Business Organization 2 (Notes)

CORPORATION LAW
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 the partnership.
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;
(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 (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
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
Stock- section 51
Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law creating
them
Section 4. Corporations created by special laws
or charters. - Corporations created by special laws or
charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code,
insofar as they are applicable. (n)
Section 3
- The two requisites must always concur
1. That they have a capital stock divided into shares; and,
2. That they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on the
basis of the shares held by each of them.
Section 4
- Created by a special law, they have their own character
- They are not immune from suit unless provided by the law
of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or independent
from that of the other
Close corporation
- There is no exemption it is absolute
Public corporation
- Political or governmental purposes
- 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 the general good and
welfare
Private Corporation
- Immediate benefit, aim or advantage of private individuals
- Those formed for some private purpose, benefit, aim or
end
- Distinction: public for governmental purpose
Corporation Sole
- Exemption to the rule because it is composed only of one
person
- An incorporator may also be a juridical person
Close corporation
- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no public offering
Open corporation
- openly admit investors
- example: stock exchange
Domestic/ Foreign
Test
- Incorporation test
- If incorporated under the laws of the Philippines it is a
domestic corporation
ME Gray vs. CA
- Parent or Holding/ subsidiaries and affiliates
- Affiliates- no majority vote
SMC 12%

CBP
HERSHEY CBPl 12%
12%
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 pr 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 protected by
law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended
certificate of incorporation under the amended name. (n)
Doctrine of secondary meaning

- A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an article
in the market, because of geographically or otherwise
descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his
article that, in that trade and to that branch of the
purchasing public, the word or phrase has become to
mean that the article was his product.
Section 18
- Lyceum of the Philippines case, the additional geographical
name does not make it confusingly similar
- actual confusion is not necessary- Philips case it is enough
that there is probable confusion
2 requisites must be proven
- that the complainant corporation acquired a prior right
over the use of such corporate name
- identical, deceptively or confusingly, patently deceptive
principal office
- statement of principal office is required
- city and municipality not only province must be specified
- principal office NOT operations office
- necessary because it will establish the residence of
corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries of
the city where the principal office
- non-stock may be held anywhere in the Philippines, if
provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in the
register of deeds where the principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
term of existence
- corporate term required
- determining what point in time the juridical personality
will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of liquidation
- Dissolution- it is automatic
When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it has no
vested politic, exist only for a period of 3 years only for
liquidation and for that purpose only
Article 5 How many incorporators should there be?
- 5-15
May a corporation be an incorporator?
- 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: 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?
- 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
Govt 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
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 30
- 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 company metro
manila 10 M if located in MM
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 of stock, otherwise,
each share shall be, in all respect, equal to every other
share.
Participating
- Must be stated because the presumption is that it is
participating
Cumulative
- Irrespective of whether or not they where earned
Preferred
- May be denied
- Unless denied they are still entitled
What if hindi i-declare kahit na may dividends rights for the
previous years? May they be denied dividend rights
because they are non holders of non-cumulative? NOTE:
YOU CANNOT COMPEL THE CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL
SEC. 43
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)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
Compare cumulative share from non-cumulative, earned
cumulative or dividend credit type
- Cumulative share whether or not earned
- Non-cumulative earned cumulative or dividend credit type-
only if earned
Par
- stated par value; shall not be issued less than par
No par
- without stated par value
- once fully paid no longer liable
Corporations cannot use its capitals in declaring dividends;
not all can issue no par value section 6
Voting
- entitled to vote at any motion brought up in writing
Non-voting
- not entitled to vote
What types of shares may be denied of the right to vote?
- Preferred and redeemable shares
Is it correct to state that common shares can never be
denied the right to vote?
- Only preferred and redeemable shares are denied unless
provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI
YUNG FOUNDERS 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
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
Section 23-27 minimum qualifications, but there may be
additional
Grounds for disapproval
- Only substantial and not strict is required
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)
- But the grounds in section 17 are not exclusive
When will the corporation commence to exist?
- Section 19
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)
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.
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
- 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 3
rd
parties
- When there is no 3
rd
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 3
rd
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
- 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
- Admission, conduct or agreement
- Will not apply among members themselves there must be
a 3
rd
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. 3
rd
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
- 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
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 plaintiffs 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 defendants 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 corporations
obligations is not to ignore the corporations 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
- 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

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.
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.
Founders 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
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
- 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
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be
able to be nominated
Gen. Rule:
- Term of one year who will serve as such until there
successors are elected and qualified
Exception:
- Non-stock corporation can serve for a term of 3 years
- Educational non-stock- term of the governing board can
be 5 years
May this term exceed one year?
- Yes, they may serve in a hold over capacity until their
successors have been duly elected and qualified
Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected from
among themselves
- Must be duly elected and qualified
How are the directors elected?
1-100T/S
2-100T/S
3-100T/S
to 10=1M/S
Do you include the vote of 1 & 2 to have a quorum to have
a valid meeting?
- NO, quorum requirements is 401,000
Quorum requirement is 501k
Holders of non-voting shares are only entitled to vote in last par. Of
section 6
1-200k
2-200k
3-200k
4-100k
5-100k
6-100k
7-50k
8-40k
9-5k
10-5k
=1MS
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo
and ninominate nila yung sarili nila and cast all their shares on
themselves
Who wins? Or who gets elected?
- No vote requirement, the one who gets the most number
of votes gets elected, section24.
What is cumulative voting?
- Process of multiplying the number of shares to the
number of director to be elected
- Matter of right granted to stockholders in a stock
corporation
1 to 5 has 200k/s and members of the same family- majority 800k they
have 4M votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to have a rightful
representation in the board
Is it allowed in a non-stock corporation?
- Not generally available
- Section 89 unless the articles or by-laws allow cumulative
voting
Section 89. Right to vote. - The right of the
members of any class or classes to vote may be limited,
broadened or denied to the extent specified in the articles
of incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class,
shall be entitled to one vote.
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
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 vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- 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 NACOCOs 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
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
May directors be ousted from office?
- At least 2/3 of members representing outstanding capital
stock. Again notice requirement must be complied with
1-200 1-5 same family
2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not
related
7-50
8-40
9-5
10-5 outstanding
director
Meetings called by the president or the secretary ordered
by the president
It depends if the removal is without cause they 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 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.
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)
Other than by removal or expiration of term they do not
have the power
When will the vacancies be filled up?
Is notice required, to fill up vacancies due to removal?
What if the vacancy is due to an increase, can it be filled up
in the same meeting where in the number is increased?
Election due to removal-in the same meeting notice is not
required
Election due to increase in number- it must be so stated in
the meeting
Section 30
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 theres 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
- 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
- Duty of loyalty of corporate directors
- 31,32,33,34
- 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.
Director x co.
A-REALTY
B
C Z owns property and is going abroad never to Return, he
wants to sell for 25M the fair market
value is 30M
D
E
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 self0dealing 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;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
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 contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
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.
Where any of the first two conditions set forth
in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of
at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
(n)
Prime white cement vs. IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage
- as a director he should have acted in a manner as not to
unduly prejudice the corporation
- he cannot be allowed to enrich himself
May corporate directors purchase the corporate property?
Mead vs. Mccullogh
- interlocking director- a director of one corporation who
deals and transacts business with another corporation
who is himself a director
A- director of X company also a director of Y corporation
B-
C-
D-
E-
Both companies enter into a contract and A sits, is the
contract valid?
- Yes on the ground of fraud or if it is unfair
- May be subject to the provision of section 32
- Section 32 contract may become voidable, hence it may
also be ratified
X Co.
Y Co.
A owe 20% A
owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
BOD mismanages corporate officers. Who may file a suit?
- General rule: BOD which can institute a case because it has
all the powers. To allow stockholders to file would violate
the doctrine of corporate entity and may result to
multiplicity of suits
- Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
Derivative suit
- An action based on injury to the corporation-to enforce a
corporate right- wherein the corporation itself is joined as
a necessary party, and recovery is in favor of and for the
corporation.
- Remedy granted by law to stockholders to institute a case
to remedy a wrong done directly to the corporation and
indirectly to the stockholders, if the board refuses to do
so. Otherwise if not they would be left without any
recourse
Available suits
individual or personal
- Wrong done against his person as a stockholder
Class suit
- Filed by a stockholder in representation of other
stockholders
- A wrong or redress done, a derivative suit in nature
Intra-corporate remedies
- Demand to the BOD to institute such action
- Negated by the BOD
- The one who instituted must be a stockholder at the date
when the act was done, must have been a stockholder by
that time
Demand will not be required if the majority of the BOD are
the ones guilty of the wrong charged
The corporation must be made a party in the case
whatever side will not matter because under Philippine
law misjoinder is not a ground for dismissal
Non-joinder is a ground for dismissal
Any benefit should inure to the corporation
Stockholder bringing the action is entitled to
reimbursement such as attorneys fee ONLY IF the case is
SUCCESSFUL to avoid harassment suit to their
management
Pascual vs. Orozco
- By virtue of the fact that he is a stockholder, may maintain
a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be a
stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902
Derivative suit
- By a stockholder to address a wrong done against the
corporation and the stockholder indirectly
- Essential requisite must have been a stockholder from the
time the act complained of took place
- Cannot institute an action from the years he was still not a
stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in equity
and such is in the hands of its BOD however there are
exceptions when the BOD will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from criminal
prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must be
stated in the complaint that it is being instituted as a
derivative suit and for and in behalf of the corporation
- Granting arguendo, that this is a derivative suit, the same
is still outrightly dismissible for having been wrongfully
filed in the regular court devoid of any jurisdiction to
entertain the complaint. The case should have been filed
with the SEC which exercises original and exclusive
jurisdiction over derivative suits, they being intra-
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 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
- 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
- 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 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.
2. He has tried to exhaust intra-corporate 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;
3. The stockholder bringing the suit must 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.
4. The corporation should be made a party, either as party-
plaintiff or defendant, in order to make the courts
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,
5. Any benefit or damages recovered shall 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, 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;
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
(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.
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
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, 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 dept 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
- merely ministerial or permissive
Power to amend
- section 16
- special 37,38,120
Power to adopt by-laws
- section 46-48
Power to issue or sell stocks and to admit members
- stock of stockholders and provision governing non-stock
Power to acquire or alienate real or personal property
- is there any limitation? YES
- Two specific limitation
1. Section 36, as lawful transactions of business of the
corporation may reasonably and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
- Importance of the purpose clause
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
Govt 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
- Converts the property to a private land automatically once
converted it can now be registered
Power to make donation
- Limitation section 36 par.9
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a
means of increasing its business or promoting patronage.
Thus, paragraph 9 of section 36 expressly authorizes a
corporation to make donations. The only limitations
imposed are the following:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and,
3. It shall not be in aid of political party or candidate, or for
purposes of partisan political activity.
Power to establish pension
- 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 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
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.
- Examples: Php 10M capital for grocery business, mayor
didnt 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 taxis,
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
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 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
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?
- 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, its 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, its 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?
- NO, EXCEPT
1) Express or implied agreement to the purchase
2) Where the transaction amounts to consolidation or
merger of the corporations
3) When 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 debt
Legitimate purpose: for a corporation to reacquire its own
shares
- Limitation: it must have surplus/unrestricted retained
earnings
- Exception: may redeem irrespective of unrestricted
retained earnings
1) Exercise of stockholders right to compel close
corporation to purchase his shares
2) Where corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock
ACS 1M
SUBSRIBED 1M
PAID-UP 1M
ASSETS 500K
1M PROFITS
- 500K LIABILITIES
____________________
500K RESERVES IN A CLOSE
CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS
X REALTY CORPORATION
THE ONLY PROPERTY OF
THE CORPORATION
BOARD OF DIRECTORS
DECIDED TO SELL IT
Will it need the approval of the stockholders?
- NO, 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
If X is a manufacturing company, then it can sell its only
property upon approval of the stockholders because it will
render itself capable of continuing its business, BUT if the
proceeds will be used to purchase a better one for the
continuance of its business, then it does not need the
approval of the stockholders
Conditions for the valid exercise of this power are the
following
1. Resolution by the majority vote of the board of
directors/trustees
2. Authorization from the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or members must be
made at a meeting duly called for that purpose
4. Prior written notice of the proposed action and of the
time and place of meeting must be made addressed to all
stockholders of record, either by mail or personal service;
5. The sale of the assets shall be subject to the provisions of
existing laws on illegal combinations and monopolies
6. Any dissenting stockholder shall have the option to
exercise his appraisal right
IDP vs. CA
- Consent of the members was not secured
Edward Nell Co. vs. Pacific Farms
- Generally where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter
is not liable 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
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,
stockholders consent or approval is necessary
- Thus, if its for the secondary purpose, it is necessary
- If its 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 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
stockholders 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
Stockholders 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
(16a)
What are dividends?
- Corporate profits set aside, declared and ordered by the
Board of Directors to be paid to the stockholders.
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 1M-U.R.E. (surplus profits
of the corporation)
1-100k
2-100k
To
10-100k
1M
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 Xco. 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.
- 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.
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
Stock dividends increase corporate assets? No, it will only
have the effect of increasing the subscribed and paid-up
capital of the corporation
Will there be a corresponding increase in their
proportionate interest?
- REMAINS THE SAME
- Exception: when stock dividends will result in a fractional
share
ACS-2M 1-100K 200 (10%) *VOTING AND
DIVIDEND RIGHTS STILL THE SAME
SUB-1M TO 10%
PU-1M 10-100K
ACS 2M
SUB 1M
PU 1M
1M RE
1 100K
2 100K
TO
10 100K
1M
May they be compelled?
- NO. You cannot declare if it does not come from
unrestricted retained earnings.
1. 1M-U.R.E. (is it true there is no way to compel?)
2. 2M-U.R.E.
May they be compelled to declare dividends
- Mandatory if earned, the board may be compelled to
declare dividends
- if exceeds 100% of the paid-up capital the boards may be
compelled
ACS 2M 1M U.R.E.
SUB 1M
PU 800K
1-100K 50K PU
2-100K 50K
TO
10-100K
1M
Will 1 and 2 receive full amount of dividends?
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be applied to
his delinquency plus expenses.
Delinquency occurs, you are called to pay, but you failed to
pay. In case of stock dividend, the delinquent stock holder
will not be entitled thereto until he has paid his
subscription in full.
Are non-stockholders entitled to receive dividends?
- No, tock dividends are civil fruits of the original
investment, and to the owners of the shares belong the
civil fruits.
How did the court decide dividends in the case of Neilsen
- Stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered.
- Whether cash, property or stock, only stockholders may
receive dividends. Dividends are fruits of investments.
They come from the U.R.E. or surplus profits of the
corporation.
ACS 2M 1M U.R.E.
SUB 1M JULY 24 DECLARATION JULY
31
PU 1M
1 100K 100T JULY 26-Y(NEW ONE WAS DECLARED TO
Y) JULY 30- 100K
2
TO 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 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, 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 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
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 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.
- 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
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 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 3
rd
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
Govt vs. El Hogar
- Did the court categorically ruled here that the provision in
the 5
th
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
- 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 2
nd
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
- 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 the 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 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
What if there is nobody who can call?
- The petitioner, stockholder may petition the court
What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder petition to
authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person, but
neglects his duty. Ponce will not apply.
Writ of injunction may never be issued ex parte
Is there any exception?
- Section 28 only instance
Section 28. Removal of directors or trustees. -
Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose,
and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose
of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on
the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written demand
of a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed
directly to the stockholders or members by any
stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as
well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this
Code. Removal may be with or without cause: Provided,
That removal without cause may not be used to deprive
minority stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code. (n)
Cases of removal or ouster of a director
Mandamus would be appropriate remedy if there is a
person authorized but refuses
Quorum and voting requirement
- Majority stockholders or members constitute a quorum
Is the presence of the majority owners of the outstanding
capital stock ABSOLUTE to have a quorum?
- NO. when the code requires a higher quorum it must also
be equivalent to the vote required
Do you include non-voting shares in arriving at the voting
requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate par. Of
section 6
Five requisites of a valid meeting
1. It must be held on the date fixed in the by-laws or in
accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
Date not complied with, notice, place, not complied with
and the person who called not authorized, what happens
to any resolution called?
- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
provided it is within the power of the corporation. 3
RD

paragraph of 324
- 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?
- 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
Stockholders 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 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?
- 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

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
Section 60. Subscription contract. - Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract. (n)
Under the old law the 4
th
mode is PURCHASE
Purchase
- Reciprocal in nature
- Purchaser can neither require the issuance
Xco. Inc.
P

Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder December 08
o he will not be considered a stockholder unless he has paid
in full
August 08 property is ravaged by fire all are turned into shares
Is Z liable to pay the balance of his acquisitions?
- 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
Z did not pay on the date called and was declared a delinquent share
Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO PAY
THE UNPAID PORTION?
IT WAS AGREED THAT IT WAS A PURCHASE AND WILL BE
A STOCKHOLDER ONLY IF PAID IN FULL IS HE LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2
nd
example galling sa treasury shares hindi sa unissued
share
NO such thing as purchase of unissued stocks
A subscription contract can be conditional provided there
is nothing in the charter or statute prohibiting it and not
against public order, law, etc.
Must it be in writing?
- NO, it may be oral
5M should it be in writing to be valid and binding as a
subscription?
- NO, statutes of frauds only applies to SALES
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?
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 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.
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 transferees 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 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 owners 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 stockholders 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
- 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
De los 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 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
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,
attorneys fees and cost of suit
D sues the corporation for the value of his acquisition cost,
inclusive of damages, attorneys 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.
2
nd
situation, what cause of action may the corporation
have? Remedy?
- Third party complaint against C, but what if he is a purchaser
for value? 4
th
party claim against B
When may certificate of stocks be issued?
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 plaintiffs 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.
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
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. 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
B
C
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
directors of any stock corporation may at any time declare
due and payable to the corporation unpaid subscriptions
to the capital stock and may collect the same or such
percentage thereof, in either case with accrued interest, if
any, as it may deem necessary.
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 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
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 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
- 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
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
(16a)
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 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 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)
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;
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.
- 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.)
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 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 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 stockholders
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
- 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
corporations 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
- 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
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
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. 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
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
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
hasnt even paid his subscription in full.
May a stockholder who hasnt 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 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
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;
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, 2
nd
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:
incorporation or the by-laws, a member may vote by proxy
in accordance with the provisions of this Code. (n)
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.
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.
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)
year. (n)
Who elects the other officers?
- Directly by the general members unless the by-laws or
articles provide otherwise. <sec.92>
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; 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 members 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:
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.
- Between and among themselves, they feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you cannot be a
stockholder
- All the issued stocks of all classes is subject to restrictions
- Shall not be listed in the stock exchange not publicly
offered
- 3 qualifying conditions must be contained in the articles of
incorporation, to be considered as a close corporation, if
not, it will not be considered as such and will be governed
by the general provisions of the code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3 qualifying
provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in
management
- Combination of the corporation and partnership type of
business
May any type of corporation, be organized as such close
corporation?
- No, the 3 qualifying conditions must be present
What if 2/3 of the outstanding capital stock is owned by
another corporation which is also a close corporation, will
it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the voting
stocks of a close corporation is also owned by a close
corporation. It must be voting stocks
- Even if another corporation owns or controls 2/3 of the
voting stocks of a close corporation, the latter may still be
considered as such close corporation if the corporation
owning or controlling the shares is also a close
corporation.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least
two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a
close corporation within the meaning of this Code.
What kind of corporations cannot be a close corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
Section 97 is a permissive provision
Section 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes,
each of whom may be voted for and elected solely by a
particular class of stock; and
3. For a greater quorum or voting requirements in
meetings of stockholders or directors than those provided
in this Code.
After classification what then?
- After classification, qualification and then restriction as
provided for under the 3 qualifying conditions in section
96
Cumulative voting is restricted in close corporations if will
be elected solely by a particular class
In a close corporation, the articles of incorporation may
provide for a greater quorum and voting requirement in
meetings of both stockholders or directors to increase the
veto power of minority stockholders, unlike in a stock
corporation wherein only directors meetings may provide
for greater quorum requirement and in stockholders
meeting which may not be altered or increased, as provide
for in section 25, following the doctrine of limited capacity
The articles of a close corporation may likewise provide
that the business of the corporation shall be managed by
the stockholders rather than by the board of directors.
However the same must contain the continuing provisions
required in paragraph 2 of section 97, that is:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to
be directors; and;
3. The stockholders of the corporation shall be subject
to all liabilities of directors.
Liability of stockholders acting as directors in a close
corporation are more extensive since they are personally
liable for corporate torts unless the corporation has
obtained a reasonable adequate liability insurance, unlike
a ordinary stock corporation, wherein directors thereof
are only liable for corporate torts only if they have been
negligent or acted fraudulently in the performance of their
functions.
Restrictions
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear in the
articles of incorporation, the by-laws and the certificate of
stocks. Otherwise, the same shall not be binding on any
purchaser thereof in good faith
What if the stockholders do not want to exercise their
right or option to purchase may it be sold to any person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on transfer of
shares. - Restrictions on the right to transfer shares must
appear in the articles of incorporation and in the by-laws
as well as in the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof in good
faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the
option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails
to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person.
o ordinary stock corporations are liable only if
acted in Bad faith, fraud or negligence in
performance of duty
What if there are already 20 stockholders and they want to
add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to admit
because it breaches the qualifying conditions
Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or instead of
consenting they decide to amend their articles of
incorporation
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
becomes in excess of 20
o Unless all the stockholders consent they may
What if the other stockholders object to register? What
will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is mutual
restitution
How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his
shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover the
debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing stockholder,
unlike in an ordinary stockholder where there is none, they
may only do so in the exercise of appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation
may, by written petition to the Securities and Exchange
Commission, compel the dissolution of such corporation
whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate
assets are being misapplied or wasted.
Agreements may also be entered in a close corporation
<sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall be
managed
Board resolution
- Ordinary stock corporations- sit and act as a body at a duly
constituted meeting, they may do so by virtue of the E-
Commerce Act through teleconference or video
conference
Exception to the rule: other officers may be directly
appointed and hired by the stockholders
Close corporations may validly act even without a meeting
provided the conditions are obtained
Section 101. When board meeting is unnecessary
or improperly held. - Unless the by-laws provide otherwise,
any action by the directors of a close corporation without
a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in
writing; or
3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
4. All the directors have express or implied knowledge of
the action in question and none of them makes prompt
objection thereto in writing.
Pre-emptive rights in a close corporation is absolute
Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of stockholders in
close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in payment of
corporate debts, unless the articles of incorporation
provide otherwise.
Why is it said to be absolute?
- Because there is no public offering in a close corporation,
otherwise it will not be considered as close
In a close corporation the pre-emptive rights is broadened
to include all issues without exception unless denied or
limited by the articles of incorporation
Section 39 is the governing provision concerning rights of
the stockholder in an ordinary stock corporation and it
may be denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues of shares
whether money, property or previously incurred
indebtedness.
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That
such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Are treasury shares covered in the exercise of pre-emptive
rights in ordinary stock corporations?
As regards amendments
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting
requirement stated in said articles of incorporation shall
not be valid or effective unless approved by the
affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. - Notwithstanding any
contrary provision in the articles of incorporation or by-
laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting
the management of the corporation's business and affairs
that the votes required for any corporate action cannot be
obtained, with the consequence that the business and
affairs of the corporation can no longer be conducted to
the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to
arbitrate the dispute. In the exercise of such power, the
Commission shall have authority to make such order as it
deems appropriate, including an order: (1) cancelling or
altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
(2) cancelling, altering or enjoining any resolution or act of
the corporation or its board of directors, stockholders, or
officers; (3) directing or prohibiting any act of the
corporation or its board of directors, stockholders,
officers, or other persons party to the action; (4) requiring
the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books,
or by the other stockholders; (5) appointing a provisional
director; (6) dissolving the corporation; or (7) granting
such other relief as the circumstances may warrant.
A provisional director shall be an impartial
person who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may
be determined by the Commission. A provisional director
is not a receiver of the corporation and does not have the
title and powers of a custodian or receiver. A provisional
director shall have all the rights and powers of a duly
elected director of the corporation, including the right to
notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or
by all the stockholders. His compensation shall be
determined by agreement between him and the
corporation subject to approval of the Commission, which
may fix his compensation in the absence of agreement or
in the event of disagreement between the provisional
director and the corporation.
- Powers of the SEC in intra-corporate concerns has been
transferred to the proper commercial courts
- Prohibit, even if acting in good faith
- Provisional director appointed by the court
- Requiring the purchase, irrespective of unrestricted
retained earnings
- The provision of the law above-quoted gives the SEC a
very wide discretion in respect to management of a close
corporation in the event of a deadlock. It may:
1. Cancel or alter any provision in the articles of
incorporation, by-laws or any stockholders
agreement
2. Cancel, alter or enjoin any resolution or other act of
the corporation or its board of directors,
stockholders or officers
3. Prohibit any act of the corporation or its board of
directors, stockholders or officers or other persons
party to the action;
4. Requiring the purchase of the par value of the shares
of any stockholders, either by the corporation
regardless of availability of unrestricted earnings, or
by the other shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.
Section 105
- Dishonesty is a ground for dissolution of a close
corporation
- Even one stockholder may petition for dissolution
o when there is a relief available, dissolution
would not be available in an ordinary
corporation
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
1. The number of stockholders
cannot exceed 20
No limitation as to number of
shareholder
2. To the extent that all
stockholders can be deemed
directors, the number of
directors can effectively be
more than 15
Maximum number of directors is
15
3. Shares of stock are subject to
specified restrictions
Generally no restriction on
transfer of shares
4. Shares of stock are prohibited
from being listed in the stock
exchange or offered for sale
to the public
No prohibition
5. Stockholders may take an
active part in corporate
management by vesting
management to them rather
than a Board of Director
Management is lodged in the
Board of Directors
6. Those active in management
are personally liable for
corporate torts unless the
corporation has obtained an
adequate liability insurance
Directors are liable for torts only
if they have acted negligently or
fraudulently
7. Directors can validly act even
without a meeting
Directors must, as a rule, act as a
body at a duly constituted
meeting
8. Agreements between
stockholders regarding the
operations of the business
can validly be made
Not valid and binding since
stockholders agreement cannot
limit the discretion of the Board
to manage corporate affairs
9. To the extent that directors
may be classified into one or
more classes and to be voted
solely by a particular class of
stock, cumulative voting may,
in effect, be restricted
Ordinarily, no such classification
and no restrictions on
cumulative voting
10. The articles of
incorporation may provide
that all officers shall be
elected or appointed by the
stockholders
Officers are elected by the Board
of Directors
11. It may provide for greater
quorum and voting
requirements in meetings of
stockholders and directors
Although the articles of
incorporation or by-laws may
provide for greater quorum and
voting requirements in directors
meeting under section 25, those
for stockholders meeting
cannot generally be altered
12. Restriction on transfer of
shares should be indicated in
the articles of incorporation,
by-laws and stock certificates
Valid and binding if indicated in
the articles of incorporation and
stock certificates
13. Pre-emptive rights of
stockholders is broader as it
include all issues without
exception
Pre-emptive rights may be
denied as provided for in section
39
14. A stockholder may
withdraw and compel the
corporation to purchase his
shares for any reason with the
limitation only that the
corporation has sufficient
assets to cover its liabilities
exclusive of capital stock
Unless he sells his shares, a
stockholder cannot get back his
investment nor compel the
corporation to buy his shares
except in the exercise of his
appraisal right
15. The proper forum may Courts cannot interfere I the
interfere in the management
of a close corporation in case
of deadlocks under Section
104, even of the
directors/stockholders are
acting in good faith
business judgment of the
directors/stockholders
BUSINESS JUDGMENT RULE
16. Any stockholder may
petition the SEC for corporate
dissolution on grounds among
others, provides for in section
105
Dissolution may be had only on
the grounds provided by the
provisions of the Code on
dissolution and P.D. 902-A, as
amended

Manuel Dulay Enterprises vs. CA
- What was the position of Manuel Dulay here? President,
General Manager and Treasurer
- Cannot act both as president and treasurer at the same
time
- Since it is a close corporation owned by the family of
Manuel Dulay, save and except the secretary, it should be
governed by Title XII
- Petitioner is classified as a close corporation and
consequently a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate,
a corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed
ratified by the absent director unless the latter promptly
files his written objection with the secretary of the
corporation after having knowledge of the meeting which,
in this case, petitioner Virgilio Dulay failed to do.
- Virgilio Dulay is a signatory witness, he knows very well
about the deed of absolute sale, he is estopped
Naguiat vs. NLRC
- Section 100 par. 5. To the extent that the stockholders are
actively engaged in the management or operation of the
business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance.
Family corporations is not automatically a close
corporation the 3 qualifying conditions must be present.
SPECIAL CORPORATIONS
2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
What provision governs educational corporations?
Section 106. Incorporation. - Educational
corporations shall be governed by special laws and by the
general provisions of this Code. (n)
- Special laws like they Education Act of the Philippines
- These institutions of learning, once recognized by the
government as such are mandated by law to be
incorporated within ninety (90) days under the provisions
of the Corporation Code and must, perforce, comply with
the requirements and procedure laid down there under.
Their failure to so will not immune the educational
institution from suit as a corporation. (Chiang Kai Siek Case)
- Favorable recommendation of government agency
involved
Two types of educational corporations
- Certificate of completion in the academic field
- Vocational and technical ones
o Recommendation of DECS if certificate of
completion in the academic field
How is the governing board of an educational institution
instituted?
- Non-stock- multiples of 5 only (example: 5,10,15)
- Stock- can be anywhere between 5 to 15
Can they consist of 7 or 9 members?
- Yes, if stock
Can they be incorporated also as non-stock?
- Yes
- B.P. 232 allows the organization of an educational
institution that is stock corporation, only if they do not
issue a certificate of completion in the academic field
Qualifications and disqualifications of the membership in
the board of an educational corporation
- Educational corporations are governed by special laws and
general provisions, hence if there is no provision in the
special law, you go back to section 25 and 27 of the
general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional qualifications and
disqualifications
Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident
and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person,
except that no one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by law
and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees
as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)
Section 27. Disqualification of directors, trustees or officers.
- No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer
of any corporation. (n)
Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards, shall
be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of
the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino equity
participation in all educational institutions. The control and
administration of educational institutions shall be vested
in citizens of the Philippines.

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

A foreign corporation not doing business in the
Philippines, may it be sued?
- If it is not transacting business in the country it cannot be
sued for lack of jurisdiction
Is there any sanction that can be enforced to foreign
corporations which are doing business without the
required license?
- Penal sanctions under section 144
- Any violation of the code is subject to such penal sanctions
What would constitute doing business?
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose
and object of its organization (Mentholatum Co. Inc. vs.
Mangaliman)
Mentholatum vs. Mangaliman
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose
and object of its organization
- Whatever transaction the Philippine-American Drug Co.
had executed in view of the law, the Mentholatum Co. did
it itself. And the Mentholatum Co. being a foreign
corporation doing business in the Philippines without the
license required by section 68 of the Corporation Law, it
may not prosecute this action for violation of trade mark
and unfair competition
Why is foreign corporations barred access from our courts
if they do business without a license?
- Marshall-Wells Co. vs. Henry W. Elser and Co.
Marshall-Wells Co. vs. Henry W. Elser and Co.
- The object of the statute was to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of its courts. The object of the statute was not
to prevent the foreign corporation from performing single
acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to
render it amenable to suit in local courts.
Bulakhidas vs. Navarro
- It is settled that if a foreign corporation is not engaged in
business in the Philippines, it may not be denied the right
to file an action in Philippine courts for isolated
transactions
- The object of section 68 and 69 of the Corporation law
was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a
domicile for the purpose of business without taking the
steps necessary to render it amenable to suit in the local
courts. It was never the purpose of the Legislature to
exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, from
securing redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs. Manila Port Service
- It must stated that the section is not applicable to a
foreign corporation performing single acts or isolated
transactions. There is nothing to show that the petitioner
has been in the Philippines engaged in continuing business
or enterprise for which it was organized, when the sixteen
bundles were erroneously discharged in manila, for it to be
considered as transacting business in the Philippines. The
fact is that the bundles, the value of which is sought to be
recovered, were landed not as a result of a business
transaction, isolated or otherwise, but due to a mistaken
belief that they were part of the shipment of forty similar
bundles consigned to persons or entities in the Philippines,
there is no justification therefore, for invoking the section
There were 3 contracts entered into, how come they were
still not considered as doing business? (Antam Consolidted,
Inc. vs. CA)
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction however,
is not merely incidental or casual but indicates the foreign
corporations intention to do other business in the
Philippines, said single act or transaction constitutes
doing or engaging in or transacting business in the
Philippines
- In the case at bar, the transaction entered into by the
respondent with the petitioners are not a series of
commercial dealings which signify an intent on the part of
the respondent to do business in the Philippines but
constitute an isolated one which does not fall under the
category of doing business.
- The records show that the only reason why the
respondent entered into the second and third transactions
with the petitioner was because it wanted to recover the
loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction
and in order to give the latter a chance to make good on
their obligation. From these facts alone, it can be
deducted that in reality there was only one agreement
between the petitioners and the respondent.
- The three seemingly different transactions were entered
into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part of
the respondent to engage in a continuity of transactions
with petitioners which will categorize it as a foreign
corporation doing business in the Philippines
- 3 contracts, but according to the court was not doing
business in the Philippines
Far East Intl import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme Court
was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction however,
is not merely incidental or casual but indicates the foreign
corporations intention to do other business in the
Philippines, said single act or transaction constitutes
doing or engaging in or transacting business in the
Philippines
- In the instant case, the testimony of Atty. Pablo Ocampo,
that appellant was doing business in the Philippines
corroborated by no less than Nabuo Toshida, one of
appellants officers, that he was sent to the Philippines to
look into the operation of mines, thereby revealing the
defendants desire to continue engaging in business here,
after receiving the shipment of the scrap iron under
consideration, making the Philippines a base thereof.
- In such a case, the single act of transaction is not merely
incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the operations for the
conduct of a part of corporations ordinary business
If a corporation appoints a distributor or a representative,
will it necessarily imply doing business in the country?
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- Appointment of a distributor or representative in the
Philippines, unless it has an independent status (transacts
and does business in its own name and for its account and
not of the foreign corporation)
- if that be the case the mere appointment of a distributor
will not constitute doing business
How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner ASPAC
and the respondents show that there are provisions which
are highly restrictive in nature, such as to reduce
petitioner ASPAC to a mere extension or instrument of the
private respondents
- ITEC was doing business without a license, however
ASPAC is estopped
- by entering into the Representative Agreement with
ITEC, petitioner is charge with knowledge that ITEC was
not licensed to engage in business activities in the country,
and is thus stopped from raising in defense such incapacity
of ITEC, having chosen to ignore or even presumptively
take advantage of the same
- In top-weld we ruled that a foreign corporation may be
exempted from the license requirements in order to
institute an action in our courts if its representative in the
country maintained an independent status during the
existence of the disputed contract. Petitioner is deemed
to have acceded to such independent character when it
entered into the Representative Agreement with ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal or
contract rights arising from, or growing out of any
business which it has transacted in the Philippine Islands.
The sole purpose of the action is to protect its reputation,
its corporate name, its goodwill, whenever that
reputation, corporate name or goodwill have through the
natural development of its trade, established themselves
- And it contends that its rights to the use of its corporate
and trade name, is a property right, a right in rem, which
may assert and protect against all the world, in any of the
courts of the world even in jurisdictions where it does not
transact business just the same as it may protect its
tangible property, real or personal, against trespass, or
conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but
extends to every market where the traders goods have
become known and identified by the use of the mark
General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business in
the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
favorably known in the Islands through the use therein of
its products bearing its corporate and trade name has a
legal right to maintain an action in the Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to counteract the effects of said
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts for
infringement of a mark or trade-name, for unfair
competition, or false designation of origin and false
description, whether or not it has been licensed to do
business in the Philippines under Act Numbered Fourteen
hundred and fifty-nine, as amended, otherwise known as
Corporation Law, at the time it brings complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and
MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity Fair
Mills Inc. vs. T. Eaton Co. this court further said:
By the same token, the petitioner should be
given the same treatment in the Philippines as
we make available to our own citizens. We are
obliged to assure to nationals of countries of
the Union an effective protection against unfair
competition on the same way that they are
obligated to similarly protect Filipino Citizen
and firms
- The ruling in the aforecited case is in consonance with the
Convention of the Union of Paris for the protection of
Industrial Property to which the Philippines became a
party. Article 8 thereof provides that a trade name shall be
protected in all the countries of the Union without the
obligation of filing or registration, whether or not it forms
part of the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts, in the
first place it was not doing business in the Philippines
- The marketing of its products in the Philippines is done
through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which
buys and then markets not only products of the petitioner
but also many other products bearing equally well-known
and established trademarks and trade-names
Assuming Rustans had no independent status would the
SC grant Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it can bring
action because the case involves a violation of our penal
code
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the
preliminary investigation being conducted by the Special
Prosecutor the information shall be in the name of the
People of the Philippines and no longer the petitioner
which is only an aggrieved party since a criminal offense is
essentially an act against the State. It is the latter which is
principally the injured party although there is a private
right violated
- The records show that the goodwill and reputation of the
petitioners products bearing the trademark Lacoste date
back even before 1964 when Lacoste clothing apparels
were forst marketed in the Philippines. To allow
Hemandas to continue using the trademark Lacoste for
the simple reason that he was the first registrant in the
Supplemental Register of a trademark used in
international commerce and not belonging to him is to
render nugatory the very essence of the law on
trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
- The law denies to a foreign corporation the right to
maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the fact
that the suing corporation is exempt there from, becomes
a necessary averment in the complaint
- These are matters peculiarly within the knowledge of
appellants alone, and it would be unfair to impose upon
appellee the burden of asserting and proving the contrary.
It is enough that foreign corporations are allowed by law
to seek redress in our courts under certain conditions: the
interpretation of the law should not go so far as to
include, in effect, an inference than those conditions have
been met from the mere fact that the party suing is a
foreign corporation
Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos in the
case at bar, since the petitioner is not maintaining any
suit but is merely defending one against itself; it did not
file any complaint but only a corollary defensive petition to
prohibit the lower court from further proceeding with a
suit that it had no jurisdiction to entertain
What law govern foreign corporation doing and
transacting business in the Philippines with a license
- Laws of the Republic of the Philippines save and except
that would normally be those matters which concern its
formation, organization or dissolution, or those fixing the
relationship, liabilities, responsibilities, or duties of the
stockholders, members or officers of the foreign
corporation or their relations to each other.
- In effect, intra-corporate or internal matters not affecting
creditors or the public in general are governed not by
Philippine laws but the law under which the foreign
corporation was formed or organized
Section 129. Law applicable. - Any foreign
corporation lawfully doing business in the Philippines shall
be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only
as provide for the creation, formation, organization or
dissolution of corporations or those which fix the
relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to
each other or to the corporation. (73a)
Will the pre-emptive rights of a foreign corporation be
governed by the same section of the code? Is the pre-
emptive rights of a stockholder in a domestic corporation
same as the pre-emptive of a stockholder of a foreign
corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign corporation?
How do you distinguish this case from a Philippine law?
- Since it concerns the rights of stockholders it is the law of
New York that should govern
Is the license to do business of a foreign corporation
subject to suspension or revocation? What are the
grounds?
Section 134. Revocation of license. - Without
prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the Securities
and Exchange Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any fees as
required by this Code;
2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required by
this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment to
its articles of incorporation or by-laws or of any articles of
merger or consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit to transact
business in the Philippines. (n)
SEC does not have the sole authority to suspend or revoke
the license of a foreign corporation doing business in the
Philippines, other government agencies like the Central
Bank , the Insurance Commission may also do so within
their respective dominion, despite the provision of section
134
If the SEC believes that revocation is warranted, section
135 provides that:
Section 135. Issuance of certificate of revocation.
- Upon the revocation of any such license to transact
business in the Philippines, the Securities and Exchange
Commission shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.
The Securities and Exchange Commission shall
also mail to the corporation at its registered office in the
Philippines a notice of such revocation accompanied by a
copy of the certificate of revocation. (n)
Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign corporations.
- Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the Philippines
may be allowed to withdraw from the Philippines by filing
a petition for withdrawal of license. No certificate of
withdrawal shall be issued by the Securities and Exchange
Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have
been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Philippine Government or any of its
agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks in
a newspaper of general circulation in the Philippines.

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

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

-SEC. 2. Declaration of State Policy. The State shall establish a
socially conscious, free market that regulates itself, encourage the
widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the capital
market, protect investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create
distortions in the free market.

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

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

NOTE: No person shall engage in the business of
buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an associated
person of any broker or dealer unless registered as
such with the Commission. (Sec 28)

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

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

EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the
Government of the PH, or by any political subdivision or
agency thereof, or by any person controlled or supervised
by, and acting as an instrumentality of said Government.
b) Any security issued or guaranteed by the
government of any country with diplomatic relations with
the PH, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, that the SEC
may require compliance with the form and content of
disclosures the Commission may prescribe.
c) Certificates issued by a receiver or by a trustee
in bankruptcy duly approved by the proper adjudicatory
body.
d) Any security or its derivatives the sale or
transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission,
Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue.
e) Any security issued by a bank except its own
shares of stock.

AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency
or bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona fide debt, a
security pledged in good faith as security for such debt.
c) An isolated transaction in which any security is
sold, offered for sale, subscription or delivery by the
owner thereof, or by his representative for the owners
account, such sale or offer for sale, subscription or delivery
not being made in the course of repeated and successive
transactions of a like character by such owner, or on his
account by such representative and such owner or
representative not being the underwriter of such security.
d) Distribution by a corporation, actively engaged
in the business authorized by its AOI, of securities to its
stockholders or other security holders as a stock dividend
or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
f) Issuance of bonds or notes secured by
mortgage upon real estate or tangible personal property,
where the entire mortgage together with all the bonds or
notes secured thereby are sold to a single purchaser at a
single sale.
g) Issue and delivery of any security in exchange
for any other security of the same issuer pursuant to a
right of conversion entitling the holder of the security
surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security
issued and delivered in exchange, if sold at the conversion
price, would at the time of such conversion fall within the
class of securities entitled to registration under this Code.
Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange
are sold.
h) Brokers transactions, executed upon
customers orders, on any registered Exchange or other
trading market.
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is incurred,
or no commission, compensation or remuneration is paid
or given in connection with the sale or disposition of such
securities, and only when the purpose for soliciting, giving
or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its
authorized capital increased.
j) The exchange of securities by the issuer with its
existing security holders exclusively, where no commission
or other remuneration is paid or given directly or indirectly
for soliciting such exchange.
k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any twelve-
month period.
l) The sale of securities to any number of the
following qualified buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance company; (iv) Pension
fund or retirement plan maintained by the Government of
the Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the
Commission may by rule determine as qualified buyers, on
the basis of such factors as financial sophistication, net
worth, knowledge, and experience in financial and
business matters, or amount of assets under management.

PROTECTION OF SHAREHOLDERS INTEREST

1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)

TENDER OFFER A publicly announced intention acting alone or in
concert with others to acquire equity securities of a company. (2002
Bar Exams)

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

PROXY SOLICITATION

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

FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS

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

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

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

Note: Marking the close, Painting the tape, Squeezing the
float, Hype and dump, Boiler Room Operations become
unlawful if it is effected to either raise the price or induce
the purchase of a security or of a controlling, controlled, or
commonly controlled company by others or to depress the
price to induce the sale of a security, whether of the same or
of a different class, of the same issuer or of a controlling,
controlled company or common controlled company by
others or to create active trading to induce the purchase
through said devices or schemes.

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

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

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

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

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

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

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

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

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

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CORPORATION LAW

Corporation is one of the types of business organizations.

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