the Supreme
Court held that a corporation, whose
corporate life expired, cannot lawfully
pursue the business for which it was
organized. It cannot apply for a new
certificate or a secondary franchise for it is
incapable of receiving a grant. Neither can it
enforce a contract executed prior its
dissolution for the purpose of continuing the
business of its organization.
- In general the rights and liabilities of the
corporation are not extinguished by its
dissolution.
Section 145. Amendment or
repeal. - No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers,
nor any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said corporation
or by any subsequent amendment or repeal
of this Code or of any part thereof. (n)
104
 Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying
in an activity that was illegal
- A corporation where the corporate life has
expired it cannot lawfully pursue the business
for which it was organized.
- the Supreme Court held that a corporation,
whose corporate life expired, cannot lawfully
pursue the business for which it was
organized. It cannot apply for a new certificate
or a secondary franchise for it is incapable of
receiving a grant.
- Awarding it to Camarines Sur is tantamount to
a medal for its illegal acts
- It cannot apply for a new certificate or a
secondary franchise for it is incapable of
receiving a grant. It was not even a
corporation de facto. And then, there is no
application subscribed by the new corporation
- And yet as stated, the new corporation has not
filed any application for certificate of public
convenience in Sabang, and has not published
such application.
 Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would
convey the idea clearly manifested in the
limitation “but not for the purpose of continuing
the business for which it was established,” that
the 3-year period allowed by the law is only for
the purpose of winding up its affairs.
 Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the
court applied the constitutional provision
- Cannot be read as permitting to destroy the
substantive rights
- Such would collide with the non-impairment of
contracts clause of the constitution
- Complainants will have the right to follow the
assets of the corporation in the hands of SRA
or any other agency for that matter
 After dissolution what next?
- Liquidation and winding up should follow
 What is the definition of liquidation and
winding up?
- Collection of all corporate assets, the
payments of all its debts and settlement of its
obligations and the ultimate distribution of the
corporate assets, if any of it remains, to all
stockholders in accordance with their
proportionate stockholdings in the
corporation or in accordance with their
respective contracts of subscription.
 Preference upon liquidation
- If there are preferred shares, the preference
granted to such should be complied with
- Preferred shares may give the holder
thereof, preference only in the dividends but
also in the distribution of corporate assets
upon liquidation or termination of the
corporate existence. If such is the intent, the
contract of subscription must so indicate
lest they are placed on equal footing with
common shareholders
- Preference may be participating or non-
participating
 Dissolved corporations are granted a period
of 3 years to liquidate
Section 122. Corporate liquidation.
- Every corporation whose charter expires
by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate
existence for other purposes is terminated
in any other manner, shall nevertheless be
continued as a body corporate for three (3)
years after the time when it would have
been so dissolved, for the purpose of
prosecuting and defending suits by or
against it and enabling it to settle and close
its affairs, to dispose of and convey its
property and to distribute its assets, but not
for the purpose of continuing the business
for which it was established.
At any time during said three (3)
years, the corporation is authorized and
empowered to convey all of its property to
trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such
conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and
others in interest, all interest which the
corporation had in the property terminates,
the legal interest vests in the trustees, and
the beneficial interest in the stockholders,
members, creditors or other persons in
interest.
Upon the winding up of the
corporate affairs, any asset distributable to
any creditor or stockholder or member who
is unknown or cannot be found shall be
105
 escheated to the city or municipality where
such assets are located.
Except by decrease of capital stock
and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and
after payment of all its debts and liabilities.
(77a, 89a, 16a)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the
3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a
corporation and although there is no law
authorizing it, neither is there anything that
prohibits the BOD from undertaking the same
- If this method is resorted to, the board will only
have a period of 3 years to finish its task of
liquidation
- Claims for or against the corporate entity not
filed within the period will become
unenforceable as there exist no corporate
entity against which they can be enforced
- Actions pending for or against the corporation
when the 3 year period expires, are abated
since after the period, the corporation ceases
for all intents and purposes and is no longer
capable of suing or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all
corporate assets to a trustees who will take
charge of liquidation
- If this method is used, the three year period
limitation imposed by section 122 will not apply
provided the designation of the trustee is
made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper
forum on petition or motu proprio upon the
dissolution of the corporation
- The appointment of a receiver is, however,
permissive rather than mandatory and the law
tends to recognize that in cases of voluntary
dissolution there is no occasion for the
appointment of a receiver except under special
circumstances and upon proper showing
- If a receiver is appointed, the 3 year period
fixed by law within which to complete the task
of liquidation will not likewise apply because
the dissolved corporation is substituted by the
receiver who may sue or be sued even after
that period
o Mere appointment of a receiver
without anything more does imply in
the dissolution of a corporation
 National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the
corporation when the 3 year period expires,
are abated since after that period, the
corporation ceases for all intents and
purposes and is no longer capable of suing
or being sued
- May be continued by the trustee provided
done within the 3 year period
- Should the corporation, therefore, finds it
difficult to finish its liquidation, it may, at any
time during the three year period, convey all
its assets and receivables to a trustee to
prosecute and defend suits by or against
the corporation begun before the expiration
of said period
- The effect of the conveyance is to make the
trustees the legal owners of the property
conveyed, subject to the beneficial interest
therein of creditors and stockholders
 Sumera vs. Valencia
- Thus it was held that when a corporation is
dissolved and the liquidation of the assets is
placed in the hands of receiver or assignee,
the period of 3 years prescribed by law is
not applicable and the assignee may
institute all actions leading to the liquidation
of the corporation even after the expiration
of 3 years.
- If the corporation carries out the liquidation
of its assets through its own officers and
continues and defends the actions brought
by or against it, its existence shall terminate
at the end of three years from the time of
dissolution; but if a receiver or assignee is
appointed, with or without a transfer of its
properties within 3 years, the legal interest
passes to the assignee, the beneficial
interest remaining in the members,
stockholders, creditors and other interested
persons and said assignee may bring an
action, prosecute that which has already
been commenced for the benefit of the
corporation, or defend the latter against any
other action already instituted or which may
be instituted even outside of the period of
three years fixed for the offices of the
corporation.
106
 Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it
can continue prosecuting suit even beyond the
3 year period fixed by law because he
becomes the legal owner of the rights, assets
and properties conveyed to him
 Gelano vs. CA
- “Trustee” as used in the corporation statute
must be understood in its general concept
which could include the counsel to whom was
entrusted in the instant case, the prosecution
of the suit filed by the corporation. The
purpose in the transfer of the assets of the
corporation to a trustee upon its dissolution is
more for the protection of its creditors and
stockholders. Debtors like the petitioners
herein may not take advantage of the failure of
the corporation to transfer its assets to a
trustee, assuming it has any to transfer which
petitioner has failed to show, in the first place.
To sustain petitioners’ contention would be to
allow them to enrich themselves at the
expense of another, which all enlightened legal
systems condemn.
- The counsel who prosecuted and defended
the interest of the corporation may be
considered as a “trustee” at least with respect
to the matter in litigation only
 May a corporation that is already dissolved,
transfer and assign its assets and properties to
a new corporation which will continue the
business of the dissolved one?
- Yes, provided all the stockholders gave their
consent (Chung Ka Bio vs. IAC)
 Republic vs. Marsman Development Company
& Chung Ka Bio vs. IAC
- During the three year period granted to a
corporation to liquidate or wind up its affairs,
the BOD is not normally permitted to
undertake any activity outside the usual
liquidation of the corporation. There is,
however, nothing to prevent the stockholders
from conveying their respective shareholdings
toward the creation of a new corporation to
continue the business of the old. This is
because winding up is the sole activity of the
dissolved corporation that does not intend to
incorporate a new. If it does, however, it is not
unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Republic vs. Marsman Development
Company)
- Winding up is the sole activity of a dissolved
corporation that does not intend to
incorporate anew. If it does, however, it is
not unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new
corporation intended to be created as long
as the stockholders have given their
consent (Chung Ka Bio vs. IAC)
 What happens to the remaining assets and
properties of the dissolved corporation if
liquidation and winding up as provided in
section 122 is not complied with, as a result
of which the 3 year period has elapsed
- If the three year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation
within that period, the board of directors o
trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA
may be permitted to do so continue as”
trustees” by legal implication to complete
the liquidation. Still in the absence of a BOD
or BOT, those having any pecuniary interest
in the assets, including not only the
shareholders but likewise the creditors of
the corporation, acting for and in its behalf,
might make proper representations with the
SEC, which has primary and sufficiently
broad jurisdiction in matters of this nature,
for working out a final settlement of the
corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of
the Supreme Court in the case of
Clemente vs. CA is wrong, opinion
is further discussed after the
Clemente Case
 Clemente vs. CA
- Who owns the properties? SOCIEDAD
ANONIMA
- The termination of the life of a juridical entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity or those of its owners and creditors. If
the three year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation
within that period, the board of directors o
trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA
107
 may be permitted to do so continue as”
trustees” by legal implication to complete the
liquidation. Still in the absence of a BOD or
BOT, those having any pecuniary interest in
the assets, including not only the shareholders
but likewise the creditors of the corporation,
acting for and in its behalf, might make proper
representations with the SEC, which has
primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final
settlement of the corporate concerns
o the ruling is wrong according to
atty. Ladia
 According to atty Ladia: What happens to a
corporation that is already dissolved, that has
not been able to appoint a trustee with in the 3
year period?
- a corporation dissolved which failed to
exercise its rights granted in section 122 after
the 3 year period has elapsed, ceases to exist
for all intents and purposes, it can no longer
sue or be sued
- according to 122 of the code, the property
should be escheated, accordingly:
Section 122. Corporate liquidation. -
Every corporation whose charter expires by its
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for three (3) years after the
time when it would have been so dissolved, for
the purpose of prosecuting and defending
suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey
its property and to distribute its assets, but not
for the purpose of continuing the business for
which it was established.
At any time during said three (3)
years, the corporation is authorized and
empowered to convey all of its property to
trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such conveyance
by the corporation of its property in trust for the
benefit of its stockholders, members, creditors
and others in interest, all interest which the
corporation had in the property terminates, the
legal interest vests in the trustees, and the
beneficial interest in the stockholders,
members, creditors or other persons in
interest.
Upon the winding up of the
corporate affairs, any asset distributable
to any creditor or stockholder or
member who is unknown or cannot be
found shall be escheated to the city or
municipality where such assets are
located.
Except by decrease of capital stock
and as otherwise allowed by this Code, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
- Section 123. Definition and rights of foreign
corporations. - For the purposes of this
Code, a foreign corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state. It
shall have the right to transact business in
the Philippines after it shall have obtained a
license to transact business in this country
in accordance with this Code and a
certificate of authority from the appropriate
government agency. (n)
 What if the law of the state of the foreign
corporation does not allow Filipino citizens
to do business in their country?
- The phrase “and whose laws allow Filipino
citizens and corporations to do business in
its own country or state” is not, however, an
accurate inclusion in the definition as ay
corporation registered or organized under
the laws of another state is necessarily a
foreign corporation whether or not the state
of its incorporation allow Filipino citizens or
corporations to do business in that forum.
- The said phrase was inserted by the
framers of the law only as a condition
precedent to the grant of a license of a
foreign corporation to do business in the
Philippines.
 Composed of 100% Americans; organized
under the laws other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation
irrespective of the nationality
108
- Exception: control test would apply in
determining the corporate nationality, i.e., the
citizenship of the controlling stockholders
determines the nationality of the corporation
 If a foreign corporation wants to transact
business in the Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a license.
- A foreign corporation applying for a license to
transact business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their translation to
an official language of the Philippines, if
necessary. The application shall be under oath
and, unless already stated in its articles of
incorporation, shall specifically set forth the
following:
1. The date and term of incorporation;
2. The address, including the street number, of
the principal office of the corporation in the
country or state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in
all legal proceedings and, pending the
establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purpose or purposes which the
corporation intends to pursue in the
transaction of its business in the Philippines:
Provided, That said purpose or purposes are
those specifically stated in the certificate of
authority issued by the appropriate
government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which the
corporation has authority to issue, itemized by
classes, par value of shares, shares without
par value, and series, if any;
8. A statement of its outstanding capital
stock and the aggregate number of shares
which the corporation has issued, itemized
by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid
in; and
10. Such additional information as may be
necessary or appropriate in order to enable
the Securities and Exchange Commission
to determine whether such corporation is
entitled to a license to transact business in
the Philippines, and to determine and
assess the fees payable.
Attached to the application for
license shall be a duly executed certificate
under oath by the authorized official or
officials of the jurisdiction of its
incorporation, attesting to the fact that the
laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein, and that the applicant is
an existing corporation in good standing. If
such certificate is in a foreign language, a
translation thereof in English under oath of
the translator shall be attached thereto.
The application for a license to
transact business in the Philippines shall
likewise be accompanied by a statement
under oath of the president or any other
person authorized by the corporation,
showing to the satisfaction of the Securities
and Exchange Commission and other
governmental agency in the proper cases
that the applicant is solvent and in sound
financial condition, and setting forth the
assets and liabilities of the corporation as of
the date not exceeding one (1) year
immediately prior to the filing of the
application.
Foreign banking, financial and
insurance corporations shall, in addition to
the above requirements, comply with the
provisions of existing laws applicable to
them. In the case of all other foreign
corporations, no application for license to
transact business in the Philippines shall be
accepted by the Securities and Exchange
Commission without previous authority from
the appropriate government agency,
whenever required by law. (68a)
109
 Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the
license, a foreign corporation, except those
engaged in foreign banking or insurance, shall
deposit with the SEC, for the benefit of
creditors, securities consisting of bonds or
other evidence of indebtedness of the
Philippine government or its political
subdivision, or of government owned or
controlled corporation, shares of stock in
“registered enterprises” as this term is defined
in R.A. 5186, shares of stock in domestic
insurance companies and banks or any
combination thereof with an actual market
value of 100,000
- Additional securities may be required by the
SEC if the actual market value of the securities
on deposit has decreased by at least 10%.
Section 126 of the code provides:
Section 126. Issuance of a license. -
If the Securities and Exchange Commission is
satisfied that the applicant has complied with
all the requirements of this Code and other
special laws, rules and regulations, the
Commission shall issue a license to the
applicant to transact business in the
Philippines for the purpose or purposes
specified in such license. Upon issuance of the
license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for as long
as it retains its authority to act as a corporation
under the laws of the country or state of its
incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled
in accordance with this Code or other special
laws.
Within sixty (60) days after the
issuance of the license to transact business in
the Philippines, the license, except foreign
banking or insurance corporation, shall deposit
with the Securities and Exchange Commission
for the benefit of present and future creditors
of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange
Commission, consisting of bonds or other
evidence of indebtedness of the Government
of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or
controlled corporations and entities, shares of
stock in "registered enterprises" as this term is
defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in
the stock exchange, or shares of stock in
domestic insurance companies and banks, or
any combination of these kinds of securities,
with an actual market value of at least one
hundred thousand (P100,000.) pesos;
Provided, however, That within six (6)
months after each fiscal year of the
licensee, the Securities and Exchange
Commission shall require the licensee to
deposit additional securities equivalent in
actual market value to two (2%) percent of
the amount by which the licensee's gross
income for that fiscal year exceeds five
million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall
also require deposit of additional securities
if the actual market value of the securities
on deposit has decreased by at least ten
(10%) percent of their actual market value
at the time they were deposited. The
Securities and Exchange Commission may
at its discretion release part of the additional
securities deposited with it if the gross
income of the licensee has decreased, or if
the actual market value of the total
securities on deposit has increased, by
more than ten (10%) percent of the actual
market value of the securities at the time
they were deposited. The Securities and
Exchange Commission may, from time to
time, allow the licensee to substitute other
securities for those already on deposit as
long as the licensee is solvent. Such
licensee shall be entitled to collect the
interest or dividends on the securities
deposited. In the event the licensee ceases
to do business in the Philippines, the
securities deposited as aforesaid shall be
returned, upon the licensee's application
therefor and upon proof to the satisfaction
of the Securities and Exchange
Commission that the licensee has no
liability to Philippine residents, including the
Government of the Republic of the
Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law
before a foreign corporation may transact
business in the Philippines
- Yes. A Resident agent is required. As a
condition precedent to the grant of a license
to do or transact business in the Philippines,
the foreign corporation is required to
designate its resident agent on whom
summons and other legal processes may
be served in all actions or legal proceedings
against such corporation
- Section 128 provides:
110
 Section 128. Resident agent; service
of process. - The Securities and Exchange
Commission shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation file
with the Securities and Exchange Commission
a written power of attorney designating some
person who must be a resident of the
Philippines, on whom any summons and other
legal processes may be served in all actions or
other legal proceedings against such
corporation, and consenting that service upon
such resident agent shall be admitted and held
as valid as if served upon the duly authorized
officers of the foreign corporation at its home
office. Any such foreign corporation shall
likewise execute and file with the Securities
and Exchange Commission an agreement or
stipulation, executed by the proper authorities
of said corporation, in form and substance as
follows:
"The (name of foreign corporation)
does hereby stipulate and agree, in
consideration of its being granted by the
Securities and Exchange Commission a
license to transact business in the Philippines,
that if at any time said corporation shall cease
to transact business in the Philippines, or shall
be without any resident agent in the
Philippines on whom any summons or other
legal processes may be served, then in any
action or proceeding arising out of any
business or transaction which occurred in the
Philippines, service of any summons or other
legal process may be made upon the
Securities and Exchange Commission and that
such service shall have the same force and
effect as if made upon the duly-authorized
officers of the corporation at its home office."
Whenever such service of summons
or other process shall be made upon the
Securities and Exchange Commission, the
Commission shall, within ten (10) days
thereafter, transmit by mail a copy of such
summons or other legal process to the
corporation at its home or principal office. The
sending of such copy by the Commission shall
be necessary part of and shall complete such
service. All expenses incurred by the
Commission for such service shall be paid in
advance by the party at whose instance the
service is made.
In case of a change of address of the
resident agent, it shall be his or its duty to
immediately notify in writing the Securities and
Exchange Commission of the new address.
(72a; and n)
- The necessity of the appointment of a
resident agent is only for the purpose of
receiving summons and other legal
processes in any legal action or proceeding
against the foreign corporation
 Who may be appointed as a resident
agent?
- Section 127 provides that:
Section 127. Who may be a
resident agent. - A resident agent may be
either an individual residing in the
Philippines or a domestic corporation
lawfully transacting business in the
Philippines: Provided, That in the case of an
individual, he must be of good moral
character and of sound financial standing.
(n)
 May a partnership be appointed as a
resident agent?
- Yes, domestic corporation taken in its
general sense not legal sense
 If there is a resident agent appointed. May
summons be served to any officers of the
corporation?
- No, if there is a resident agent, the
designation is exclusive and service must
be made only to the resident agent or else
the service is without force and effect
unless made to him
- Thus, while the law allows service upon the
SEC or any of its officers or agents within
the Philippines
- The two modes may become effective only
if the foreign corporation failed or neglected
to designate such a person or an agent
- Summons must be made only to resident
agent except when there is no resident
agent appointed
- Where such foreign corporation actually
doing business here has not applied for a
license to do and has not designated an
agent to receive summons, then service of
summons on it will be made pursuant to the
provisions of the rules of court. If such
foreign corporation has a license to do
business, then summons to it will be served
on the agent designated by it for the
purpose, or otherwise in accordance with
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 the Corporation Law (General Corporation of 5. Or where a party is stopped to
the Philippines vs. Union Insurance Soc. Of challenge the personality of the
Canton Ltd.) corporation by entering into a contract
with it.
 If the foreign corporation conducts business in
the Philippines without the license  Rules laid down by the SC
requirement. What is the effect?
A. As to B. As to
- Section 133 provides: whether or whether or
not it can not it can be
Section 133. Doing business without sue sued
a license. - No foreign corporation transacting A foreign A foreign
business in the Philippines without a license, corporation corporation
or its successors or assigns, shall be permitted transacting or transacting business
to maintain or intervene in any action, suit or doing business in in the Philippines
proceeding in any court or administrative the Philippines with the requisite
agency of the Philippines; but such corporation with a license can license can be sued
may be sued or proceeded against before sue before in the Philippine
Philippine courts or administrative tribunals on Philippine Courts Courts
any valid cause of action recognized under Subject to certain A foreign
Philippine laws. (69a) exceptions, a corporation
foreign corporation transacting business
- if they do so, the responsible officers may be doing business in in the Philippines
subjected to the penal sanctions provided for the country without without a license
in section 144 of the code, which may either a license cannot can be sued in
be fine or imprisonment sue in Philippine Philippine Courts
Courts
If it is not if it is not doing
 What if it is not doing business without a transacting business in the
license? business in the Philippines, it cannot
Philippines, even be sued in
- If it is not transacting business in the without a license, it Philippine Courts for
Philippines, even without a license, it can sue can sue before the lack of jurisdiction
before the Philippine Courts Philippine Courts
 A foreign corporation not doing business in
 The general rule is that “it is not the lack of the Philippines, may it be sued?
required license but doing business without a
license which bars a foreign corporation form - If it is not transacting business in the
access to our courts.” country it cannot be sued for lack of
jurisdiction
 Exception:
 Is there any sanction that can be enforced
1. Foreign corporations can sue before the to foreign corporations which are doing
Philippine Courts if the act or transaction business without the required license?
involved is an “isolated transaction” or the
corporation is not seeking to enforce any
- Penal sanctions under section 144
legal or contractual rights arising from, or
- Any violation of the code is subject to such
growing out of, any business which it has
penal sanctions
transacted in the Philippines
2. Neither is a license required before a
foreign corporation may sue before the  What would constitute doing business?
forum if the purpose of the suit is to protect
its trademark, trade name, corporate - The true test, however, seems to be
name, reputation or goodwill; whether the foreign corporation is
3. Or where it is based on a violation of the continuing the body or substance of the
Revised Penal Code; business or enterprise for which it was
4. Or merely defending a suit filed against it organized or whether it has substantially
retired from it and turned it over to another.
The term implies a continuity of commercial

112
 dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, the purpose and
object of its organization (Mentholatum Co.
Inc. vs. Mangaliman)
 Mentholatum vs. Mangaliman
- The true test, however, seems to be whether
the foreign corporation is continuing the body
or substance of the business or enterprise for
which it was organized or whether it has
substantially retired from it and turned it over
to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, the purpose and
object of its organization
- Whatever transaction the Philippine-American
Drug Co. had executed in view of the law, the
Mentholatum Co. did it itself. And the
Mentholatum Co. being a foreign corporation
doing business in the Philippines without the
license required by section 68 of the
Corporation Law, it may not prosecute this
action for violation of trade mark and unfair
competition
 Why is foreign corporations barred access
from our courts if they do business without a
license?
- Marshall-Wells Co. vs. Henry W. Elser and Co.
 Marshall-Wells Co. vs. Henry W. Elser and Co.
- The object of the statute was to subject the
foreign corporation doing business in the
Philippines to the jurisdiction of its courts. The
object of the statute was not to prevent the
foreign corporation from performing single
acts, but to prevent it from acquiring a domicile
for the purpose of business without taking the
steps necessary to render it amenable to suit
in local courts.
 Bulakhidas vs. Navarro
- It is settled that if a foreign corporation is not
engaged in business in the Philippines, it may
not be denied the right to file an action in
Philippine courts for isolated transactions
- The object of section 68 and 69 of the
Corporation law was not to prevent the foreign
corporation from performing single acts, but
to prevent it from acquiring a domicile for
the purpose of business without taking the
steps necessary to render it amenable to
suit in the local courts. It was never the
purpose of the Legislature to exclude a
foreign corporation which happens to obtain
an isolated order for business from the
Philippines, from securing redress in the
Philippine courts
 The Swedish East Asia Co., Ltd. Vs. Manila
Port Service
- It must stated that the section is not
applicable to a foreign corporation
performing single acts or “isolated
transactions.” There is nothing to show that
the petitioner has been in the Philippines
engaged in continuing business or
enterprise for which it was organized, when
the sixteen bundles were erroneously
discharged in manila, for it to be considered
as transacting business in the Philippines.
The fact is that the bundles, the value of
which is sought to be recovered, were
landed not as a result of a business
transaction, isolated or otherwise, but due
to a mistaken belief that they were part of
the shipment of forty similar bundles
consigned to persons or entities in the
Philippines, there is no justification
therefore, for invoking the section
 There were 3 contracts entered into, how
come they were still not considered as
doing business? (Antam Consolidted, Inc.
vs. CA)
- Every case shall be judged in the light of its
peculiar circumstances, where a single act
or transaction however, is not merely
incidental or casual but indicates the foreign
corporation’s intention to do other business
in the Philippines, said single act or
transaction constitutes “doing” or “engaging
in” or “transacting” business in the
Philippines
- In the case at bar, the transaction entered
into by the respondent with the petitioners
are not a series of commercial dealings
which signify an intent on the part of the
respondent to do business in the Philippines
but constitute an isolated one which does
not fall under the category of “doing
business.”
- The records show that the only reason why
the respondent entered into the second and
third transactions with the petitioner was
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 because it wanted to recover the loss it
sustained from the failure of the petitioners to
deliver the crude coconut oil under the first
transaction and in order to give the latter a
chance to make good on their obligation. From
these facts alone, it can be deducted that in
reality there was only one agreement between
the petitioners and the respondent.
- The three seemingly different transactions
were entered into by the parties only in an
effort to fulfill the basic agreement and in no
way indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will
categorize it as a foreign corporation doing
business in the Philippines
- 3 contracts, but according to the court was not
doing business in the Philippines
 Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the
Supreme Court was doing business in the
Philippines
- Every case shall be judged in the light of its
peculiar circumstances, where a single act or
transaction however, is not merely incidental
or casual but indicates the foreign
corporation’s intention to do other business in
the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
- In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in
the Philippines corroborated by no less than
Nabuo Toshida, one of appellant’s officers, that
he was sent to the Philippines to look into the
operation of mines, thereby revealing the
defendant’s desire to continue engaging in
business here, after receiving the shipment of
the scrap iron under consideration, making the
Philippines a base thereof.
- In such a case, the single act of transaction is
not merely incidental or casual, but is of such
character as distinctly to indicate a purpose on
the part of the operations for the conduct of a
part of corporation’s ordinary business
 If a corporation appoints a distributor or a
representative, will it necessarily imply doing
business in the country?
- If the foreign corporation maintained an
independent status during the existence of the
disputed contract.
- Appointment of a distributor or representative
in the Philippines, unless it has an
independent status (transacts and does
business in its own name and for its
account and not of the foreign corporation)
- if that be the case the mere appointment of
a distributor will not constitute doing
business
 How do you know if it has an independent
status?
- Communications Materials and Design vs.
CA
 Communications Materials and Design vs.
CA
- A perusal of the agreements between
petitioner ASPAC and the respondents
show that there are provisions which are
highly restrictive in nature, such as to
reduce petitioner ASPAC to a mere
extension or instrument of the private
respondents
- ITEC was doing business without a license,
however ASPAC is estopped
- by entering into the Representative
Agreement” with ITEC, petitioner is charge
with knowledge that ITEC was not licensed
to engage in business activities in the
country, and is thus stopped from raising in
defense such incapacity of ITEC, having
chosen to ignore or even presumptively
take advantage of the same
- In top-weld we ruled that a foreign
corporation may be exempted from the
license requirements in order to institute an
action in our courts if its representative in
the country maintained an independent
status during the existence of the disputed
contract. Petitioner is deemed to have
acceded to such independent character
when it entered into the Representative
Agreement with ITEC
 Western Equipment and Supply Co. vs.
Reyes
- The company is not here seeking to enforce
any legal or contract rights arising from, or
growing out of any business which it has
transacted in the Philippine Islands. The
sole purpose of the action is to protect its
reputation, its corporate name, its goodwill,
whenever that reputation, corporate name
or goodwill have through the natural
development of its trade, established
themselves
- And it contends that its rights to the use of
its corporate and trade name, is a property
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 right, a right in rem, which may assert and
protect against all the world, in any of the
courts of the world even in jurisdictions where
it does not transact business just the same as
it may protect its tangible property, real or
personal, against trespass, or conversion
- Since it is the trade and not the mark that is to
be protected a trademark acknowledges no
territorial boundaries or municipalities or states
or nations, but extends to every market where
the trader’s goods have become known and
identified by the use of the mark
 General Garments Corporation vs. Director of
Patents
- A foreign corporation which has never done
business in the Philippine Islands and which is
unlicensed and unregistered to do business
here, but is widely and favorably known in the
Islands through the use therein of its products
bearing its corporate and trade name has a
legal right to maintain an action in the Islands
- Mentholatum case was subsequently
derogated when Congress, purposely to
“counteract the effects” of said case, enacted
R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign
corporation or juristic person to bring an action
in Philippine Courts for infringement of a mark
or trade-name, for unfair competition, or false
designation of origin and false description,
“whether or not it has been licensed to do
business in the Philippines under Act
Numbered Fourteen hundred and fifty-nine, as
amended, otherwise known as Corporation
Law, at the time it brings complaint.
 Puma Sporschufabriken Rudolf Dassler, K.G.
vs. IAC and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of
Vanity Fair Mills Inc. vs. T. Eaton Co. this court
further said:
“By the same token, the petitioner
should be given the same treatment in
the Philippines as we make available
to our own citizens. We are obliged to
assure to nationals of countries of the
Union an effective protection against
unfair competition on the same way
that they are obligated to similarly
protect Filipino Citizen and firms
- The ruling in the aforecited case is in
consonance with the Convention of the Union
of Paris for the protection of Industrial Property
to which the Philippines became a party.
Article 8 thereof provides that a trade name
shall be protected in all the countries of the
Union without the obligation of filing or
registration, whether or not it forms part of
the trademark
 Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to
our courts, in the first place it was not doing
business in the Philippines
- The marketing of its products in the
Philippines is done through an exclusive
distributor, Rustan Commercial Corporation.
The latter is an independent entity which
buys and then markets not only products of
the petitioner but also many other products
bearing equally well-known and established
trademarks and trade-names
 Assuming Rustans had no independent
status would the SC grant Lacoste access
to our courts?
- Even if Lacoste did business in the
Philippines it can bring action because the
case involves a violation of our penal code
- Such was a violation of article 189 of the
RPC, if prosecution follows after the
completion of the preliminary investigation
being conducted by the Special Prosecutor
the information shall be in the name of the
People of the Philippines and no longer the
petitioner which is only an aggrieved party
since a criminal offense is essentially an act
against the State. It is the latter which is
principally the injured party although there is
a private right violated
- The records show that the goodwill and
reputation of the petitioner’s products
bearing the trademark Lacoste date back
even before 1964 when Lacoste clothing
apparels were forst marketed in the
Philippines. To allow Hemandas to continue
using the trademark Lacoste for the simple
reason that he was the first registrant in the
Supplemental Register of a trademark used
in international commerce and not
belonging to him is to render nugatory the
very essence of the law on trademarks and
trade names
 Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co.
- The law denies to a foreign corporation the
right to maintain suit unless it has previously
complied with a certain requirement, then
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 such compliance, or the fact that the suing
corporation is exempt there from, becomes a
necessary averment in the complaint
- These are matters peculiarly within the
knowledge of appellants alone, and it would be
unfair to impose upon appellee the burden of
asserting and proving the contrary. It is
enough that foreign corporations are allowed
by law to seek redress in our courts under
certain conditions: the interpretation of the law
should not go so far as to include, in effect, an
inference than those conditions have been met
from the mere fact that the party suing is a
foreign corporation
 Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in
Olympia it did not
 Time Inc. vs. Reyes
- We fail to see how these doctrines can be a
propos in the case at bar, since the petitioner
is not “maintaining any suit” but is merely
defending one against itself; it did not file any
complaint but only a corollary defensive
petition to prohibit the lower court from further
proceeding with a suit that it had no jurisdiction
to entertain
 What law govern foreign corporation doing and
transacting business in the Philippines with a
license
- Laws of the Republic of the Philippines save
and except that would normally be those
matters which concern its formation,
organization or dissolution, or those fixing the
relationship, liabilities, responsibilities, or
duties of the stockholders, members or officers
of the foreign corporation or their relations to
each other.
- In effect, intra-corporate or internal matters not
affecting creditors or the public in general are
governed not by Philippine laws but the law
under which the foreign corporation was
formed or organized
Section 129. Law applicable. - Any
foreign corporation lawfully doing business in
the Philippines shall be bound by all laws,
rules and regulations applicable to domestic
corporations of the same class, except such
only as provide for the creation, formation,
organization or dissolution of corporations or
those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to each
other or to the corporation. (73a)
 Will the pre-emptive rights of a foreign
corporation be governed by the same
section of the code? Is the pre-emptive
rights of a stockholder in a domestic
corporation same as the pre-emptive of a
stockholder of a foreign corporation.
- No
 M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a
foreign corporation? How do you distinguish
this case from a Philippine law?
- Since it concerns the rights of stockholders
it is the law of New York that should govern
 Is the license to do business of a foreign
corporation subject to suspension or
revocation? What are the grounds?
- Section 134 provides:
Section 134. Revocation of license.
- Without prejudice to other grounds
provided by special laws, the license of a
foreign corporation to transact business in
the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any
fees as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent
or of his address, to submit to the Securities
and Exchange Commission a statement of
such change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report, affidavit or
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 other document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)
 SEC does not have the sole authority to
suspend or revoke the license of a foreign
corporation doing business in the Philippines,
other government agencies like the Central
Bank , the Insurance Commission may also do
so within their respective dominion, despite the
provision of section 134
 If the SEC believes that revocation is
warranted, section 135 provides that:
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such
license to transact business in the Philippines,
the Securities and Exchange Commission
shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the
appropriate government agency in the proper
cases.
The Securities and Exchange
Commission shall also mail to the corporation
at its registered office in the Philippines a
notice of such revocation accompanied by a
copy of the certificate of revocation. (n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to
transact business in the Philippines may be
allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No
certificate of withdrawal shall be issued by the
Securities and Exchange Commission
unless all the following requirements are
met;
1. All claims which have accrued in the
Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of
general circulation in the Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or
the SECURITIES REGULATION CODE in
the year 2000
 The jurisdiction of SEC for cases falling
under section 5 thereof was transferred to
the courts of general jurisdiction designated
by the SC, they were called special
commercial courts, the only exceptions
were revocation of corporate franchise and
calling of elections
 However the SEC retained receivership or
suspension payments within June 20,2000
 Jurisdiction of special commercial courts
are exclusive and original, jurisdiction is
conferred by law; 1 Special Commercial
Court per region except MAKATI and
QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-
Special Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special
Commercial Courts
- Allegation corporate officers employing
schemes in diverting
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- Not only detrimental to corporation, but
general membership
- Fraud must be stated with particularity
 Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity
otherwise it may be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special
commercial courts
- Sole criteria is there must be an intra-
corporate relationship
- Pertaining to a controversy (speaks also of
intra-partnership controversy, that partnership
must be registered with the SEC)
 Rule now
1. Necessarily be an intra-corporate relationship;
and,
2. The controversy must arise out of said
relationship
 Intra-corporate relationship alone will not
suffice to put it in the ambit of special
commercial courts and courts of general
jurisdiction may take cognizance
 Case of a transferee of shares of stock to
compel the corporation to recognize him as a
stockholder
 How can it be intra-corporate when he is not
yet fully paid
- When the transferee has done all he can be
required to do to render the transfer effectual
and the corporation refuses to register the
transfer, the requirement of the registration is
waived and the transferee is considered
technically a stockholder who may sue to
enforce the right to have the transfer
registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are
not yet prima facie; it will not be considered
intra-corporate
 Controversies in the appointment (asked in the
bar)
- Cases involving election, appointment and
removal
 In Andaya the court said that a corporate
officer elected or appointed by the BOD is
always a corporate act
- The fact that petitioner sought payment of
his back wages, other benefits as well as
moral and exemplary damages and
attorney’s fees in his complaint will not
operate to prevent the SEC from exercising
its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC just
because of that
 Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to
special commercial courts and not in the
NLRC
- SEC has jurisdiction over cases of removal
from employment of corporate officers
- The relationship of a person to a
corporation, whether as officer or as agent
or employee or not determined by the
nature of the servides performed, but by the
incidents of the relationship on they actually
exist
- Corporate officers dismissal is always a
corporate act or intra-corporate controversy
 Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction
exception will not apply to mere recovery
 Main consideration
- Asserts his right to the office or questions
the propriety or validity of his ouster or
removal, it will be the special commercial
courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to
Special Commercial Courts
- Suspension of payment, appointment of
management receivership
 What is the reason for suspension of all
claims?
- The reason for suspending actions for
claims against the corporation is not really
to enable the management committee or
the rehabilitation receiver to substitute the
defendant in any pending action against it
before any court, tribunal or body. The real
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 justification is to enable the management
committee or rehabilitation receiver to
effectively exercise his powers free from any
Judicial or extra-judicial interference that might
unduly hinder or prevent the “rescue” of the
debtor company. To allow such other actions to
continue would only add to the burden of the
management committee pr rehabilitation
receiver, whose time, effort and resources
would be wasted in defending claims against
the corporation instead of being directed
towards restructuring and rehabilitation.(PAL
vs. Spouses Sadic and Kurangking)
- To enable the receiver to effectively exercise
his or her power free form any judicial or extra-
judicial that may disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against
a distress company; ask the court to be given
time to the payment of liability by postponing
the payment
- When it has sufficient assets and liabilities but
forces the impossibility of meeting them when
they respectively fall due
2. Suspension of receiver with a management
committee with a rehabilitation play or
suspension of payments accompanied by a
proposal for rehabilitation (with or without
rehabilitation)
- corporation has sufficient assets to cover its
liabilities, but sees the possibility; is or without
rehabilitation plans; normally would attach the
rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation
has no sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities
than assets continue its operations profitably?
- Even if the distressed company has no
sufficient assets and liabilities it can go for
suspension
- It asked for a management committee without
a receiver plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they
became stockholders instead of creditors
- After 5 years those who converted sold it
back to the corporation, thereby making
profits
 Amendment is for the economic
development of the country
 What if walang amendment, e mas
maraming liabilities kesa assets
 Suspension order- all actions for claims
against the corporation are accordingly
suspended at whatever stage the
proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature.
Assertion of a right to have money paid
- Claims against the corporation shall be
suspended, assertion of a right to have
money paid; it must present a monetary
claim, liquidated or unliquidated
 Nullification of corporations does not
present a monetary claim of pecuniary
nature
 Union vs. CA
- It does not allow a mere individual to file the
petition which is limited to corporations
partnership or associations.
- Where no authority is granted to hear
petitions of individuals for suspension of
payments, such petition are beyond the
competence of the SEC
 What happens if there is a suspension
order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure
or unsecure, holding or lien or without a
lien, no creditor may enforce his lien while
rehabilitation is going (Alemar case)
- No preference shall be given
 RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
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 Rule of the thumb
- Automatic suspension even if not decreed in
the decision itself
- Once lifted the preferred creditors will regain
their preference
 Appointment of a management committee
- Take over the management committee of the
distressed corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-
corporate dispute is that if there is an intra-
corporate relationship
 Why is there suspension of all actions against
claims when a receiver is appointed?
- To enable the management committee to
exercise its powers
 Sy Chim vs. Sy Siy Ho (before a management
committee may be opt by a court)
- 2 requisites for a valid appointment of
management committee
1. Imminent danger of dissipation, loss, wastage
or destruction of assets or other corporate
properties
2. Paralysis of business operations, the mere
apprehension of future misconduct based
upon prior management
- Save and except in the case of a close
corporation in case of deadlock management
committee is allowed to take over right away
 Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
 Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an
imminent danger of dissipation, loss
wastage or destruction of assets or other
properties of a corporation and paralysis of
its business operations, the mere
apprehension of future misconduct based
upon prior mismanagement will not
authorize the appointment of a
management committee
 Section 5 and 6(D) governed by separate
rules; interim rules and intra-corporate
controversy
 Venue of actions
- Rules of court- where the parties are
residing
- Intra-corporate- no matter where the parties
are residing it will be in the city or
municipality where the principal office is
located
 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing
the creditors a copy of the petition and
attachments thereof
- A creditor may now file the suspension
proceedings; provides that creditors owns at
least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections,
fraud, etc; if they are governed by interim
rules of procedure on intra-corporate
controversies
 Venue
- Special commercial courts where principal
office is located/established (section 5 rule
1)
- Matters of payment/suspension must be
filed in the city/ municipality where
corporation is located
 Under old rule, creditors have no right to
institute an action for receivership; now
creditors, if they sold 20% they can institute
an action for receivership
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 Section 5
- Service of summons may be made by fax/e-
mail
 E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate
controversy
 If the controversy arose out of an intra-
corporate dispute rules on interim rules of
procedure of intra-corporate controversies
shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any
action, claim or demand in connection with any
act done omitted by him in good faith in the
exercise of his functions and powers herein
conferred
 Claim
- Right to payment, whether or not it is reduced
to judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or
unsecured
 Investment contracts
- A contract, transaction or scheme whereby a
person invests his money in a common
enterprise and is led to expect profits primarily
from the effects of others
 The management committee and rehabilitation
receiver are empowered to:
1. Take custody and control of all assets of the
corporation
2. Evaluate assets and liabilities, earnings
operations of the corporation
3. Determine the best way to protect the
investors and creditors
4. Study, review evaluate the feasibility of
continuing operation and structures
5. Submit recommendations to the RTC
regarding rehabilitation plan
6. Rehabilitate the corporation if determined to
be feasible by the RTC
7. Report to the RTC until the corporation is
dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was
enacted to protect the public from unscrupulous
promoters who stake business which have no basis
and sell shares and interest therein to investors,
who are then left holding certificates representing
nothing more than a claim to a square of the blue
sky.
-SEC. 2. Declaration of State Policy. – The State
shall establish a socially conscious, free market that
regulates itself, encourage the widest participation
of ownership in enterprises, enhance the
democratization of wealth, promote the
development of the capital market, protect investors,
ensure full and fair disclosure about securities,
minimize if not totally eliminate insider trading and
other fraudulent or manipulative devices and
practices which create distortions in the free market.
BROKER - person who buys and sells securities for
the account of others.
DEALER - person who buys and sells securities for
his/her own account in the ordinary course of
business.
NOTE: No person shall engage in
the business of buying or selling
securities in the Philippines as a broker
or dealer, or act as a salesman, or an
associated person of any broker or
dealer unless registered as such with
the Commission. (Sec 28)
SECURITES - shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
b) Other instruments as may in the future be
determined by the Commission;
c) Fractional undivided interests in oil, gas or
other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest
or participation in a profit sharing
agreement, certificates of deposit for a
future subscription;
f) Proprietary or non proprietary membership
certificates incorporations; and
g) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
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GR: Securities shall not be sold or offered for sale or
distribution within the PH, without a registration
statement filed with and approved by SEC. Prior to
such sale, information on the securities, in such form
and with such substance as the Commission may
prescribe, shall be made available to each prospective
purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by
the Government of the PH, or by any political
subdivision or agency thereof, or by any
person controlled or supervised by, and acting
as an instrumentality of said Government.
b) Any security issued or guaranteed by
the government of any country with diplomatic
relations with the PH, or by any state, province
or political subdivision thereof on the basis of
reciprocity: Provided, that the SEC may require
compliance with the form and content of
disclosures the Commission may prescribe.
c) Certificates issued by a receiver or by
a trustee in bankruptcy duly approved by the
proper adjudicatory body.
d) Any security or its derivatives the sale
or transfer of which, by law, is under the
supervision and regulation of the Office of the
Insurance Commission, Housing and Land
Use Regulatory Board, or the Bureau of
Internal Revenue.
e) Any security issued by a bank except
its own shares of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
b) By or for the account of a pledge
holder, or mortgagee or any other similar lien
holder selling or offering for sale or delivery in
the ordinary course of business and not for the
purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.
c) An isolated transaction in which any
security is sold, offered for sale, subscription or
delivery by the owner thereof, or by his
representative for the owner’s account, such
sale or offer for sale, subscription or delivery
not being made in the course of repeated and
successive transactions of a like character by
such owner, or on his account by such
representative and such owner or
representative not being the underwriter of
such security.
d) Distribution by a corporation, actively
engaged in the business authorized by its AOI,
of securities to its stockholders or other
security holders as a stock dividend or other
distribution out of surplus.
e) Sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or other
remuneration is paid or given directly or
indirectly in connection with the sale of such
capital stock.
f) Issuance of bonds or notes secured
by mortgage upon real estate or tangible
personal property, where the entire
mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale.
g) Issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security
surrendered in exchange to make such
conversion: Provided, That the security so
surrendered has been registered under this
Code or was, when sold, exempt from the
provisions of this Code, and that the security
issued and delivered in exchange, if sold at
the conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under this
Code. Upon such conversion the par value
of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered in
such exchange are sold.
h) Broker’s transactions, executed
upon customer’s orders, on any registered
Exchange or other trading market.
i) Subscriptions for shares of the
capital stock of a corporation prior to the
incorporation thereof or in pursuance of an
increase in its authorized capital stock under
the Corporation Code, when no expense is
incurred, or no commission, compensation
or remuneration is paid or given in
connection with the sale or disposition of
such securities, and only when the purpose
for soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
j) The exchange of securities by the
issuer with its existing security holders
exclusively, where no commission or other
remuneration is paid or given directly or
indirectly for soliciting such exchange.
k) The sale of securities by an issuer
to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
l) The sale of securities to any
number of the following qualified buyers: (i)
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 Bank; (ii) Registered investment house;
(iii)insurance company; (iv) Pension fund or
retirement plan maintained by the Government
of the Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko Sentral to
engage in trust functions; (v) investment
company or; (vi) Such other person as the
Commission may by rule determine as
qualified buyers, on the basis of such factors
as financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets under
management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and
accounting (Sec 22)
TENDER OFFER – A publicly announced intention
acting alone or in concert with others to acquire equity
securities of a company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire
15% or more of the equity share of a public
company pursuant to an agreement made
between or among the person and one or
more sellers;
2. When the person intends to acquire
30% or more of the equity share of a public
company within a period of 12 months;
3. When the person intends to acquire
shares that would result in an ownership of
more than 50% of the equity shares of a public
company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the
proxy for at least ten per centum (10%) or such
percentage as the Commission may prescribe of the
outstanding share of the issuer, shall submit a report
identifying the beneficial owner within ten (10) days
after such acquisition, for its own account or customer,
to the issuer of the security, to the Exchange where the
security is traded and to the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER
MARKET MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction
in a security which involves no change in the beneficial
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or
orders for the purchase or sale of security with the
knowledge that a simultaneous order or orders of
substantially the same size, time and price for the
sale or purchase of such security has, or will be
entered by or for the same or different parties.
Note: Wash sale and matched orders
become illegal when they are used as a
means to create false appearance of active
trading in the security concerned.
3. Marking the close – placing the purchase
order, at or near the close of the trading period. The
price that was closed will then be the price that will
be posted on the following trading day.
4. Painting the tape – involves a series of
transactions that are reported publicly to give the
impression of an activity in a security.
5. Squeezing the float – the part of an
outstanding security intentionally held by dealers or
other persons with a view of reselling them later for
profit.
6. Hype and dump – Act employed by a
person or group of persons of purchasing the
outstanding capital stock of a dormant public shell
company for a nominal amount and merge it with
their privately held company. They would then gain
control of the majority stocks of the merged entity.
Stock certificates are often re-issued in the name of
the merged entity to relatives and associates who
act as nominees of the person or persons employing
the device. They would then look for a broker-
dealer who would be willing to make a “hype” of the
securities. The broker-dealer then generates
volume and advance bid price. When the market
reaches a high price, they would “dump” their
shareholdings and bail out.
7. Boiler Room Operations – involves an
intensive selling campaign through numerous
salesmen by telephone or through direct mail
offerings for securities of either a certain type or
from a specific issuer. Investors are induced to
purchase through hard-sell based on unfounded
predictions and mailing of misleading market letters.
Note: Marking the close, Painting the tape,
Squeezing the float, Hype and dump, Boiler
Room Operations become unlawful if it is
effected to either raise the price or induce
the purchase of a security or of a
controlling, controlled, or commonly
controlled company by others or to depress
the price to induce the sale of a security,
whether of the same or of a different class,
of the same issuer or of a controlling,
controlled company or common controlled
company by others or to create active
trading to induce the purchase through said
devices or schemes.
8. Circulating or Disseminating Information
– circulating an information that any of the security
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listed in the exchange will or is likely to rise or fall
because of manipulative market operations of any one
or more persons conducted for the purpose of raising
or depressing the price of the security and thus
inducing the purchase of such security.
9. Making False or Misleading Statements with
respect to any material fact which he knew or had
reasonable ground to believe was so false or
misleading for the purpose of inducing the purchase or
sale of such security.
10. Pegging or Fixing Or Stabilizing the price of
security effected either alone or with others through
any series of transactions for the purchase or sale
thereof, if done for such purpose.
11. Short sale – selling of security which the
vendor does not own unless done in accordance with
the rules and regulations of the SEC.
12. Insider Trading – the act of an insider to buy
or sell security of the issuer while in possession of
material information with respect to such security that
is not generally made known to the public unless (a)
The insider proves that the information was not gained
from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified,
the insider proves: (i) that he disclosed the information
to the other party, or (ii) that he had reason to believe
that the other party otherwise is also in possession of
the information.
Note: When is information “material non-
public”? - if: (a) It has not been generally
disclosed to the public and would likely affect
the market price of the security after being
disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or (b) would be considered by a
reasonable person important under the
circumstances in determining his course of
action whether to buy, sell or hold a security.
Note: Who is an “insider”? - “Insider”
means: (a) the issuer; (b) a director or officer
(or person performing similar functions) of, or
a person controlling the issuer; (c) a person
whose relationship or former relationship to
the issuer gives or gave him access to
material information about the issuer or the
security that is not generally available to the
public; (d) a government employee, or director,
or officer of an exchange, clearing agency
and/or self-regulatory organization who has
access to material information about an issuer
or a security that is not generally available to
the public; or (e) a person who learns such
information by a communication from any of
the foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or employee of
the corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation,
which would interfere with the exercise of
independent judgment in carrying out the
responsibilities of a director.
Corporations which require an Independent
Director
1. An exchange; or
2. Any corporation with a class of equity
securities listed for trading on an Exchange or with
assets in excess of P50M and having 200 or more
holders, at least 200 of which are holding at least
100 shares of a class of its equity securities or
which has sold a class of equity securities to the
public pursuant to an effective registration statement
shall have at least two (2) independent directors or
such independent directors shall constitute at least
20% of the members of such board, whichever is
the lesser.
OPTION TRADING
 Put – a transferrable option or offer to
deliver a given number of shares of stock at a stated
price on any given time during the stated period.
 Call – a transferrable option to buy a
specified number of share at a stated price
 Straddle – a combination of put and call.
SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being
investigated and/or charged may propose in writing
an offer of settlement with the Commission. The
Commission may only agree to a settlement offer
based on its findings that such settlement is in the
public interest. Any agreement to settle shall have
no legal effect until publicly disclosed. Such decision
may be made without a determination of guilt on the
part of the person making the offer.
DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court, which shall
have exclusive jurisdiction to hear and decide such
suits. The Court is authorized to award damages in
an amount not exceeding triple the amount of the
transaction plus actual damages.
NOTES
 If there are goods involved in the
multimarket, it is beyond the jurisdiction of SEC (Ex
First Quadrant)
 Criminal charge for violation of SRC is a
specialized dispute, hence it must be first referred
with SEC (Baviera vs. Paglinawan G.R. No. 168380
Feb 8, 2007)
 T3 Rule in trading of Securities – Trading
day + 3 more days you must comply with your
obligations.
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