Revised Corporation Reviewer PDF

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Revised Corporation Reviewer pdf
Accounting (Lyceum of the Philippines University)
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AUSL/CORPORATION LAW REVIEWER/AJP-SFO
ARELLANO UNIVERSITY SCHOOL OF LAW awarded. (MERALCO vs. Team Electronics

Corporation, 2007)
BUSINESS ORGANIZATION II
CORPORATION LAW REVIEWER 2. CORPORATION HAS THE POWERS AS
MAY EXPRESSLY BE CONFERRED BY
ATTY. RUBEN LADIA LAW.
By: PARRENO, ANTONY J. DOCTRINE OF LIMITED CAPACITY in the

corporate form of business. Unlike a natural
OLIVA, STEPHANIE FAYE person, it can only do such acts and things as
the law allows it to do.
DEFINITION OF A CORPORATION Thus, the definition that it has the powers,

attributes and properties expressly authorized
Section 2. Corporation defined. – A by law or incident to its existence.
corporation is an artificial being created by
operation of law, having the right of succession DIFFERENT TYPES OF CORPORATIONS
and the powers, attributes and properties
expressly authorized by law or incident to its Section 3. Classes of corporations. –
existence. Corporations formed or organized under this
Code may be stock or non-stock corporations.
ATTRIBUTES Corporations which have capital stock divided
into shares and are authorized to distribute to
1. CORPORATION AS AN ARTIFICIAL the holders of such shares dividends or
BEING allotments of the surplus profits on the basis of
the shares held are stock corporations. All
Q: IS A CORPORATION ENTITLED TO THE other corporations are non-stock corporations.
AWARD OF MORAL DAMAGES? (3a)
No. It is not entitled to moral damages. Moral Section 4. Corporations created by special
damages may be awarded in recompense for laws or charters. – Corporations created by
physical suffering, mental anguish, fright, special laws or charters shall be governed
serious anxiety, besmirched reputation, primarily by the provisions of the special law or
wounded feelings, moral shock, and similar charter creating them or applicable to them,
injury. (Tamayo vs. University of Negros, supplemented by the provisions of this Code,
1962) insofar as they are applicable. (n)
A corporation being an artificial person existing Stock Corporations - one with capital stock
only in contemplation of the law has No divided into shares and are authorized to
Feelings. It has No Emotions and No Senses. It distribute allotment of its surplus profits by
cannot thus experience mental anguish and way of dividends.
physical suffering.
REQUISITES IN ORDER THAT A
INSTANCES WHEN MORAL DAMAGES MAY CORPORATION MAY CONSIDERED AS A
BE AWARDED: STOCK
A corporation may have a good reputation 1. A capital stock divided into shares;
which is besmirched may also be a ground for
the award of moral damages. (Mambulao 2. The authority to distribute allotment of
Lumber vs. PNB, 1968) its surplus profits by way of dividends
Article 2219 enumerates the instances when All others are Non-Stock.
moral damages may be awarded. Said provision
authorizes the recovery of moral damages in CORPORATIONS WITH CAPITAL STOCK BUT
cases of libel, slander and any other form of THEY ARE NOT STOCK CORPORATIONS.
defamation.
Club shares - they have capital stock divided
This provision of the Civil Code does not qualify into shares but they are Non-Stock in the sense
whether the plaintiff is a natural or a juridical that they do not distribute allotment of their
person. Thus, a juridical person can validly surplus profits by way of dividends.
complain for libel and any other form of
defamation and claim for moral damages. Example: Manila Golf Club
(Filipinas Broadcasting vs. Ago Medical
Center, 2005, Art. 2219, (7), NCC)
When the corporation has a reputation that is

debased resulting in its humiliation in the
business realm, moral damages may be
AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |1

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Q. WHAT WOULD BE THE IMPORTANCE OF This cannot be done in case of a Stock

KNOWING THE TYPE OF CORPORATIONS Corporation due to the Doctrine of Limited
INVOLVED? Capacity
It is important in order to determine what law Note however that if there is no by-law
or provision of the law may apply to them. In provision authorizing the holding of the
case of Stock and Non-Stock Corporations: members’ meetings in Non-Stock Corporation
then of course the meeting can also be held
Section 87(2). The provisions governing stock only within the territorial boundaries of the city
corporation, when pertinent, shall be or municipality where it has its principal office.
applicable to non-stock corporations, except as
may be covered by specific provisions of this Section 87, the provisions governing Stock
Title. Corporations will apply; So if there is no such
by-law provision, then the same rule with
The abovementioned provision provides that: respect to a stock corporation will also apply to
non-stock.
“The provisions governing Stock corporations
when pertinent shall be applicable to Non- Section 51. Place and time of meetings of
Stock corporations except as may be provided stockholders of members. – Stockholder’s or
by Title 11.” member’s meetings, whether regular or special,
shall be held in the city or municipality where
Therefore, Title 11 is the provision governing the principal office of the corporation is located,
Non-Stock Corporations and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall,
Venue of Meetings of Stockholders for purposes of this section, be considered a
city or municipality.
Section 51. Place and time of meetings of
stockholders of members. – Stockholder’s or Notice of meetings shall be in writing, and the
member’s meetings, whether regular or special, time and place thereof stated therein.
shall be held in the city or municipality where
the principal office of the corporation is located, All proceedings had and any business
and if practicable in the principal office of the transacted at any meeting of the stockholders
corporation: Provided, That Metro Manila shall, or members, if within the powers or authority
for purposes of this section, be considered a of the corporation, shall be valid even if the
city or municipality. meeting be improperly held or called, provided
all the stockholders or members of the
Notice of meetings shall be in writing, and the corporation are present or duly represented at
time and place thereof stated therein. the meeting.
All proceedings had and any business Metro Manila is considered as one single City
transacted at any meeting of the stockholders or Municipality.
or members, if within the powers or authority
of the corporation, shall be valid even if the So whether they be non-stock or stock
meeting be improperly held or called, provided corporation, if the principal office is located
all the stockholders or members of the anywhere in Metro Manila, they can hold their
corporation are present or duly represented at meetings also anywhere within Metro Manila.
the meeting.
Section 24. Election of directors or trustees. –
Stockholders Meetings can only be held within At all elections of directors or trustees, there
the territorial boundaries of the city or must be present, either in person or by
municipality where the corporation has its representative authorized to act by written
principal office and as far as practicable, at the proxy, the owners of a majority of the
principal office of the corporation. outstanding capital stock, or if there be no
capital stock, a majority of the members
Section 93. Place of meetings. – The by-laws entitled to vote. The election must be by ballot
may provide that the members of a non-stock if requested by any voting stockholder or
corporation may hold their regular or special member. In stock corporations, every
meetings at any place even outside the place stockholder entitled to vote shall have the right
where the principal office of the corporation is to vote in person or by proxy the number of
located: Provided, That proper notice is sent to shares of stock standing, at the time fixed in
all members indicating the date, time and place the by-laws, in his own name on the stock
of the meeting: and Provided, further, That the books of the corporation, or where the by-laws
place of meeting shall be within the Philippines. are silent, at the time of the election; and said
stockholder may vote such number of shares
A Non-Stock Corporation can validly provide for as many persons as there are directors to be
in their by-laws that members’ meetings may elected or he may cumulate said shares and
be held anywhere in the Philippines. give one candidate as many votes as the
number of directors to be elected multiplied by

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the number of his shares shall equal, or he Q. WHAT LAW GOVERNS THEM?
may distribute them on the same principle
among as many candidates as he shall see fit: They are governed by the Special Law creating
Provided, That the total number of votes cast them; supplemented by the provisions of the
by him shall not exceed the number of shares Corporation Code when pertinent.
owned by him as shown in the books of the
corporation multiplied by the whole number of Thus, where there is a provision in the special
directors to be elected: Provided, however, That law creating them, the special law will govern
no delinquent stock shall be voted. Unless even if it may run counter to the provisions of
otherwise provided in the articles of the Corporation Code.
incorporation or in the by-laws, members of
corporations which have no capital stock may
cast as many votes as there are trustees to be In Gonzales vs. PNB, a stockholder sought to
elected but may not cast more than one vote for inspect the financial books and records of the
one candidate. Candidates receiving the Philippine National Bank.
highest number of votes shall be declared
elected. Any meeting of the stockholders or The Supreme Court held that a particular
members called for an election may adjourn stockholder cannot inspect the financial books
from day to day or from time to time but not and records because the PNB was created by
sine die or indefinitely if, for any reason, no special law. The special law creating PNB
election is held, or if there are not present or provides that, “the financial books and records
represented by proxy, at the meeting, the of the PNB may be inspected only by the
owners of a majority of the outstanding capital Monetary Board of the Central Bank and the
stock, or if there be no capital stock, a majority result of the inspection can only be revealed to
of the members entitled to vote. (31a) the President of the Republic of the Philippines,
the Secretary of Finance and of the members of
Section 24 speaks of Cummulative Voting. the Board of PNB itself.’”
Cummulative Voting is a matter of Right in LAWS GOVERNING EMPLOYER-EMPLOYEE

Stock Corporations and cannot be denied by RELATIONSHIP:
the provisions of the Articles of Incorporation or
By-Laws. (1) National Labor Code
Whereas, in Non-Stock Corporations unless (2) Civil Service Law

provided for in the Articles of Incorporation or
by-laws, members are entitled to cast only one Q. WHAT LAW GOVERNS EMPLOYER-
vote per candidate. EMPLOYEE RELATIONSHIP IN GOCC’s OR
THOSE WITH THEIR OWN CHARTER?
GR: in Non-stock corporations, cummulative
voting is not allowed. The test in determining whether a Government-
Owned or Controlled Corporation is subject to
XPN: the Civil Service Law is the manner of its
creation (PNOC-EDC vs NLRC).
(1) Sec. 24 also states, “Unless otherwise
provided for in the Articles of If it is created by special law or it has its own
Incorporation”. charter, then the Civil Service Law will apply.
(2) Under the provisions of Title 11, the When it is incorporated under the General
Articles of Incorporation or by-laws of a Corporation Law, it is the Labor Laws.
non-stock corporation under Sec. 89,
may broaden, limit or deny voting PNOC was created by special law, so therefore,
rights of the members. Meaning, it can generally it is governed by the Civil Service
validly allow also cummulative voting. Law. But PNOC-EDC, which is a subsidiary of
PNOC, was created by merely following the
CORPORATIONS CREATED BY SPECIAL LAW requirements and procedures laid down by the
Corporation Code.
Section 4. Corporations created by special
laws or charters. – Corporations created by There was an issue regarding employer-
special laws or charters shall be governed employee relationship in PNOC-EDC, not the
primarily by the provisions of the special law or PNOC itself. Therefore, since it was created by
charter creating them or applicable to them, the Corporation Code pursuant to the
supplemented by the provisions of this Code, Corporation Code, the employer-employee
insofar as they are applicable. (n) relationship issue will be governed by the Labor
Laws.

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COMMENCEMENT OF CORPORATE 4. The term for which the corporation is to

EXISTENCE exist;
Section 19. Commencement of corporate 5. The names, nationalities and residences of

existence. – A private corporation formed or the incorporators;
organized under this Code commences to have
corporate existence and juridical personality 6. The number of directors or trustees, which
and is deemed incorporated from the date the shall not be less than five (5) nor more than
Securities and Exchange Commission issues a fifteen (15);
certificate of incorporation under its official
seal; and thereupon the incorporators, 7. The names, nationalities and residences of
stockholders/members and their successors persons who shall act as directors or trustees
shall constitute a body politic and corporate until the first regular directors or trustees are
under the name stated in the articles of duly elected and qualified in accordance with
incorporation for the period of time mentioned this Code;
therein, unless said period is extended or the
corporation is sooner dissolved in accordance 8. If it be a stock corporation, the amount of its
with law. (n) authorized capital stock in lawful money of the
Philippines, the number of shares into which it
GR: Corporation commences to exist upon the is divided, and in case the share are par value
issuance of the Certificate of Incorporation or shares, the par value of each, the names,
Registration by the SEC. nationalities and residences of the original
subscribers, and the amount subscribed and
XPN: paid by each on his subscription, and if some
or all of the shares are without par value, such
(1) Corporation sole commences to exist fact must be stated;
and will be vested with a juridical
personality upon the filing of the 9. If it be a non-stock corporation, the amount
verified Articles of Incorporation with of its capital, the names, nationalities and
the SEC. residences of the contributors and the amount
contributed by each; and
(2) Those created by special law. They are
not issued approval or certificates of 10. Such other matters as are not inconsistent
incorporation by the SEC but they are with law and which the incorporators may
created by law. It will commence to deem necessary and convenient.
exist upon the effectivity of the law
creating them. The Securities and Exchange Commission shall
not accept the articles of incorporation of any
CONTENTS AND FORMAT OF THE stock corporation unless accompanied by a
ARTICLES OF INCORPORATION sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five
Section 14. Contents of the articles of (25%) percent of the authorized capital stock of
incorporation. – All corporations organized the corporation has been subscribed, and at
under this code shall file with the Securities least twenty-five (25%) of the total subscription
and Exchange Commission articles of has been fully paid to him in actual cash
incorporation in any of the official languages and/or in property the fair valuation of which
duly signed and acknowledged by all of the is equal to at least twenty-five (25%) percent of
incorporators, containing substantially the the said subscription, such paid-up capital
following matters, except as otherwise being not less than five thousand (P5,000.00)
prescribed by this Code or by special law: pesos.
1. The name of the corporation; Section 15. Forms of Articles of Incorporation.

– Unless otherwise prescribed by special law,
2. The specific purpose or purposes for which articles of incorporation of all domestic
the corporation is being incorporated. Where a corporations shall comply substantially with
corporation has more than one stated purpose, the following form:
the articles of incorporation shall state which is
the primary purpose and which is/are the ARTICLES OF INCORPORATION OF
secondary purpose or purposes: Provided, That (Name of Corporation)
a non-stock corporation may not include a
purpose which would change or contradict its KNOW ALL MEN BY THESE PRESENTS:
nature as such;
The undersigned incorporators, all of legal age
3. The place where the principal office of the and a majority of whom are residents of the
corporation is to be located, which must be Philippines, have this day voluntarily agreed to
within the Philippines; form a (stock) (non-stock) corporation under
the laws of the Republic of the Philippines;

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AND WE HEREBY CERTIFY: (Modify Nos. 8 and 9 if shares are with no par
value. In case the corporation is non-stock,
FIRST: That the name of said corporation shall Nos. 7, 8 and 9 of the above articles may be
be "_______, INC. or CORPORATION"; modified accordingly, and it is sufficient if the
articles state the amount of capital or money
SECOND: That the purpose or purposes for contributed or donated by specified persons,
which such corporation is incorporated are: (If stating the names, nationalities and residences
there is more than one purpose, indicate of the contributors or donors and the respective
primary and secondary purposes); amount given by each.)
THIRD: That the principal office of the TENTH: That _______ has been elected by the
corporation is located in the City/Municipality subscribers as Treasurer of the Corporation to
of _________, Province of ________, Philippines; act as such until his successor is duly elected
and qualified in accordance with the by-laws,
FOURTH: That the term for which said and that as such Treasurer, he has been
corporation is to exist is _____________ years authorized to receive for and in the name and
from and after the date of issuance of the for the benefit of the corporation, all
certificate of incorporation; subscription (or fees) or contributions or
donations paid or given by the subscribers or
FIFTH: That the names, nationalities and members.
residences of the incorporators of the
corporation are as follows: ELEVENTH: (Corporations which will engage in
any business or activity reserved for Filipino
NAME NATIONALITY RESIDENCE citizens shall provide the following):
____________ _____________ _____________
"No transfer of stock or interest which shall
SIXTH: That the number of directors or reduce the ownership of Filipino citizens to less
trustees of the corporation shall be _______; than the required percentage of the capital
and the names, nationalities and residences of stock as provided by existing laws shall be
the first directors or trustees of the corporation allowed or permitted to be recorded in the
are as follows: proper books of the corporation and this
restriction shall be indicated in all stock
NAME NATIONALITY RESIDENCE certificates issued by the corporation."
____________ _____________ _____________
IN WITNESS WHEREOF, we have hereunto
SEVENTH: That the authorized capital stock of signed these Articles of Incorporation, this
the corporation is ________ (P_____) PESOS in ___day of __, 19 ______ in the City/Municipality
lawful money of the Philippines, divided into of ___________, Province of _______, Republic of
_______ shares with the par value of _______ the Philippines.
(P_____) Pesos per share. __________ _________
(In case all the share are without par value): (Names and signatures of the incorporators)
That the capital stock of the corporation is SIGNED IN THE PRESENCE OF:
_______ shares without par value. (In case some ___________ __________
shares have par value and some are without
par value): That the capital stock of said (Notarial Acknowledgment)
corporation consists of ______ shares of which
_______ shares are of the par value of _______ TREASURER’S AFFIDAVIT
(P_______) PESOS each, and of which _____ REPUBLIC OF THE PHILIPPINES)
shares are without par value. CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
EIGHTH: That at least twenty five (25%) per
cent of the authorized capital stock above I, _________, being duly sworn, depose and say:
stated has been subscribed as follows:
That I have been elected by the subscribers of
Name of Subscriber the corporation as Treasurer thereof, to act as
Nationality such until my successor has been duly elected
No. of Shares Subscribed and qualified in accordance with the by-laws of
Amount Subscribed the corporation, and that as such Treasurer, I
_________ _________ __________ __________ hereby certify under oath that at least 25% of
the authorized capital stock of the corporation
NINTH: That the above-named subscribers has been subscribed and at least 25% of the
have paid at least twenty-five (25%) percent of total subscription has been paid, and received
the total subscription as follows: by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with
Name of Subscriber the Corporation Code.
Amount Subscribed Total Paid-In ____________________
____________ _____________ _____________ (Signature of Treasurer)

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SUBSCRIBED AND SWORN to before me, a GR: A corporation, once formed with its chosen
Notary Public, for and in the City/Municipality name cannot use any other name.
of____Province of _______, this _______ day of
___________, 19 _____; by ________ with Res. XPN:
Cert. No. ___________ issued at _________on
______, 19 ____ (1) Unless it has been amended in accordance
with the law.
NOTARY PUBLIC
My commission expires on _________, 19 _____ (2) As this would result in Confusion and may
open the door for Fraud and Evasion as
Doc. No. _________; well as Difficulties in administration and
Page No. _________; supervision.
Book No. ________;
Series of 19____ (7a) In Philips Export v. CA (1992), two requisites
must concur:
Prefatory Paragraph - where the incorporators
will say that it is being created in accordance 1. That the complainant corporation acquired
with the Philippine Laws a Prior Right over the use of the corporate
name; and
ARTICLE 1. CORPORATE NAME
2. The proposed name is either:
Section 18. Corporate name. – No corporate
name may be allowed by the Securities and a. Identical, Deceptively or Confusingly
Exchange Commission if the proposed name is Similar to any other existing
identical or deceptively or confusingly similar to corporation or anyone already
that of any existing corporation or to any other protected by law; or
name already protected by law or is patently
deceptive, confusing or contrary to existing b. Patently Deceptive, Confusing or
laws. When a change in the corporate name is Contrary to Law.
approved, the Commission shall issue an
amended certificate of incorporation under the Probability of Confusion
amended name. (n)
Proof of Actual Confusion need not be shown. It
suffices that the confusion is probably or likely
No corporate name shall be allowed by the SEC
to occur.
if the proposed name is:
In Lyceum of the Phil. V. CA, the Court held
(1) Identical, Deceptively or Confusingly
that the policy underlying the prohibition
similar to any existing corporation or any
against the registration of corporate name
other name already protected by law; or
which is identical, deceptively or confusingly
similar to that of any other corporation or is
(2) Patently deceptive, confusing, or contrary
patently deceptive or plainly confusing or
to law.
contrary to law is:
The name of the corporation designates the
The avoidance of confusion or fraud.
corporation in the same manner that the name
of an individual designates the person.
In this case, confusion has been effectively
precluded by including the geographical
This is so because the corporate name is the
location of the particular institutions of
“Principal Means” of distinguishing it not only
learning.
from the stockholders or members composing it
but also from other firms or entities.
Example: How could one be confused from
Lyceum of Baguio from Lyceum of Apari? They
Under Sec. 14 and 15, the corporate name
are far away situated from one another.
must include the word “Corporation” or
“Incorporated” either in its full or abbreviated
DOCTRINE OF SECONDARY MEANING
form, to distinguish it from any other type of
business entity.
A word or phrase originally incapable of
exclusive appropriation because they are
Only corporations can append the word
generic words with reference to an article in the
“Corporation” or ”Incorporated” in its chosen
market because of geographically, otherwise
name. It cannot be done in a partnership or
descriptive, might nevertheless have been used
sole proprietorship.
so long or so exclusively by one good user or
service provider that is with reference to the
article or service that in that trade or in that
branch of the purchasing public, the word or
phrase has become to mean that the article or
service is his own.

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ARTICLE 2. PURPOSE CLAUSE. Also true in a Non-Stock Corporation, unless

the Articles of Incorporation or By-Laws provide
The purpose or purposes for which the otherwise.
corporation is formed are as follows:
The articles and by-laws of a NON-STOCK
The importance of the purpose clause is that it corporation can validly provide that members’
practically defines the scope of the corporate meetings can be held ANYWHERE in the
enterprise. Philippines.
This is corollary to the Doctrine of Limited (3) Service of Summons

Capacity in the corporate form because it
confers as well as it limits the actual authority Service of summons to a corporation may be
of the corporation. served only also within the city or municipality
where it has its principal office.
Section 45. Ultra vires acts of corporations. –
No corporation under this Code shall possess (4) Registration of Chattel Mortgage
or exercise any corporate powers except those
conferred by this Code or by its articles of Under the Mortgage Law, if the shares of stocks
incorporation and except such as are necessary of a corporation are mortgaged, it must be
or incidental to the exercise of the powers so registered in the Registry of Deeds of the city or
conferred. (n) municipality where it has its Principal Office.
Section 45 provides that it can only do such And if the owner of the shares resides in
acts and things as are expressly granted by another city or municipality, it must also be
law, the articles of incorporation and those that registered in the city or municipality where he
are necessary or incidental thereto. resides.
If it acts or transacts business beyond such If these requirements of the Mortgage Law are
powers and authority, the act performed. It will not complied with, then the mortgage will not
be considered as Ultra Vires. be valid as against third parties.
Allowing a collateral attack on the part of the ARTICLE 4. CORPORATE TERM

contracting parties to question the validity of
the questioned act or transaction and escape Section 11. Corporate term. – A corporation
liability therefrom. shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless
ARTICLE 3. PRINCIPAL OFFICE sooner dissolved or unless said period is
extended. The corporate term as originally
“That the principal office of a corporation shall stated in the articles of incorporation may be
be located at Q.C, Metro Manila, Philippines” extended for periods not exceeding fifty (50)
years in any single instance by an amendment
This statement establishes the residence of the of the articles of incorporation, in accordance
corporation which may serve important for the with this Code; Provided, That no extension can
purpose of determining among others: be made earlier than five (5) years prior to the
original or subsequent expiry date(s) unless
(1) Venue of Actions for or against the there are justifiable reasons for an earlier
corporation. extension as may be determined by the
Securities and Exchange Commission. (6)
If an action is not based from a written
contract, the corporation can only be sued in “The term for which the corporation shall exist
the city or municipality where it has its shall be __no. of years from and after the date
principal office. of its registration.”
Of course, if it has a contract, then the contract GR: A Corporation can exist for a period not
may stipulate venue of actions that may arise exceeding fifty (50) years from the date of its
out of any question involving the same. incorporation.
(2) Venue of Meetings of stockholders XPN:

and/or members.
(1) Sooner Dissolved; or
In a Stock Corporation, meetings can only be
held within the territorial boundaries of the city (2) The period is extended by way of
or municipality where it has its principal office. amendment of the articles of incorporation.
And as far as practicable at the principal office
of the corporation. It may be extended for periods not
exceeding fifty (50) years, for any single
instance by amendment of the articles of
incorporation.

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GR: No Extension of the corporate term can be Q. CAN MINORS BE INCORPORATORS, EVEN
made earlier than five (5) years, prior to the IF REPRESENTED BY THE GUARDIAN OR
expiration of the original term stated in the THEIR PARENTS?
articles of incorporation.
No. Because the law is categorical, and requires
XPN: There are Justifiable Reasons for an them to be All of Legal Ages.
earlier extension, as may be determined by the
SEC. Sec. 10 does not require any Citizenship, thus
no Citizenship requirement
ARTICLE 5. INCORPORATORS
GR: A corporation organized under Philippine
Section 5. Corporators and incorporators, Laws may have Incorporators consisting solely
stockholders and members. – Corporators are of Foreigners.
those who compose a corporation, whether as
stockholders or as members. Incorporators are XPN:
those stockholders or members mentioned in
the articles of incorporation as originally (1) If it is covered by our Nationalization Laws.
forming and composing the corporation and
who are signatories thereof. Example: Under the Trade Liberalization Law of
the Philippines
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a Corporations engaged in the retail trade may
non-stock corporation are called members. (4a) consist of stockholders solely of Foreigners if
“The names, nationalities and residences of the the paid-in capital is at least U.S $2.5Million or
incorporators” its peso equivalent.
Stockholders or Members originally forming the Q: IN THIS CASE, ALL THE

Corporation and who are signatories of the INCORPORATORS OR STOCKHOLDERS ARE
articles of incorporation are the Incorporators FOREIGNERS. IS THIS ALLOWED?
Section 10. Number and qualifications of Yes. Because the law only says “majority of
incorporators. – Any number of natural persons whom are residents of the Philippines”.
not less than five (5) but not more than fifteen
(15), all of legal age and a majority of whom are ARTICLE 6. DIRECTORS AND TRUSTEES
residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Section 23. The board of directors or trustees.
Each of the incorporators of s stock corporation – Unless otherwise provided in this Code, the
must own or be a subscriber to at least one (1) corporate powers of all corporations formed
share of the capital stock of the corporation. under this Code shall be exercised, all business
(6a) conducted and all property of such
corporations controlled and held by the board
Qualifications and Disqualifications as to who of directors or trustees to be elected from
may be Incorporators: among the holders of stocks, or where there is
no stock, from among the members of the
(1) Any number of “NATURAL” persons, not corporation, who shall hold office for one (1)
less than 5 but not more than 15; year until their successors are elected and
qualified. (28a)
(2) All of legal age; and
Every director must own at least one (1) share
(3) The majority of whom are residents of the of the capital stock of the corporation of which
Philippines he is a director, which share shall stand in his
name on the books of the corporation. Any
GR: A Corporation cannot generally be an director who ceases to be the owner of at least
Incorporator one (1) share of the capital stock of the
corporation of which he is a director shall
Because the law says “natural” persons. A thereby cease to be a director. Trustees of non-
corporation is not a natural person. stock corporations must be members thereof. A
majority of the directors or trustees of all
XPN: corporations organized under this Code must
be residents of the Philippines.
R.A 720, as amended by PD 122
“The names, nationalities and residences of the
Said law allows cooperatives and corporations, Directors or Trustees who are to serve as such
primarily organized to hold equities in Rural until their successors have been elected and
Banks. qualified in accordance with law.”

lOMoARcPSD|7948091
(1) Not less than 5 but not more than 15 Q: SHOULD THE STOCKHOLDER BE THE
members of the governing board BENEFICIAL OR EQUITABLE OWNER OF
THE SHARE IN ORDER THAT HE MAY
(2) Must own at least one (1) share of the QUALIFY TO BE A DIRECTOR? EXAMPLE,
Capital Stock whose share shall stand in THE PERSON HOLDS THE SHARE IN TRUST
his name in the books of the corporation FOR A CERTAIN MINOR, IS HE QUALIFIED
TO BE A DIRECTOR?
(3) Majority of them must be residents of the
Philippines. Yes. It suffices that he is possessed with Legal
Title to the shares (Lee vs. CA)
There may also be other Qualifications or
Disqualifications that may be provided in the What is material is the Legal Title to and not
by-laws in accordance with Sec. 47(5). Beneficial Ownership of the stock, as appearing
in the books of the corporation.
Section 47. Contents of by-laws. – Subject to
the provisions of the Constitution, this Code, As long as he holds at least one (1) share, as
other special laws, and the articles of appearing in the books of the corporation, no
incorporation, a private corporation may matter how he is holding the same, whether in
provide in its by-laws for: trust or otherwise, he becomes qualified to be a
Director.
5. The qualifications, duties and compensation
of directors or trustees, officers and employees; DISQUALIFICATION OF DIRECTORS
Again, there is no Citizenship Requirement, Section 27. Disqualification of directors,

Only Residency requirement. trustees or officers. – No person convicted by
final judgment of an offense punishable by
Thus, a corporation created under the laws of imprisonment for a period exceeding six (6)
the Philippines may have members of the years, or a violation of this Code committed
governing board consisting solely of Foreigners within five (5) years prior to the date of his
election or appointment, shall qualify as a
Unless barred by our nationalization laws. director, trustee or officer of any corporation.
(n)
Example: Sec. 4, Art. 14, 1987 Constitution
One cannot be and serve as a director if:
Subject to certain exceptions, the Management
of Educational Institutions shall be vested (1) He has been convicted by Final Judgment,
solely to citizens of the Philippines. not merely a charge, of an offense
punishable by imprisonment for a period
Educational institutions may have exceeding (6) years or a violation of the
Stockholders consisting of Foreigners. They can Corporation Code, committed within (5)
co-own or hold a maximum of (40%) of the years prior to the date of his election
capital stock of an educational corporation.
(2) As provided for in Section. 23, if he ceases
Q. BEING STOCKHOLDERS, CAN THEY to own at least one (1) share of the capital
QUALIFY TO BE DIRECTORS? stock.
GR: No. There is a constitutional prohibition. (3) Others as may be provided for in the By-
Because a director is a Manager of the Laws
corporation. And since the management is
vested solely to citizens of the Philippines, even As provided for in Section. 47, the by-laws
if they may have shares of stock, these may provide for additional qualifications
foreigners cannot qualify to be and to act as and disqualifications for membership in the
directors. board.
XPN: Those created by Mission Boards, In the case of Gokungwei vs. SEC, Gokungwei
Charitable Institutions and Religious Orders. has business interests directly in competition
with the San Miguel Corporation.
Example: St. Louis University, created by a
religious sect based in Beligium. The president San Miguel amended the by-laws to provide for
and the chairman of the board is a Belgian a Disqualification for membership of the board:
priest.
Disqualifying a stockholder from being
elected as a member of the board, if he
happens to own a controlling interest in
another business or enterprise directly
in competition with San Miguel.

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The Supreme Court upheld the validity of the (1) At least 25% of the authorized capital stock
By-Laws, inserting said disqualification as must be Subscribed
being reasonable, as it prevents the uniting of
incompatible interests in one single enterprise. (2) At least 25% of the Total Subscription must
be paid
OTHER ALLIED LAWS TO CONSIDER FOR
PURPOSES OF DISQUALIFICATION: Meaning, the law does not require that each of
the subscribers must pay at least 25% of their
(1) Central Bank Banking Laws respective subscription.
A person charged with an offense involving Thus, anyone or some of these stockholders or
Financial Fraud cannot be a director in a subscribers may pay the minimum paid-up
financial institution. This is an exception from capital of 25% of the Total Subscription, while
the law requiring conviction by final judgment, the others may not have paid a single centavo
under Section 27. out of their subscriptions.
(2) Financial Company Act of the Philippines In no case however, that the paid-up capital be
less than P5,000.00
You have to submit NBI and Police Clearance of
Directors applying in a financing company. But again we have to note that while the law
How can he be a director therefore if he is prescribes P5,000.00 as the minimum paid-up
charged with an offense? capital, there are certain business activities
where the law or rules and regulations would
ARTICLE 7. CAPITAL STOCK require higher Paid-Up Capital than that
provided for by the Corporation Code.
If it is a Stock Corporation, it is
Example:
(1) The Authorized Capital Stock.
(2) The number of shares within which it is (1) Financing Company Act of the Philippines
divided
(3) The par value of its shares P10M minimum paid-up capital, if the principal
(4) There may be no par value shares office is located in Metro Manila.
(5) The amount subscribed,
(6) The names, residences and nationalities of P5M in other cities or municipalities
the subscribers and their respective
subscriptions (2) Banking
(7) The paid-in or paid-up capital
There is a minimum paid-up capital prescribed
If it is a Non-Stock Corporation, it is sufficient by the Central Bank
to indicate:
(3) POEA
(1) The operating capital
(2) The names, nationalities and residences of Those hiring for employees abroad or
those who contributed to the capital recruitment agencies, P3M
ARTICLE 8. SUBSCRIBED CAPITAL STOCK NB: Check the particular agency concerned as
they might have prescribed a minimum paid-up
ARTICLE 9. SUBSCRIBERS capital.
ARTICLE 10. TREASURER Q. WHAT IS CAPITAL?
ARTICLE 11. NO TRANSFER CLAUSE In the case of Gamboa v. Teves, 2011, this
case involves the PLDT Co. and the issue of
Section 13. Amount of capital stock to be whether or not PLDT has violated our
subscribed and paid for the purposes of nationalization laws that is, the maximum
incorporation. – At least twenty-five percent number of ownership of shares of foreigners in
(25%) of the authorized capital stock as stated the telecommunications industry.
in the articles of incorporation must be
subscribed at the time of incorporation, and at The Philippine Constitution reserves these
least twenty-five (25%) per cent of the total types of corporations to Philippine nationals or
subscription must be paid upon subscription, partnerships or corporations of which 60% of
the balance to be payable on a date or dates the capital stock is owned by Filipino citizens.
fixed in the contract of subscription without
need of call, or in the absence of a fixed date or In this case, the 60-40 requirement was
dates, upon call for payment by the board of breached. Foreigners were holding more than
directors: Provided, however, That in no case 40% of PLDT’s capital stock.
shall the paid-up capital be less than five
Thousand (P5,000.00) pesos. (n)
AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 10

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The Supreme Court held that the term Capital In effect, the Supreme Court reiterated its
in Sec. 11, Art. 12, 1987 Constitution refers earlier ruling. Three (3) Special Laws were
only to shares of stocks Entitled to Vote in the cited:
Election of Directors.
(1) Omnibus Investments Code of 1981
Considering that common shares with voting
rights translates to control as opposed to (2) Omnibus Investments Code of 1987
preferred shares which are non-voting, the
term Capital under the Constitution refers only (3) Foreign Investments Act
to Common Shares.
All these three special laws carried the
However, if the preferred shares have the Right definition of Philippine Nationals as stated
to Vote in the election of directors then the under the Constitution.
term Capital shall include the preferred shares.
A Philippine National is:
Because the right to participate in the control
and management of the corporation is (1) A citizen of the Philippines; or
exercised through the right to hold in the
election of directors. (2) A domestic partnership or corporation
organized under the laws of the Philippines
In short, the term Capital in the Constitution with at least 60% of the capital stock,
refers only to shares of stocks that can vote in outstanding and entitled to vote is held by
the Election of Directors. the citizens of the Philippines.
In that case, Justice Velasco dissented, saying The Supreme Court then held that only shares
that the Corporation Code defines Outstanding with voting rights should be the basis of
Stocks as the total shares of stock issued. determining whether or not the constitutional
provision has been breached.
It does NOT distinguish whether they are
common or preferred shares. It includes all Section 6. Classification of shares. – The
types of shares. shares of stock of stock corporations may be
divided into classes or series of shares, or both,
Section 137. Outstanding capital stock any of which classes or series of shares may
defined. – The term "outstanding capital stock", have such rights, privileges or restrictions as
as used in this Code, means the total shares of may be stated in the articles of incorporation:
stock issued under binding subscription Provided, That no share may be deprived of
agreements to subscribers or stockholders, voting rights except those classified and issued
whether or not fully or partially paid, except as "preferred" or "redeemable" shares, unless
treasury shares. (n) otherwise provided in this Code: Provided,
further, That there shall always be a class or
Likewise, the SEC defined Capital as to include series of shares which have complete voting
both voting and non-voting shares in the rights. Any or all of the shares or series of
determination of the Nationality of a shares may have a par value or have no par
corporation. value as may be provided for in the articles of
incorporation: Provided, however, That banks,
It was defined by the SEC that Capital denotes trust companies, insurance companies, public
the Sum Total of the shares subscribed and utilities, and building and loan associations
paid-in or promised to be paid by the shall not be permitted to issue no-par value
stockholders irrespective of the nomenclature shares of stock.
issued by the corporation. Hence, non-voting
preferred shares are considered in the Preferred shares of stock issued by any
computation of the 60-40 requirement under corporation may be given preference in the
the Constitution. distribution of the assets of the corporation in
case of liquidation and in the distribution of
A Motion for Reconsideration was filed because dividends, or such other preferences as may be
of this dissenting opinion, however the Motion stated in the articles of incorporation which are
for Reconsideration was denied. not violative of the provisions of this Code:
Provided, That preferred shares of stock may be
In Heirs of Gamboa vs. Teves, 2012, it was issued only with a stated par value. The board
explained that the Constitutional provision of directors, where authorized in the articles of
reserving to Philippine nationals the operation incorporation, may fix the terms and conditions
of Public Utilities, like the PLDT, or to of preferred shares of stock or any series
corporations with at least 60% of the capital thereof: Provided, That such terms and
stock, outstanding, refers only to shares with conditions shall be effective upon the filing of a
Voting Rights. certificate thereof with the Securities and
Exchange Commission.

lOMoARcPSD|7948091
Shares of capital stock issued without par Otherwise, all shares of stocks, irrespective of
value shall be deemed fully paid and non- their classification, shall have the same rights
assessable and the holder of such shares shall and privileges.
not be liable to the corporation or to its
creditors in respect thereto: Provided; That Q. WHY SHOULD A CORPORATION
shares without par value may not be issued for CLASSIFY ITS SHARES?
a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That (1) To Specify and Define the rights and
the entire consideration received by the privileges of the stockholders.
corporation for its no-par value shares shall be
treated as capital and shall not be available for Example:
distribution as dividends.
Voting and Non-Voting shares
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance Non-Voting shares cannot vote for the directors
with constitutional or legal requirements. and officers
Except as otherwise provided in the articles of NB: Only Preferred and Redeemable shares
incorporation and stated in the certificate of may be denied the right to vote.
stock, each share shall be equal in all respects
to every other share. (2) For Regulation and Control of the issuance
of shares of stocks or sales of corporate
Where the articles of incorporation provide for securities for the protection of the
non-voting shares in the cases allowed by this purchasers or stockholders.
Code, the holders of such shares shall
nevertheless be entitled to vote on the following Example:
matters:
Close Corporations
1. Amendment of the articles of incorporation;
It is required that all of its shares for any class
2. Adoption and amendment of by-laws; shall be subjected to one or more specified
restrictions allowed by the Code.
3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of Section 96. Definition and applicability of
the corporate property; Title. - A close corporation, within the meaning
of this Code, is one whose articles of
4. Incurring, creating or increasing bonded incorporation provide that: (1) All the
indebtedness; corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
5. Increase or decrease of capital stock; record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
6. Merger or consolidation of the corporation issued stock of all classes shall be subject to
with another corporation or other corporations; one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
7. Investment of corporate funds in another shall not list in any stock exchange or make
corporation or business in accordance with this any public offering of any of its stock of any
Code; and class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
8. Dissolution of the corporation. corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
Except as provided in the immediately controlled by another corporation which is not
preceding paragraph, the vote necessary to a close corporation within the meaning of this
approve a particular corporate act as provided Code.
in this Code shall be deemed to refer only to
stocks with voting rights. (5a) Any corporation may be incorporated as a close
corporation, except mining or oil companies,
Section 6 empowers a Stock Corporation to stock exchanges, banks, insurance companies,
provide for a Classification of Shares which public utilities, educational institutions and
may grant the holder thereof certain rights and corporations declared to be vested with public
privileges not otherwise accorded to holders of interest in accordance with the provisions of
any other types of shares. this Code.
DOCTRINE OF EQUALITY OF SHARES The provisions of this Title shall primarily

govern close corporations: Provided, That the
Said rights and privileges of course must be provisions of other Titles of this Code shall
clearly provided for in the articles of apply suppletorily except insofar as this Title
incorporation or the certificate of stock. otherwise provides.

lOMoARcPSD|7948091
As provided for in Section 96, the shares of (5) To Better Ensure return of investments
stocks of a Close Corporation can be held of
record only by not more than twenty specified Example:
persons.
Preferred and Redeemable Shares
So if you are not one of those 20 specified
persons, you cannot be a stockholder in that Preferred Shares may be granted the right to
particular close corporation because Close receive dividends first before any other types of
Corporations are normally organized by closely- shares may receive their shares of the
knit groups like the family, for instance. They dividends.
would normally want to keep the business
between and among themselves and they would Redeemable Shares may be Optional or
not welcome strangers to come in and interfere Obligatory. It may require the corporation to
in their management thereof. redeem that type of shares in the specified
Return of Investment or Interest.
(3) As a Management Control Device
There is therefore insurance that you will have
Example: a better return of investment.
In Voting and Non-Voting shares COMMON SHARES
Only Voting Shares are entitled to vote in the The most common type of share is the Common
election of directors who will manage the Share. It usually carries with it Right to Vote
corporate affairs. and frequently the Exclusive Right To Vote.
Founder’s Shares It must be observed, however, if there are more

than one type of shares, each share,
May be granted Specified Rights, including the irrespective of classification, shall be equal in
Exclusive Right To Vote in the election of all respects. Unless the Articles of
corporate directors and officers for a period not Incorporation or the Contract of Subscription
exceeding five years upon the effectivity of the provides otherwise.
Articles of Incorporation.
Example:
So for five years, the holders of these Founder’s
Shares will have the exclusive right to vote and Preferred Shares may be issued. Are these
be voted upon as members of the Board and shares Non-Voting? Not Necessarily. It wasn’t
even as corporate officers. stated that they are Non-Voting preferred type
of share.
(4) For purposes of Compliance with Statutory
Requirements, particularly with respect to Non-Voting Shares are not included in
Nationalized or Partly nationalized determining compliance with the voting
industries. requirement to pass a valid corporate act.
Example: However, they are not absolutely denied the

right to vote. Under the last paragraph of Sec.
Utilization of the Philippine Natural Resources 6:
Minimum Ownership of Filipino is (60%). So “Except as otherwise provided in the

Foreigners can own (40%). immediately preceding paragraph, the vote
necessary to approve a particular corporate act
For purposes of compliance with that as provided for in the Code shall be deemed to
requirement of the law, if there are 100M refer only to stocks with voting rights.”
shares, the corporation can classify it to the
effect that there shall be 60M Common A Q FOR INSTANCE, FOR THE APPROVAL OF
Shares to be owned or held of record by Filipino MANAGEMENT CONTRACT, THERE ARE
citizens and 40M Common B shares which may NON-VOTING SHARES. IN THE 100M
be owned or held by any other citizen, other SHARES, 20% ARE PREFERRED NON-
than Filipino Citizens. VOTING SHARES. WILL YOU INCLUDE
THESE 20M SHARES IN ARRIVING AT THE
You cannot therefore transfer the 60M shares VOTING REQUIREMENT IMPOSED BY THE
reserved solely for Filipinos to a foreigner CODE TO HAVE A VALID MANAGEMENT
because of the No Transfer Clause in the CONTRACT?
Articles of Incorporation
No. They are not one of those listed under the
“No transfer of shares of stocks which will immediately preceding paragraph of the last
result to a violation of our nationalization laws paragraph of Sec. 6.
shall be recorded in the books of the
corporation.”

lOMoARcPSD|7948091
But if they fall under those enumerated in the TREASURY SHARES

Penultimate Paragraph of Section 6, then, you
include Non-Voting Shares. Treasury Shares are shares of stock which:
That enumeration provides the instances when
non-voting shares are nonetheless entitled to (1) Has been issued as Fully Paid
vote.
(2) Subsequently Reacquired by the issuing
If that is the case, you include the non-voting corporation either by Purchase,
shares in arriving at the voting requirement Redemption, Donation or any Other Lawful
imposed by the Code. Mode of Acquisition.
Management contract is not one of them, so They have no voting rights while they remain in
Non-Voting Shares need NOT be included or the treasury, because Treasury Shares are not
counted. Outstanding Stocks.
INSTANCES WHEN NON-VOTING SHARES Section 137. Outstanding capital stock defined.
ARE ENTITLED TO VOTE: – The term "outstanding capital stock", as used
in this Code, means the total shares of stock
1. Amendment of the Articles Of Incorporation issued under binding subscription agreements
to subscribers or stockholders, whether or not
2. Adoption or Amendment of the By-Laws fully or partially paid, except treasury shares.
(n)
3. Increase or Decrease of Bonded
Indebtedness When the law speaks of Voting and Dividend
Rights, it speaks only of Outstanding Stocks.
4. Increase or Decrease in Capital Stock
So, the Treasury Shares have no right to vote
5. Sale or Disposition of All or Substantially and to receive dividends, while they remain in
All Of The Corporate Assets and/or the treasury of the corporation.
Properties
Treasury shares may be subsequently re-
6. Mergers and Consolidations issued by the corporation. It becomes the
Property Right of the corporation and they can
7. Investment Of Funds in Another thus sell or dispose of them again.
Corporation
When Re-Issued, they would REGAIN BACK—
8. Dissolution Of The Corporation their status as Outstanding Stocks. They are
Treasury Shares only while they are in the
If it falls under any of this enumeration, Non- treasury of the corporation.
Voting Shares must also be counted in arriving
at the voting requirement imposed by the Code NO PAR VALUE SHARES
to pass a valid corporate act or transaction.
Section 6 provides for the limitations in the
Under Section 6, Preferred and “Redeemable” issuance of no par value shares:
Shares may be denied the right to vote. Unless
otherwise provided for in this Code. 1. Once they are issued they are deemed Fully
Paid and Non-Assessable
In Gamboa v. Teves, the Supreme Court held
that Common Shares cannot be deprived of the 2. The consideration for its issuance should
right to vote in any corporate meetings. not be less than P5.00/share
Any provision in the Articles of Incorporation 3. The entire consideration constitutes

restricting the right of common shareholders to Capital, which is not available for dividend
vote is invalid. You cannot deny Common declaration
Shares the right to vote.
Because dividends may be declared only
Q. MAY COMMON SHAREHOLDERS BE out of the Unrestricted Earnings or Surplus
VALIDLY DENIED THE RIGHT TO VOTE, Profits of the corporation
EFFECTIVELY THAT IS?
4. They cannot also be at the same time
Yes, they can be effectively denied the right to issued as Preferred Shares
vote by the issuance of Founder’s Shares.
5. They cannot be issued by banks, trust
NB: “Unless otherwise provided for in the Code” companies, public utilities and building and
loans associations
Founders’ Shares may be granted the right to
vote in the election of directors and officers, for
a maximum period of five years.

lOMoARcPSD|7948091
RESTRICTIONS AND TRANSFERS OF be determined by the Securities and Exchange

SHARES OF STOCKS Commission.
The Code does not require corporations After it is incorporated, Section 22 requires:
registered under this provision to provide a
statement of restrictions and transfers of (1) Every corporation registered under this
shares. general provision that it must organize and
commence the transaction of its business
However, there is also likewise nothing in the within two (2) years, from the date of its
law which should prohibit the corporation from incorporation
providing reasonable restrictions, such as,
Options and the Right of First Refusal in the Its FAILURE to do so would result to the
articles of incorporation. Automatic Dissolution of the corporation
If that be the case, it must be provided for in (2) If it commence the transaction of its
the Articles of Incorporation and in all of the business but subsequently becomes
Stock Certificates to be issued by the inoperative continuously for at least five (5)
Corporation in order to be validly binding years:
against 3rd persons. This is only directory. They
may or may not provide restrictions or It will be a ground for the suspension or
transfers of shares. revocation of the corporate franchise. Thus,
proper notice and hearing must be had.
Q. WILL THIS APPLY TO CLOSE
CORPORATIONS? (3) If its failure to Organize or Commence the
transaction of its business or to
No. It is not only permissive, but mandatory. continuously operate is due to causes
beyond the control of the corporation, as
Section 96 provides that a Close Corporation may be determined by the SEC, Automatic
must provide, among others, in the Articles of Dissolution, or suspension or revocation
Incorporation that all of its shares of stocks of will not ensue.
any class, shall be subjected to one or more
specified restrictions and transfers of shares DE FACTO CORPORATION and
allowed by the Code. CORPORATION BY ESTOPPEL
NO TRANSFER CLAUSE Section 20. De facto corporations. – The due

incorporation of any corporation claiming in
Guarantees full compliance with our good faith to be a corporation under this Code,
nationalization laws. and its right to exercise corporate powers, shall
not be inquired into collaterally in any private
It bars the corporation from registering suit to which such corporation may be a party.
transfers of shares of stock if it is violative of Such inquiry may be made by the Solicitor
the Nationality Requirements imposed by the General in a quo warranto proceeding. (n)
Code.
Section 20 is the governing law regarding De
TREASURER IN TRUST, EXECUTION Facto Corporations.
CLAUSE AND ACKNOWLEDGMENT
This provision does not define what De Facto
Section 22. Effects on non-use of corporate Corporations are but it merely states that:
charter and continuous inoperation of a
corporation. – If a corporation does not formally The due incorporation of any corporation
organize and commence the transaction of its claiming in good faith to be a corporation under
business or the construction of its works within the Code and its right to exercise corporation
two (2) years from the date of its incorporation, powers shall not be inquired collaterally in any
its corporate powers cease and the corporation private suit to which such corporation may be
shall be deemed dissolved. However, if a a party.
corporation has commenced the transaction of
its business but subsequently becomes Said inquiry may be made by the Solicitor
continuously inoperative for a period of at least General in a Quo Warranto Proceeding
five (5) years, the same shall be a ground for
the suspension or revocation of its corporate A De Facto Corporation however, is one that is
franchise or certificate of incorporation. (19a) so defectively formed or created, so as not to be
considered as a De Jure Corporation, one that
This provision shall not apply if the failure to is formed or organized in strict compliance with
organize, commence the transaction of its the requirements of the law, it nevertheless
businesses or the construction of its works, or exist for all practical intents and purposes as a
to continuously operate is due to causes corporate body by virtue of its bona fide
beyond the control of the corporation as may attempt to incorporate under existing statutory

lOMoARcPSD|7948091
authority coupled with the exercise of corporate In Hall v. Piccio, between and among the
powers in good faith. stockholders of a De Facto Corporation, it
cannot exist as such De Facto Corporation, if
While it may not be a De Jure Corporation by the certificate of registration or incorporation
virtue of an irregularity in its organization, has not yet been issued.
constitution or even from some ommission to
comply with the requirements under which it Because between and among themselves, the
may have been formed or organized as a De supposed stockholders, they are aware of the
Jure Corporation, it nevertheless exist as a fact of its non-registration
corporate body, separate and distinct from its
stockholders/members composing it. Therefore, they cannot claim in good faith to be
and act as a corporation. This is the 4th
REQUISITES FOR ITS EXISTENCE AS A DE requisite, Good Faith in claiming to be and
FACTO CORPORATION: doing business as a corporation
1. There must be a Law or an apparently Valid Absence of one of the requisites then it is not a
Statute, under which it may have been corporation at all. Hence, any person in
created as a De Jure Corporation; interest can therefore question its existence.
2. An attempt in Good Faith to form a Q. ARE THE RIGHTS, LIABILITIES, DUTIES

corporation, according to the requirements AND OBLIGATIONS OF THE
of the law, which should go far enough as STOCKHOLDERS, DIRECTORS, OFFICERS
to amount to a Colorable Compliance with OR MEMBERS OF A “DE FACTO”
the law; CORPORATION—THE SAME AS THOSE OF
THE “DE JURE” CORPORATION?
3. User of Corporate Powers;
Yes. They have the same rights, liabilities,
4. Good Faith in claiming to be and doing duties and obligations. They are subject to the
business as a corporation. same laws, rules and regulations that apply to
a De Jure Corporation.
All these requirements must be present. They
must go hand in hand. Otherwise, it cannot The only importance of the distinction between
exist as a corporation at all. a De Facto Corporation and a De Jure
Corporation is for the purpose of determining
In the case of Municipality of Malabagan vs. the applicability of Section 20, on whether or
Benito, an Executive Order contrary to the not their existence as such may be attacked by
provisions of the Municipal Code then, was another person.
issued by the President of the Philippines
creating the Municipality of Malabagan. Existence of a De Jure Corporation cannot be
attacked even by the State
The said municipality cannot be considered as
a De Facto Corporation. Its existence may Existence of a De Facto Corporation can be
therefore be attacked by any person in interest attacked only by the state in a Quo Warranto
not only the Solicitor General. proceeding. No other party can question the
existence of a De Facto Corporation.
In this case, it was ruled that, citing the Pelaez
Doctrine under the Constitution because again, CORPORATION BY ESTOPPEL
the Corporation Code must be read in relation
to other allied laws, An unconstitutional act is Section 21. Corporation by estoppel. – All
not a law. It confers no rights. It imposes no persons who assume to act as a corporation
duties. It affords no protection. It creates no knowing it to be without authority to do so
office. shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a
It is, in legal contemplation, inoperative, as result thereof: Provided, however, That when
though it had never been passed. any such ostensible corporation is sued on any
transaction entered by it as a corporation or on
Therefore, in this particular case, one essential any tort committed by it as such, it shall not be
requisite for its existence as a De Facto allowed to use as a defense its lack of corporate
Corporation does not exist, there is no law or personality.
an apparently valid statute, under which it may
have been formed or organized as a De Jure On who assumes an obligation to an ostensible
Corporation. corporation as such, cannot resist performance
thereof on the ground that there was in fact no
Since an unconstitutional act is not a law, corporation. (n)
therefore this essential requisite is not present.
It is not a corporation at all and its existence Section 21 does not define what a Corporation
may be questioned by any person in interest. by Estoppel is. It merely provides for the
consequences of those persons who assume to

lOMoARcPSD|7948091
be and act as a corporation, knowing it to be However, in this case, the petitioner was not
without authority to do so. trying to escape liability from the contract, but
was rather the one claiming under it.
They are liable as General Partners for all the
Debts, Liabilities and/or Damages incurred or That being the case, he is not estopped or
arising therefrom. Provided, when such barred from claiming liability against the
ostensible corporation is sued on any associates or the persons who assume to be
transaction entered by it or on any tort and act as a corporation. (International
committed by it as such, it shall not be allowed Express Travel and Tours case)
to use as a defense its lack of corporate
capacity. (3) Where there is no 3rd person involved
Definition of a Corporation by estoppel The corporation by estoppel is founded on

principles of equity and it is designed to
(1) Neither a De Jure/De Facto corporation prevent injustice and unfairness.
(2) By virtue of serious defects in its It applies when persons assume to form a
organization as a corporate body, but corporation, exercises corporate functions and
nevertheless exist as a corporate entity. enter into contracts with 3rd persons.
(3) Only to those who cannot deny its Where there is no 3rd person involved, then the
corporate existence, either by virtue of their conflict arises only between and among those
Agreement, Admission or Conduct. It may assuming to form the corporation—who
apply for or against the corporation, or for therefore know that it has not been registered.
or against the 3rd party transacting with it. Hence, there is no Corporation by Estoppel.
(Lozano v. Delos Santos)
GR: A person who has contracted or otherwise
dealt with an association in such a way as to Section 21 speaks of the liability of the
recognize and in effect, admits its existence as associates or the persons assuming to act as a
a corporation, cannot deny its juridical corporation.
personality in an action arising therefrom.
The associates can be held liable as General
Thus, if such be the case, if a person transacts Partners.
business with a supposed corporation that
does not exist he cannot allege lack of Q. WHO SHOULD BEAR THE LOSS? ALL OF
personality on the part of the supposed THE ASSOCIATES OR ONLY THE ACTIVE
corporation to sue and that it has not been ONES?
registered. (Asia Banking v. Standard
Products) Only those who Actively Participated in
holding out the association as a corporate body
XPN: This doctrine will not hold true, however, should be held liable by virtue of the express
where: provision in Section 21.
(1) Fraud takes part in the transaction. This would be more in conformity with the
rules governing agency under the Civil Code
The plaintiff’s charge states that she was which would hold out:
unaware of the fact that the association has no
juridical personality. “An agent personally liable to the party with
whom he contracts in cases he exceeds the
The defendant gave no confirmation or denial limit of his authority without giving the other
and the circumstances attendant to the party sufficient notice of his powers.
execution of the contract led to the inescapable
conclusion that the plaintiff was really made to Thus, the Passive Shareholders or supposed
believe that there was such a corporation duly stockholders or associates should be limited in
organized in accordance with law. their liability only to their agreed contribution.
She cannot thus be estopped from denying that LIMITED SHAREHOLDERS’ LIABILITY in the
there is a corporation to speak of and prevent corporate form of business.
her from making the association personally
liable, as provided for under Section 21 The stockholder’s liability is limited to the
(Salvatiera v. Carlitos) amount he subscribed. This is one of the
advantages of the corporate form of business.
(2) When he is trying to Escape Liability on a
contract from which he has benefited on XPN: Corporation by Estoppel
the irrelevant ground of defective
incorporation.

lOMoARcPSD|7948091
Q. WILL THIS LIMITED SHAREHOLDERS’ The mere fact that the corporation happens to
LIABILITY APPLY TO PERSONS ASSUMING own all of the shares of stocks of another
TO ACT AS A CORPORATION KNOWING IT corporation, these are the wholly owned
TO BE WITHOUT AUTHORITY TO DO SO? subsidiaries, will not justify piercing the veil of
corporate fiction. (Del Rosario v. NLRC)
No. Under the Civil Code, the “general
partners” can be held liable even beyond their This rule, same as above, the mere fact that the
agreed contribution. corporation happens to own all/substantially
all of the shares of stocks of another
This is the gist of Sec. 21. They are liable as corporation does not justify piercing the veil of
General Partners. They can be held liable even corporate fiction and treating them as one.
beyond their agreed contribution or their
particular subscription. True, it is PNB who owns all the shares of stock
of PNB-IFL. Therefore, it may have control over
There is no such thing as shareholders’ limited the business practices and policies of the PNB-
liability in a Corporation by Estoppel. IFL.
CORPORATE ENTITY THEORY But did it use that control to commit a

fraud/wrongdoing? No. it did not.
The corporation is possessed with a personality
separate and distinct from the stockholders or Was it the proximate cause of the injury? No. it
persons composing it. is not. (PNB vs. Ritrato Group)
It is not affected by the personal rights, In Borromeo v. CA, the same ruling was
obligations or transactions of the latter. reiterated. This rule finds its justification to the
Instrumentality Rule, earlier enunciated in the
In the same vein, the stockholders, members or case of Concept Builders vs. NLRC
individual directors or officers are not also
affected by the rights and obligations incurred When one corporation is organized and
or accrued for the corporation. controlled and its affairs are conducted so that
it is a mere instrumentality or adjunct of the
Note that this is a General Rule, because we other the fiction of the Corporate Entity of the
have the Doctrine of Piercing the Veil of instrumentality may be disregarded.
Corporate Fiction
INSTRUMENTALITY RULE
PIERCING THE VEIL OF CORPORATE
FICTION (1) There must be Absolute Control
When the notion of the legal corporate entity is Not mere majority or even complete stock
used: ownership, but Domination, not only of
finances but also of the policy and business
(1) To defeat public convenience; practices in respect to the transaction attack so
that the corporate entity has, at that time, no
(2) Justify wrong; separate mind, will/existence of its own
(3) Protect fraud; or (2) Control must have been used by to commit
Fraud or Wrong to perpetuate a violation of the
(4) Defend crime plaintiff’s legal right.
The law will regard the corporation as a mere (3) The aforesaid Control must be Proximately
association of persons or in the case of two (2) cause the Injury or Unjust Loss complained of.
corporations, they will MERGE them into one.
Absence of any one (1) of these elements would
The other being regarded merely as an Alter prevent piercing the veil of corporate fiction.
Ego, Business conduit, Adjunct Extension or (PNB vs. Ritrato Group, Yamamoto vs. Shino
Instrumentality of the other. Leather Industries)
NB: For the separate personality of the AMENDMENT OF THE ARTICLES OF

corporation to be disregarded: INCORPORATION
The wrongdoing must be Clearly and Section 16. Amendment of Articles of

Convincingly established. Incorporation. – Unless otherwise prescribed by
this Code or by special law, and for legitimate
Fraud must be proven by Clear and Convincing purposes, any provision or matter stated in the
evidence amounting to more than articles of incorporation may be amended by a
Preponderance. It cannot be justified by majority vote of the board of directors or
speculation and can never be presumed. trustees and the vote or written assent of the
stockholders representing at least two-thirds

lOMoARcPSD|7948091
(2/3) of the outstanding capital stock, without Q. THE PURPOSE CLAUSE WAS CHANGED
prejudice to the appraisal right of dissenting FROM REALTY TO CONSTRUCTION. IT WAS
stockholders in accordance with the provisions FILED 8 MONTHS AGO AND SEC HAS NOT
of this Code, or the vote or written assent of at ACTED UPON IT. THE CORPORATION
least two-thirds (2/3) of the members if it be a STARTED DOING BUSINESS AS A
non-stock corporation. CONSTRUCTION COMPANY IN
ACCORDANCE WITH THE AMENDMENT 5
The original and amended articles together MONTHS BACK. DID THE CORPORATION
shall contain all provisions required by law to CARRY ITS POWERS AND FUNCTIONS IN
be set out in the articles of incorporation. Such ACCORDANCE WITH ITS ARTICLES?
articles, as amended shall be indicated by
underscoring the change or changes made, and Yes. Because it was already valid on the date it
a copy thereof duly certified under oath by the was filed, 8 months ago.
corporate secretary and a majority of the
directors or trustees stating the fact that said The voting requirement and the effectivity of
amendment or amendments have been duly amendment will apply only however, to
approved by the required vote of the Ordinary or Regular Amendments of the
stockholders or members, shall be submitted to Articles of Incorporation
the Securities and Exchange Commission.
It will not apply in cases of Special
The amendments shall take effect upon their Amendments.
approval by the Securities and Exchange
Commission or from the date of filing with the (1) Extension or Shortening of the Corporate
said Commission if not acted upon within six Term (Section 37 in relation to Section
(6) months from the date of filing for a cause 120)
not attributable to the corporation.
(2) Increase or Decrease in Capital Stock
Unless otherwise prescribed by Special Law or (Section 38)
this Code, and for legitimate purposes, any
provision or matter stated in the Articles of In both cases, the 2/3 votes must be cast at
Incorporation may be amended by the meeting during the meeting called for that
purpose. The written assent of the Stockholder
(1) The Majority Vote of the Board of Directors is not sufficient.
or Trustees; and
In Section 38, any decrease in the capital stock
(2) The Vote or Written Assent of the will never become valid and effective, until and
Stockholders, representing at least 2/3 of unless the SEC gives its stamp of approval.
the Outstanding Capital Stock Because the SEC will determine whether the
decrease in capital stock will not prejudice the
The amendment will take effect: rights of 3rd parties.
(1) Upon the Approval of the SEC; or BOARD OF DIRECTORS
(2) From the date of its filing with the said Section 23. The board of directors or trustees.
Commission, if Not Acted Upon within six – Unless otherwise provided in this Code, the
months from the date of filing, for a cause corporate powers of all corporations formed
not attributable to the corporation. under this Code shall be exercised, all business
conducted and all property of such
Q. THE AMENDMENT WAS FILED 8 MONTHS corporations controlled and held by the board
BACK AND THE SEC HAS NOT ACTED UPON of directors or trustees to be elected from
IT. IS THE AMENDMENT ALREADY VALID? among the holders of stocks, or where there is
no stock, from among the members of the
Yes. It was valid not 6 months thereafter, but corporation, who shall hold office for one (1)
on the date it was Filed. It retroacts to the filing year until their successors are elected and
date. 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.

lOMoARcPSD|7948091
Unless otherwise provided for in the Code, All Q. ARE THERE ANY EXCEPTIONS TO THIS
Corporate Powers, All Business are conducted, RULE OF QUORUM OR VOTING
and All Properties are controlled by the board REQUIREMENT?
of directors
(1) In the cases of Election of Corporate
They are the Corporate Managers and are thus Officers. Vote of the majority of their entire
the ones who can act for and in behalf of the number is required;
corporation.
(2) Unless the Articles of Incorporation or By-
GR: They must sit and act as a body at a Laws require a higher Quorum or Voting
validly held and constituted or conducted requirement. The Articles and By-Laws
meeting to have a valid Corporate Act or may provide for a higher Quorum or Voting
Transaction requirement in directors’ meetings.
Individual directors cannot bind the Q. WE SAY THAT THEY MUST SIT AND ACT
Corporation by their Individual Acts, except the AS A BODY TO HAVE A VALID CORPORATE
following: ACT OR TRANSACTION. ARE THE
DIRECTORS THEREFORE REQUIRED TO BE
1. There is a Valid Delegation Of Authority; PHYSICALLY PRESENT TO HAVE A VALID
MEETING?
2. When Expressly Conferred;
No. The E-Commerce Law allows them to meet
3. Where the officer or agent is clothed with via Teleconference or Video Conference.
Actual or Apparent Authority;
This is not yet available to stockholders. It is
4. When Expressly or Impliedly ratified; or only to Directors or Trustees meeting.
5. And even perhaps by Estoppel Directors or Officers are not liable for their acts
for and in behalf of their corporation as long as:
Q. THE BOARD OF DIRECTORS OR BOARD
OF TRUSTEES IN CASE OF A NON-STOCK (1) They act in Good Faith; and
CORPORATION HAS TO SIT AND ACT AS A
BODY AT A DULY CONSTITUTED MEETING. (2) Within the Scope of their Powers And
WHAT IS THE QUORUM REQUIREMENT FOR Authority
A VALID DIRECTORS’ MEETING? WHAT IS
THE VOTE REQUIRED? Pursuant to the Doctrine of Corporate Entity
Theory, Contracts or Obligations incurred by
(1) Quorum requirement: them, in their official capacity, is not theirs,
but that of the Corporation which they
Majority of the members of the Board as fixed represent.
in the Articles of Incorporation
GR: BUSINESS JUDGMENT RULE
(2) Vote requirement:
Questions of Policy and Management are left
In every decision of at least a majority of the solely to the honest decisions of the Board of
directors or trustees are present at a meeting at Directors.
which there is a quorum, may pass a valid
corporate act. The courts are without authority to substitute
its judgment as against the said Board of
Q. IF THERE ARE 9 MEMBERS OF THE Directors.
BOARD AS FIXED IN THE ARTICLES OF
INCORPORATION, MAY THE VOTE OF 3 As long as they act in Good Faith, their
MEMBERS PASS A VALID CORPORATE ACT actuations are not subject to judicial review.
OR TRANSACTION? (Montelibano vs. Bacolod)
Yes. The Quorum requirement is 5, majority of XPN: Corporate Directors or Officers and/or
their number as fixed in the Articles of agents may nonetheless be held liable
Incorporation Personally or Solidarily even if they are acting
for and in behalf of the Corporation:
The vote of the majority present at which there
is a quorum will pass a valid corporate act. 1. When he assents to Patently Unlawful act
Majority of 5 is 3 or Bad Faith or Gross Negligence in
directing the corporate affairs or for conflict
of interest resulting in damages to the
corporation, its stockholders/other persons
as provided for in Section 31.

lOMoARcPSD|7948091
Section 31. Liability of directors, trustees or Q. IF A CORPORATE OFFICER, THE

officers. - Directors or trustees who willfully TREASURER AND THE PRESIDENT, PAYS A
and knowingly vote for or assent to patently CORPORATE OBLIGATION IN FAVOR OF
unlawful acts of the corporation or who are THE CREDITOR, AND THE CHECK THAT
guilty of gross negligence or bad faith in WAS USED TO PAY ITS OBLIGATION
directing the affairs of the corporation or BOUNCED, MAY THE CORPORATE OFFICER
acquire any personal or pecuniary interest in WHO SIGNED THE CHECK ADVANCE THE
conflict with their duty as such directors or CORPORATE ENTITY THEORY TO FREE
trustees shall be liable jointly and severally for HIMSELF FROM ANY LIABILITY?
all damages resulting therefrom suffered by the
corporation, its stockholders or members and No. Because he is made to be Personally Liable
other persons. by a Special Law. (Bouncing Checks Law)
When a director, trustee or officer attempts to The liability of the corporate directors may also
acquire or acquire, in violation of his duty, any be based on the fact that they owe a 3-Fold
interest adverse to the corporation in respect of Duty to the corporation and the stockholders
any matter which has been reposed in him in as a body.
confidence, as to which equity imposes a
disability upon him to deal in his own behalf, DUTY OF LOYALTY
he shall be liable as a trustee for the
corporation and must account for the profits FORBIDDEN PROFITS RULE
which otherwise would have accrued to the
corporation. (n) Section 31. Liability of directors, trustees or
officers. - Directors or trustees who willfully
2. If he consents to the issuance of Watered and knowingly vote for or assent to patently
Stocks, or Craving due knowledge thereof unlawful acts of the corporation or who are
does not forthwith file his written objections guilty of gross negligence or bad faith in
with the corporate secretary, as provided directing the affairs of the corporation or
for in Section 65. acquire any personal or pecuniary interest in
conflict with their duty as such directors or
Section 65. Liability of directors for watered trustees shall be liable jointly and severally for
stocks. – Any director or officer of a corporation all damages resulting therefrom suffered by the
consenting to the issuance of stocks for a corporation, its stockholders or members and
consideration less than its par or issued value other persons.
or for a consideration in any form other than
cash, valued in excess of its fair value, or who, When a director, trustee or officer attempts to
having knowledge thereof, does not forthwith acquire or acquire, in violation of his duty, any
express his objection in writing and file the interest adverse to the corporation in respect of
same with the corporate secretary, shall be any matter which has been reposed in him in
solidarily, liable with the stockholder concerned confidence, as to which equity imposes a
to the corporation and its creditors for the disability upon him to deal in his own behalf,
difference between the fair value received at the he shall be liable as a trustee for the
time of issuance of the stock and the par or corporation and must account for the profits
issued value of the same. (n) which otherwise would have accrued to the
corporation. (n)
3. When he agrees to hold himself personally
or solidarily liable with the corporation. Section 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for
4. He is made by Specific Provision of the Law himself a business opportunity which should
to Personally Answer for his corporate acts. belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he
Example: must account to the latter for all such profits
by refunding the same, unless his act has been
In the case of the Bouncing Checks Law ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
Sec. 1 of the Bouncing Checks Law provides outstanding capital stock. This provision shall
that if a check is drawn by a corporation, the be applicable, notwithstanding the fact that the
person or persons who signed the check shall director risked his own funds in the venture
be Personally Liable.
Directors are considered in Equity as bearing a
Fidiuciary Relation to the corporation and the
stockholders as a whole.
Section 31 provides that Directors are liable

Jointly and Severally for Damages if they
acquire any personal or pecuniary interest in
conflict with their duty of loyalty, as such
director.

lOMoARcPSD|7948091
2. That the vote of such director or trustee was

Section 34 provides that, where a director, by not necessary for the approval of the contract;
virtue of his office acquires for himself a
business opportunity which should belong to 3. That the contract is fair and reasonable
the corporation, thereby, obtaining profits to under the circumstances; and
the prejudice of such corporation, he must
account to the latter the corporation, all profits, 4. That in case of an officer, the contract has
by refunding the same. Notwithstanding the been previously authorized by the board of
fact, that he may have risked his own funds in directors.
the specific venture.
Where any of the first two conditions set forth
Unless, his act has been ratified by a vote of at in the preceding paragraph is absent, in the
least 2/3 of the Outstanding Capital Stock. case of a contract with a director or trustee,
such contract may be ratified by the vote of the
This is the Forbidden Profits Rule. Forbidden stockholders representing at least two-thirds
in a sense that Directors are Fidiuciary (2/3) of the outstanding capital stock or of at
Representatives of the corporation and the least two-thirds (2/3) of the members in a
stockholders as a body. Such that, they are meeting called for the purpose: Provided, That
not allowed to obtain any Personal Profit, full disclosure of the adverse interest of the
Commission, Bonus or Gain for their Official directors or trustees involved is made at such
Actions. meeting: Provided, however, That the contract
is fair and reasonable under the
This may also refer to: circumstances. (n)
(1) Those arising out of transactions of An Interlocking Director is a director of a

directors with 3rd persons which may corporation wherein he transacts business with
involve what is called as Misappropriation another corporation, and he also sits in that
of Corporate Opportunities; corporation also as a director.
(2) Disloyal Diverting Of Business. This is Section 33. Contracts between corporations
otherwise known as the Corporate with interlocking directors. – Except in cases of
Opportunity Doctrine. fraud, and provided the contract is fair and
reasonable under the circumstances, a
CORPORATE OPPORTUNITY DOCTRINE contract between two or more corporations
having interlocking directors shall not be
Places a director of a corporation in the invalidated on that ground alone: Provided,
position of a Fidiuciary, and prohibits him from That if the interest of the interlocking director
seizing a business opportunity and of in one corporation is substantial and his
developing it at the expense of the facilities of interest in the other corporation or
the corporation. corporations is merely nominal, he shall be
subject to the provisions of the preceding
He cannot appropriate to himself a business section insofar as the latter corporation or
opportunity, which in fairness, should belong corporations are concerned.
to the corporation.
Stockholdings exceeding twenty (20%) percent
NB: Section 34 will apply, notwithstanding the of the outstanding capital stock shall be
fact that the director risked his own funds in considered substantial for purposes of
the venture. interlocking directors. (n)
SELF-DEALING AND INTERLOCKING GR: Contracts of Self-dealing Directors are

DIRECTORS generally Voidable, at the option of the
corporation.
A Self-Dealing Director is one who enters into a
contract, or transacts business with his own XPN: They are valid per se if all the requisites
corporation. or conditions set out in Section 32 are present:
Section 32. Dealings of directors, trustees or 1. That the presence of such director or
officers with the corporation. – A contract of the trustee in the board meeting in which the
corporation with one or more of its directors or contract was approved was not necessary to
trustees or officers is voidable, at the option of constitute a quorum for such meeting;
such corporation, unless all the following
conditions are present: 2. That the vote of such director or trustee
was not necessary for the approval of the
1. That the presence of such director or trustee contract;
in the board meeting in which the contract was
approved was not necessary to constitute a 3. The contract is Fair and Reasonable under
quorum for such meeting; the circumstances;

lOMoARcPSD|7948091
There is no legal yardstick as to when a ELECTION OF THE MEMBERS OF THE

contract is fair and reasonable. BOARD
It is always a Question of Fact whether it is The members of the Board, whether they be
beneficial to both. Stock or Non-Stock are to be elected by:
4. That in case of an officer, the contract has (1) The stockholders and/or
been previously authorized by the board of
directors. (2) Members entitled to vote.
If any of the first 2 conditions will be absent, The non-voting shares have no voting rights in
the contract is voidable and thus, subject to the election of the Corporate Directors.
ratification by at least 2/3 of the Outstanding
Capital Stock at a meeting held for that Quorum requirement: Majority of the
purpose. Outstanding Capital Stock or Members entitled
to vote
Provided that, full disclosure of the adverse
interest of the director involved is made and the Non-voting shares are said to be not included
contract is Fair and Reasonable. in determining the quorum requirement and
voting requirement imposed by law as per last
GR: The contract of an Interlocking Director is paragraph of Section 6.
generally valid.
Q. WHAT IS THE VOTING REQUIREMENT IN
XPN: Except in cases of Fraud and when the ORDER THAT A DIRECTOR MAY BE
Contract is not Fair and Reasonable. CONSIDERED AS ELECTED?
A contract between two more corporations None, the only requirement is the candidates
having Interlocking directors shall not be receiving the Highest number of votes.
invalidated on that ground alone.
Q. QUORUM REQUIREMENT?
XPN to the XPN:
Majority of the Outstanding Capital Stock
If the interest of the interlocking director in one
corporation is Substantial and his interest in Q. X HAS ONLY 1 SHARE. THERE ARE 5
the other corporation is merely Nominal, then CANDIDATES AND X IS THE 5TH, HE HAS
the provisions of the preceding Section, ONLY 1 SHARE. IS HE ELECTED?
provisions governing Self-Dealing Directors, will
apply. Meaning, the contract will be Voidable Yes. He is the 5th candidate receiving the
also. highest number of votes. The candidate
receiving the highest number of votes gets
NB: Stockholding in Excess of 20% is elected. Not majority of the outstanding capital
Substantial for purposes of determining stock but rather, the number of votes cast in
whether the contract of the Interlocking his name.
director is Voidable or Generally Valid
application. Stockholders may avail of their Cummulative
Voting, right to cumulate their vote, in a Stock
Q. MR. X IS A STOCKHOLDER IN A corporation.
CORPORATION AND HOLDS 25% OF ITS
OUTSTANDING CAPITAL STOCKS. HE IS CUMULATIVE VOTING
ALSO A STOCKHOLDER IN B CORPORATION
AND ALSO OWNS 22% OF ITS Multiplying the number of shares held by the
OUTSTANDING CAPITAL STOCKS. A AND B particular stock holder by the number of
CORPORATIONS ENTERED INTO A directors to be elected.
CONTRACT. IS THE CONTRACT GENERALLY
VALID OR GENERALLY VOIDABLE? WILL No. of Shares Held
SECTION 32 APPLY OR SECTION 33? x No. of Directors to be elected
Total Number of Votes
Section 33 will apply, because his interest in
both Corporations are Substantial, more than Example: You are holding 100 shares; 5
20% in both corporations. directors are to be elected; How many votes can
you cast? 100 x 5 = 500 votes
Section 33 says if it is Substantial in one and
nominal in the other it will be voidable. It will These 500 votes may be:
be subjected to Section 32.
(1) Cast to a single person only, or
If they are both Substantial or both Nominal, it
is Section 33 that will be applicable. The (2) Distributed to as many candidates as you
contract is Generally Valid. may deem fit and proper.

lOMoARcPSD|7948091
This was included in the Corporation Code for GR: One year until their successors have been
purposes of getting the minority the right of duly elected and qualified, in accordance with
representation in a Stock Corporation. law.
Q. MINORITY HAS 20% STOCKHOLDINGS. XPN:

THE OTHER 80% OF SHARES ARE HELD BY
ONE SINGLE FAMILY 5 SIBLINGS, 1. In a Non-Stock Corporation, they can serve
MAJORITY CONTROL THE 80%; THERE ARE for three years under Title 11
ALSO 5 MINORITY, NOT RELATED TO THE
MAJORITY AND NOT RELATED TO ONE 2. In Educational Corporations they can serve
ANOTHER? for a term of five years
If the 20% shares of the minority are pulled If there is no election, and their term of office
multiplied by the number of the directors to be already expired, naturally, by virtue of this
elected, they are guaranteed one seat in the provision, they shall serve for a term of one
board. This is why you have cumulative voting. year until their successors are duly elected and
qualified, then they can continue acting as
100 shares is the OCS; Minorities are holding directors in a hold-over capacity.
20 shares and there are 5 directors to be
elected. 20 x 5 = 100 votes DISTINCTION BETWEEN TERM AND
TENURE (Valle Verde Country Club vs.
If these 100 votes are cast in favor of one of the Africa)
minority, the minority is guaranteed one seat
Term Tenure
No matter what the Majority Stockholders do, Fixed by law Represents the term
they cannot outvote the minority. They can during which the
only elect (4) members of the Board. The 20% incumbent actually
and the 80%, equivalent to 400 votes holds Office.
Cumulative voting is a matter of right granted The time during which May be of longer or
to stockholders in a stock corporation. By the officer may claim to shorter duration
virtue of the Doctrine Of Limited Capacity, it hold office as a matter
cannot be denied in a stock corporation. A of right and fixes the
corporation can only do such acts and things interval after which the
as the allow it. several incumbents
shall succeed one
GR: In a Non-stock Corporation cumulative another
voting is generally not allowed, as provided for Not affected by the
in section 89. hold-over. The term is
fixed by law and it does
XPN: Provisions of Title 11 are clear and not change simply
specific: because the office may
have become vacant.
“The Articles of Incorporation or By-laws of a
non-stock corporation may Broaden, Limit or Where an incumbent holds his office beyond
Deny voting rights of the members.” the end of his term due to the fact that a
successor has not been elected or has failed to
So, the Articles of Incorporation or By-Laws qualify, Tenure may be of longer or shorter
may also allow Cumulative voting. But if there duration. Term is fixed by law.
is none, they are not entitled to Cumulative
voting. Example:
DIRECTOR’S TERM OF OFFICE (1) June 8 of last year he was elected. On

December he resigned, the tenure was
Section 23 (1). The board of directors or shortened.
trustees. – Unless otherwise provided in this
Code, the corporate powers of all corporations (2) June 8 of last year he was elected. No
formed under this Code shall be exercised, all election was held. In effect, there is a hold-
business conducted and all property of such over. The tenure is extended.
corporations controlled and held by the board
of directors or trustees to be elected from But the Term is fixed by law, one year, that’s
among the holders of stocks, or where there is the period or time where one may claim office
no stock, from among the members of the as a Matter of Right.
corporation, who shall hold office for one (1)
year until their successors are elected and
qualified. (28a)

lOMoARcPSD|7948091
Directors and other Officers may be Removed removal by the stockholders or members or by
or Ousted from office. expiration of term, may be filled by the vote of
at least a majority of the remaining directors or
Section 28. Removal of directors or trustees. – trustees, if still constituting a quorum;
Any director or trustee of a corporation may be otherwise, said vacancies must be filled by the
removed from office by a vote of the stockholders in a regular or special meeting
stockholders holding or representing at least called for that purpose. A director or trustee so
two-thirds (2/3) of the outstanding capital elected to fill a vacancy shall be elected only or
stock, or if the corporation be a non-stock the unexpired term of his predecessor in office.
corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, Any directorship or trusteeship to be filled by
That such removal shall take place either at a reason of an increase in the number of
regular meeting of the corporation or at a directors or trustees shall be filled only by an
special meeting called for the purpose, and in election at a regular or at a special meeting of
either case, after previous notice to stockholders or members duly called for the
stockholders or members of the corporation of purpose, or in the same meeting authorizing
the intention to propose such removal at the the increase of directors or trustees if so stated
meeting. A special meeting of the stockholders in the notice of the meeting. (n)
or members of a corporation for the purpose of
removal of directors or trustees, or any of them, Only the Stockholders or Members can remove
must be called by the secretary on order of the directors or trustees elected by them. They
president or on the written demand of the cannot be removed or ousted by their fellow
stockholders representing or holding at least a Directors. It must be at a Stockholders’
majority of the outstanding capital stock, or, if Meeting. (Raniel v. Fuchiko)
it be a non-stock corporation, on the written
demand of a majority of the members entitled Q. SO IF THERE IS A VACANT SEAT BY
to vote. Should the secretary fail or refuse to VIRTUE OF A REMOVAL OR OUSTER OF A
call the special meeting upon such demand or DIRECTOR, MAY THE VACANCY CREATED
fail or refuse to give the notice, or if there is no BY VIRTUE OF THE REMOVAL OR OUSTER
secretary, the call for the meeting may be BE FILLED UP BY THE BOARD OF
addressed directly to the stockholders or DIRECTORS THEMSELVES IF THEY STILL
members by any stockholder or member of the CONSTITUTE A QUORUM?
corporation signing the demand. Notice of the
time and place of such meeting, as well as of No, only the stockholders can fill up the
the intention to propose such removal, must be vacancy created by virtue of removal or ouster.
given by publication or by written notice
prescribed in this Code. Removal may be with Section 29 provides that any vacancy occurring
or without cause: Provided, That removal in the Board of Directors or Trustees, other
without cause may not be used to deprive than by removal or expiration of term, may be
minority stockholders or members of the right filled up by the vote of the majority of the
of representation to which they may be entitled remaining directors, which is still constituting
under Section 24 of this Code. (n) a quorum.
With or Without Cause by at least 2/3 of the So if it is caused by removal or expiration of the
Outstanding Capital Stock or 2/3 of the term of office, then only the stockholder can fill
members, in case it is a Non-Stock Corporation up the vacancy.
The law, however, is categorical that Removal Q. MAY THE REMAINING MEMBERS OF THE
Without Cause shall not deprive the minority of BOARD OF DIRECTORS, IF STILL
their rightful representation to which they may CONSTITUTING A QUORUM, FILL UP A
be entitled. VACANCY CREATED BY THE REMOVAL OF
A HOLD-OVER DIRECTOR?
Q. MINORITY WERE ABLE TO VOTE ONE
DIRECTOR IN A 5-MAN BOARD BY EXAMPLE: JUNE 8 OF LAST YEAR HE WAS
CUMULATING THEIR VOTES. SO THEY NOW ELECTED. JUNE 8 OF THIS YEAR, NO
HAVE A REPRESENTATION IN THE BOARD. ELECTION WAS MADE. THERE WAS THEN A
MAJORITY HAS 80% STOCKHOLDINGS. CAN HOLD-OVER. DECEMBER OF 2013, HOLD-
THEY REMOVE OR OUST THAT ELECTED OVER DIRECTOR RESIGNED. MAY THE
DIRECTOR REPRESENTING THE REMAINING MEMBERS OF THE BOARD OF
MINORITY? DIRECTORS FILL UP THE VACANCY
CREATED BY THE RESIGNATION OF THE
Supposedly, Yes. Because they own 80%. 2/3 HOLD-OVER DIRECTOR?
is only 66.67%, but it cannot be done, because
the minority is entitled to representation. No. Because his term of office has already
expired. Term, as said, is fixed by law. As a
Section 29. Vacancies in the office of director general rule, One year until their successors
or trustee. – Any vacancy occurring in the are duly elected and qualified in accordance
board of directors or trustees other than by with law.

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The hold-over period, that time from the lapse (3) If there is a grant by the Stockholders
of 1 year from the director’s election to the owning or representing at least a Majority of
office until his successor’s election and the Outstanding Capital Stock
qualification is not of the director’s original
term. nor is it a new term. (4) When they render Unusual or Extra-
Ordinary Service or Services.
The hold-over period, however, constitutes part
of his tenure. Corollary, where the incumbent Section 30 also provides a ceiling of the
member of the Board of Director continues to compensation of the directors, if of course
serve in a hold-over capacity, it implies that the granted to the effect that it shall not exceed
office has a fixed term, which already expired. 10% of the net income before tax of the
Therefore, since the term of office has already corporation during the preceding year.
expired only the stockholders can fill up the
vacancy. (Valle Verde v. Africa) Section 30 uses As Such Directors, so as to
generally deny them compensation.
Section 29 provides “The remaining members of
the Board, if still constituting a quorum, except In Western Institute of Technology vs. Salas,
by removal/expiration of a term may fill up a the words As Such Directors in Section. 30,
vacancy created in the Board of Directors.” delimits the scope of the prohibition to
compensation given to directors for services
So much so that if the hold-over director performed purely in their capacity as directors
resigns, only the stockholders can fill up the or trustees.
vacancy.
The Supreme Court held that an unambiguous
Q. MAY THE STOCKHOLDERS FILL UP interpretation is that, they may be given
VACANCY CREATED BY REMOVAL AT THE compensation, even by a mere grant of the
SAME MEETING WHERE THE REMOVAL board of directors, by a mere board resolution
TOOK PLACE WITHOUT ANY NOTICE? through of course, a valid resolution, even
without any grant or authority from the by-
Yes. Section 29 provides that it may filled up at laws or from the stockholders, when they
the same meeting without further notice. render services in a capacity other than as
such directors.
Q. MAY A DIRECTOR ACTING IN A HOLD-
OVER CAPACITY BE REMOVED FROM Thus, if they are acting in a capacity other than
OFFICE AT ANY TIME AND WITHOUT such director and the board of directors passed
CAUSE? a resolution granting themselves compensation
in their capacities as President, Secretary,
Yes. One occupying an office in a hold-over Treasurer and Chairman of the Board of
capacity could be removed at any time without Directors and one of the stockholders
cause upon the election and appointment of his questioned the validity of the grant because it
successor. (Barrayoga v. Adventist requires stockholders’ approval or a grant of a
University) by-law provision, the Court ruled that they are
entitled to compensation because they are not
Section 30. Compensation of directors. – In the acting in their regular or ordinary capacity as
absence of any provision in the by-laws fixing such directors.
their compensation, the directors shall not
receive any compensation, as such directors, Likewise, the ceiling of 10% of the net income
except for reasonable per diems: Provided, of the corporation for the preceding year will
however, That any such compensation other not also apply if the compensation granted
than per diems may be granted to directors by them is other than in their ordinary or regular
the vote of the stockholders representing at capacities as directors.
least a majority of the outstanding capital stock
at a regular or special stockholders’ meeting. In So even if the 10% ceiling is breached, if it is
no case shall the total yearly compensation of given to them in their capacity also as
directors, as such directors, exceed ten (10%) President, Secretary, Treasurer or Chairman of
percent of the net income before income tax of the Board, Section 30 will not thereby be
the corporation during the preceding year. (n) violated.
GR: Directors are not entitled to Compensation CORPORATE POWERS AND AUTHORITY
XPN: A corporation is an artificial being existing only

in contemplation of the law and can thus, only
(1) Reasonable per diem do such acts and things as the law allows it to
do, as provided for in the Doctrine of Limited
(2) If there is a by-law provision allowing or Capacity in the Corporate Form.
granting the same

lOMoARcPSD|7948091
These corporate powers and authority includes:

4. To amend its articles of incorporation in
(1) Those that are Expressly Granted by law in accordance with the provisions of this Code;
Section 36 to 45.
5. To adopt by-laws, not contrary to law,
Section 36: Corporate Powers and Capacity morals, or public policy, and to amend or
repeal the same in accordance with this Code;
Section 37: Power to extend or shorten
corporate term 6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
Section 38: Power to increase or decrease subscribers and to sell treasury stocks in
capital stock; incur, create or increase accordance with the provisions of this Code;
bonded indebtedness and to admit members to the corporation if it
be a non-stock corporation;
Section 39: Power to deny pre-emptive right
7. To purchase, receive, take or grant, hold,
Section 40: Sale or other disposition of convey, sell, lease, pledge, mortgage and
assets otherwise deal with such real and personal
property, including securities and bonds of
Section 41: Power to acquire own shares. other corporations, as the transaction of the
lawful business of the corporation may
Section 42: Power to invest corporate funds reasonably and necessarily require, subject to
in another corporation or business or for the limitations prescribed by law and the
any other purpose Constitution;
Section 43: Power to declare dividends 8. To enter into merger or consolidation with
other corporations as provided in this Code;
Section 44: Power to enter into
management contract. 9. To make reasonable donations, including
those for the public welfare or for hospital,
Section 45: Ultra vires acts of corporations. charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid
(2) Those that are CONFERRED—by the of any political party or candidate or for
articles of incorporation; purposes of partisan political activity;
Once the SEC issues a certificate of 10. To establish pension, retirement, and other
registration, the government, through that plans for the benefit of its directors, trustees,
instrumentality of the SEC already conferred officers and employees; and
upon that juridical entity the corporate power
to carry out the purpose or purposes indicated 11. To exercise such other powers as may be
in the articles of incorporation, those that are essential or necessary to carry out its purpose
Necessary or Incidental to its existence. or purposes as stated in the articles of
incorporation. (13a)
If they exercise such powers and functions
beyond any of them, the act performed is what POWER TO SUE AND/OR BE SUED
is called Ultra Vires Act, allowing the
contracting parties or any of them to Q. UPON WHOM SERVICE OF SUMMONS IS
Collaterally Attack the validity thereof for being TO BE MADE?
beyond corporate powers.
GR: Section 11, Rule 14, Rules of Court
Ultra Vires Contracts are therefore those that
cannot be performed or exercised by the (1) President;
corporation because it is beyond the Express,
Inherent or Implied Powers or Authority. (2) Managing Partner;
Section 36. Corporate powers and capacity. – (3) The General Manager;
Every corporation incorporated under this Code
has the power and capacity: (4) The Corporate Secretary;
1. To sue and be sued in its corporate name; (5) The Treasurer; or
2. Of succession by its corporate name for the (6) The In-House Counsel.
period of time stated in the articles of
incorporation and the certificate of It may only be served unto them because a
incorporation; strict compliance with the mode of service is
necessary to confer jurisdiction over the person
3. To adopt and use a corporate seal; of the Corporation. The officer upon whom

lOMoARcPSD|7948091
service is to be made must be one who is Noteworthy, the Corporation may be sued only
named in the statute. in the City or Municipality where it has its
The words ‘Any of the Directors’ in the old rule Principal Office, because the principal office
and ‘Agent’ was deliberately omitted in the New establishes the residence of the Corporation, if
Rules of Court. So much so that the liberalized it is NOT based on a written contract.
service of summons no longer applies (EB
Villarosa and Partners v. Benito) If it is based on a written contract, the parties
may stipulate as to venue of actions.
Justice Regalado: “The then Sec. 13 of Rule (Clavecilla Radio Systems v. Antillon)
14 allowed service upon a defendant
corporation to be made to the President, POWER TO ISSUE SHARES OF STOCKS OR
Manager, Secretary, Agent, Cashier, Any of the TO ADMIT MEMBERS
Directors or Agents, the aforesaid terms were
obviously ambiguous and susceptible of broad The power to issue shares is lodged in the
and oftentimes illogical interpretations. Board of Directors. No stockholders’ meeting is
Especially the word ‘Agent of the corporation.” required to consider it because additional
issuance of shares of stock does not need the
In the Filoil Case, litigation lawyer made a approval of the stockholders.
special appearance precisely to question the
validity of the service of summons made upon a What is only required is a valid board
person not named in the statute whose very resolution allowing the issuance of additional
appearance was ceased upon by the Court to shares. (Ruby Industrial Corporation v. Lim)
say that he is considered as an ‘Agent’ of the
corporation. This is consistent with the rule that
Stockholders may have all the profits but shall
The absurd decision in this case necessitated turn over the day-to-day management of the
amending the particular section in the Rules of corporate affairs to the governing Board of
court permitting for instance, service of Directors who, under the Corporation Code,
summons only to the In-House counsel. provides that, All Corporate Powers, All
Business are conducted and All Properties are
He is not yet the in-house counsel. He is there controlled by the said Board, unless, of course,
only specially appearing to question the validity the law requires Stockholders’ Intervention.
of the service of summons.
Example:
XPN: Section 5, Rule 2, Interim Rules
governing Corporate Controversies (1) Investment of Corporate Fund in another
business or purpose other than the Primary
This rule, however, will not hold true if it is an purpose.
Intra-Corporate controversy, a controversy
arising between and among the stockholders, It has to be approved by at least 2/3 of the
directors, officers or between any or all of them Outstanding Capital Stock or the Stockholders
and the corporation. owning or representing at least 2/3 of the
Outstanding Capital Stock
Under the Interim Rules governing corporate
controversies, particularly Sec. 5, Rule 2 (2) To enter into mergers or consolidations.
thereof:
The law likewise requires the intervention of
If the defendant is a Domestic Corporation: stockholders owning or representing at least
2/3 of the Outstanding Capital Stock.
Service shall be deemed adequate if made upon
any of the Statutory Officers, as fixed in the By- RIGHT TO ACQUIRE OR ALIENATE
Laws or their respective Secretaries). PROPERTIES.
A director is, of course, a statutory officer of a TWO LIMITATIONS:

corporation. We know that they are corporate
managers. 1. As the Lawful Transaction of its business
may reasonably require.
So if it is Intra-Corporate, and it is served upon
any of the directors or even any officer as In the case of Luneta Motors vs. AD Santos,
provided for in the by-laws, if there is such a Luneta Motors acquired a Certificate of Public
thing as assistant finance manager in the by- Convenience for operation of taxi services. It
laws and it is served unto him, it is valid. It was the winner of an auction sale for that
goes further by including their respective particular Certificate of Public Convenience.
secretaries”. The losing bidder went to court questioning the
validity of the acquisition of the said certificate
The ruling in EB Villarosa and Partners vs. of public convenience.
Benito will apply only if the corporation is sued
by a 3rd party.

lOMoARcPSD|7948091
The Supreme Court held that Luneta Motors proposed action and of the time and place of
cannot acquire the certificate of public the meeting shall be addressed to each
convenience. stockholder or member at his place of residence
as shown on the books of the corporation and
It took note of the Articles of Incorporation and deposited to the addressee in the post office
ruled that, while it is true that Luneta Motors with postage prepaid, or served personally:
may engage in the transportation business by Provided, That in case of extension of corporate
water, it is not authorized to engage in land term, any dissenting stockholder may exercise
transportation business. his appraisal right under the conditions
provided in this code. (n)
Since it is not as the lawful transaction of its
business reasonably require, the Court ruled It may be extended or shortened by an
that it cannot acquire the certificate of public amendment of the Articles of Incorporation by a
convenience. majority vote of the directors subject to the
ratification of the stockholders owning or
In the case of Tambunbi v. Jarencio, one of representing at least 2/3 of the Outstanding
the reasons why the Court pierced the veil of Capital Stock at a meeting duly called for that
the corporate fiction of the corporation there purpose.
involved is that, it is claiming that it owns the
American drug company engaged in the In extension or shortening of the corporate
distribution of drugs. It is claiming that it owns term, Section 37 is categorical; the vote must
a printing machine belonging to a sister be cast at the meeting called for that purpose.
company which is engaged in printing. Written assent will not be sufficient.
The court stressed, how can you have a Section 11 provides that the extension of the
printing machine? What do you need a printing original terms, as indicated in the Articles of
machine for when you’re engaged in the Incorporation shall be made:
distribution of drugs? It is not as the lawful
transaction of its business reasonably require. (1) Not earlier than five years prior to the
expiration of the term indicated in the
2. Limitations imposed by law or the Articles of Incorporation.
Constitution.
(2) Unless there are Justifiable Reasons for an
Corporations, juridical entities can, like any earlier extension, as may be determined by
other natural persons, acquire lands and the SEC.
register the same in their own names.
POWER TO INCREASE OR DECREASE THE
But there is a Constitutional provision that CAPITAL STOCK OR TO CREATE, INCUR
says, it cannot register lands of the public BONDED INDEBTEDNESS
domain. It may hold such land of the public
domain only by way of lease under the Section 38. Power to increase or decrease
constitution for a particular number of area capital stock; incur, create or increase bonded
and number of years. indebtedness. – No corporation shall increase
or decrease its capital stock or incur, create or
However, there is an exception. In the case of increase any bonded indebtedness unless
Director of Lands vs. Court of Appeals, the approved by a majority vote of the board of
effect that land of the public domain may be directors and, at a stockholder’s meeting duly
converted into private property by the mere called for the purpose, two-thirds (2/3) of the
lapse of (30) years, if it is held by a possessor outstanding capital stock shall favor the
or his predecessor-in-interest continuously in increase or diminution of the capital stock, or
concept of an owner, openly, for the statutory the incurring, creating or increasing of any
period of (30) years, if that be the case, it is bonded indebtedness. Written notice of the
converted into private property and thus, it proposed increase or diminution of the capital
may be registered by a juridical entity. stock or of the incurring, creating, or
increasing of any bonded indebtedness and of
POWER TO EXTEND OR SHORTEN the the time and place of the stockholder’s meeting
CORPORATE TERM at which the proposed increase or diminution
of the capital stock or the incurring or
Section 37. Power to extend or shorten increasing of any bonded indebtedness is to be
corporate term. – A private corporation may considered, must be addressed to each
extend or shorten its term as stated in the stockholder at his place of residence as shown
articles of incorporation when approved by a on the books of the corporation and deposited
majority vote of the board of directors or to the addressee in the post office with postage
trustees and ratified at a meeting by the prepaid, or served personally.
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at A certificate in duplicate must be signed by a
least two-thirds (2/3) of the members in case of majority of the directors of the corporation and
non-stock corporations. Written notice of the countersigned by the chairman and the

lOMoARcPSD|7948091
secretary of the stockholders’ meeting, setting the subscription: Provided, further, That no
forth: decrease of the capital stock shall be approved
by the Commission if its effect shall prejudice
(1) That the requirements of this section have the rights of corporate creditors.
been complied with;
Non-stock corporations may incur or create
(2) The amount of the increase or diminution of bonded indebtedness, or increase the same,
the capital stock; with the approval by a majority vote of the
board of trustees and of at least two-thirds
(3) If an increase of the capital stock, the (2/3) of the members in a meeting duly called
amount of capital stock or number of shares of for the purpose.
no-par stock thereof actually subscribed, the
names, nationalities and residences of the Bonds issued by a corporation shall be
persons subscribing, the amount of capital registered with the Securities and Exchange
stock or number of no-par stock subscribed by Commission, which shall have the authority to
each, and the amount paid by each on his determine the sufficiency of the terms thereof.
subscription in cash or property, or the amount (17a)
of capital stock or number of shares of no-par
stock allotted to each stock-holder if such Q. WHAT ARE THE MODES OF INCREASING
increase is for the purpose of making effective THE CAPITAL STOCK?
stock dividend therefor authorized;
If the capital is originally 1M divided into 1M
(4) Any bonded indebtedness to be incurred, shares with a par value of P1.00 per share, you
created or increased; can increase the capital stock in either of the
three ways:
(5) The actual indebtedness of the corporation
on the day of the meeting; 1. Increasing the no. of shares to 2M, without
increasing the par value you arrive at an
(6) The amount of stock represented at the additional 1M increase in capital stock; or
meeting; and
2. You may retain 1M no. of shares and
(7) The vote authorizing the increase or increase the par value; or
diminution of the capital stock, or the
incurring, creating or increasing of any bonded 3. You increase both, for example, 1.5M
indebtedness. shares for P1.50 per share, you will arrive
at an increase of additional 1M in the
Any increase or decrease in the capital stock or capital
the incurring, creating or increasing of any
bonded indebtedness shall require prior Q. WHY SHOULD A CORPORATION
approval of the Securities and Exchange INCREASE ITS CAPITAL STOCK?
Commission.
For acquisition of business or to expand its
One of the duplicate certificates shall be kept business
on file in the office of the corporation and the
other shall be filed with the Securities and Q. LIMITATION IMPOSED IN DECREASING
Exchange Commission and attached to the THE CAPITAL STOCK
original articles of incorporation. From and
after approval by the Securities and Exchange No decrease in capital stock shall be allowed if
Commission and the issuance by the it will prejudice the rights of the creditors or
Commission of its certificate of filing, the other 3rd parties.
capital stock shall stand increased or
decreased and the incurring, creating or This is why the SEC is duty bound to
increasing of any bonded indebtedness determine whether or not to approve or allow a
authorized, as the certificate of filing may decrease in capital stock.
declare: Provided, That the Securities and
Exchange Commission shall not accept for It will never become valid and effective until the
filing any certificate of increase of capital stock SEC gives its stamp of approval.
unless accompanied by the sworn statement of
the treasurer of the corporation lawfully Q. WHAT ARE THE MODES OF DECREASING
holding office at the time of the filing of the CAPITAL STOCK?
certificate, showing that at least twenty-five
(25%) percent of such increased capital stock Just do the reverse of the modes to Increase
has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed 1. Decrease the number of shares without
has been paid either in actual cash to the decreasing the par value;
corporation or that there has been transferred
to the corporation property the valuation of 2. Decrease the par value without decreasing
which is equal to twenty-five (25%) percent of the number of shares; or

lOMoARcPSD|7948091
3. Decrease both the number of shares and You can also decrease the capital stock to that
the par value. same extent of the depletion of the value of the
fixed assets because also, no creditors will
Q. WHY SHOULD A CORPORATION thereby be affected.
DECREASE ITS CAPITAL, CONSIDERING
THAT IT MAY NOT DO SO IF IT WILL POWER TO DENY PRE-EMPTIVE RIGHTS
PREJUDICE THE RIGHTS OF CREDITORS
OR OTHER 3RD PERSONS? Section 39. Power to deny pre-emptive right. –
All stockholders of a stock corporation shall
There must be a valid reason for decreasing the enjoy pre-emptive right to subscribe to all
capital stock because it may be a violation of issues or disposition of shares of any class, in
the Trust Fund Doctrine. proportion to their respective shareholdings,
unless such right is denied by the articles of
If it is decreased, the capital is decreased and it incorporation or an amendment thereto:
will be violative of this Trust Fund Doctrine Provided, That such pre-emptive right shall not
then the SEC will not allow a decrease in extend to shares to be issued in compliance
capital stock. with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to
TRUST FUND DOCTRINE be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
Subscriptions to capital stock, inclusive of the the outstanding capital stock, in exchange for
unpaid portion thereof, constitutes a fund property needed for corporate purposes or in
which the creditors have a right to rely upon payment of a previously contracted debt.
the satisfaction of their claims.
Pre-emptive right is the right granted by law to
all existing stockholders to subscribe to all
1. To reduce or wipe out existing deficits issues or dispositions of shares of any class so
where creditors will not thereby be as to maintain the respective proportionate
affected. interest in the corporation, that is, their voting
and dividend rights.
The corporation has 10M authorized capital. It
used up 5M to manufacture toys for kids of If you are holding, for instance, 10% of the OCS
young ages. After the production, it was of a corporation, and the corporation issues
discovered that the toys contain a material additional 1M shares of stocks, being a holder
dangerous to the health of children. The of 10% of the Outstanding Capital Stock, you
corporation, instead of selling it openly to the are entitled to subscribe to 10% of the 1M that
public, burned these toys. There is a deficit will be issued by the corporation so that you
now of 5M. will retain your 10% dividend right and voting
right for that matter.
It can reduce now the value of its capital stock
because no creditor will be affected. This is a If you did not subscribe, then definitely, there
valid reason. will be a depletion of your voting and dividend
right.
2. To reduce or wipe out Capital Surplus
Q. May this right be denied? How?
If the capital is more than necessary to
procreate the business. You put up a The Articles of Incorporation or the Amendment
corporation and you plan to build a grocery of the Articles may deny the stockholders their
store in a city but mayor of the city already has right of Pre-Emption.
5 grocery stores. The mayor does not want to
give you a permit to open another grocery store. XPN:
So instead, you built a Sari-Sari Store. But
your capital is 10M. (1) If they are to be issued in compliance with
the law in requiring the minimum stock
In this case, you can decrease your capital ownership by the public.
stock.
(2) If they are to be issued in good faith with
3. To write down the value of fixed assets if the approval of the stockholders
there is a decline in their actual value. representing at least 2/3 of the
Outstanding Capital Stock either in
You put up Transport services with a capital exchange of property needed by the
stock of 10M. This 10M was used to purchase corporation or in payment of previously
1.3J Toyota vios at P500,000.00 per piece. You incurred indebtedness.
bought 20 of these. In the ordinary wear and
tear, in 2 years, the value of these cabs went The validity of issuance of additional shares
down to P250,000.00 and these are the only may be questioned if done in breach of trust.
assets of the corporation.

lOMoARcPSD|7948091
Thus, even if the pre-emptive right does not particular cases were placed before the
exist, either because the issue comes within Corporation Code became effective.
the exceptions provided for under Section 39,
or because it is denied or limited by a provision And the wording of the law now is very clear
in the articles of incorporation, the issue of and specific: “Existing stockholders shall have
shares may still be objectionable if: the right to subscribe to all issues or
disposition of shares of any class”, even
XPN to the XPN: Treasury Shares are now also covered.
(1) The directors acted in breach of trust; and Q. WHAT TYPES OF SHARES ARE COVERED
BY THESE PRE-EMPTIVE RIGHTS? ALL
(2) Their primary purpose is to perpetuate a TYPES OF SHARES.
shift of control of the corporation or to
freeze out the minority interest. The Pre-emptive rights of a stockholder in a
Close Corporation, if not denied also by a
You increased your capital because the articles provision in the Articles of Incorporation, is
do not allow the exercise of stockholders’ pre- Absolute.
emptive rights. But the purpose is to freeze out
the minority. The minority was able to elect a Meaning, those instances provided for under
representative in the Board because of Sec. 39, as to when a stockholder may
cumulative voting. nonetheless be able to exercise the right of
pre-emption, that is,
The 20% capital was increased by another 1M.
(1M is the ACS). Minority was not able to (1) Those issued in compliance with the law
exercise their right of pre-emption because it requiring minimum stock ownership by the
was denied in the provision in the articles. public; and
They can no longer vote a representative
because their 20% was reduced to 10%. (2) Those issued in good faith, with approval of
the stockholders owning or representing at
You can question that. (Ruby Industrial least 2/3 of the outstanding capital stock,
Corporation v. Lim) either in exchange of property needed by the
corporation or for previously incurred
Section 39 provides, ‘All issues or disposition of indebtedness
shares of any class’
Will not apply to a stockholder in a Close
In earlier cases, Benito vs. SEC and Dy vs. Corporation
SEC, the Supreme Court excluded from the
coverage of the right of pre-emption originally Section 102. Pre-emptive right in close
unsubscribed portion of the Original Capital corporations. – The pre-emptive right of
Stock. stockholders in close corporations shall extend
to all stock to be issued, including reissuance
Example: of treasury shares, whether for money, property
or personal services, or in payment of corporate
Authorized Capital Stock is 1M; number of debts, unless the articles of incorporation
shares subscribed is 250,000; so there’s a free provide otherwise.
portion of 750,000 left unsubscribed. If the
corporation will subsequently issue the the Q. MAY A STOCKHOLDER WHO HAS NOT
remaining 750,000 unsubscribed shares, then, PAID HIS SUBSCRIPTION IN FULL OF THE
the Supreme Court held, in these two CAPITAL STOCK—BE ABLE TO EXERCISE
particular case, that it does not extend to HIS RIGHT OF PRE-EMPTION?
originally unsubscribed shares.
Yes, by virtue of Sec. 72.
When a corporation, at its inception, first
offered its shares or subscription it is deemed Section 72. Rights of unpaid shares. – Holders
to have offered ALL of its authorized shares for of subscribed shares not fully paid which are
subscription of the stockholders. not delinquent shall have all the rights of a
stockholder. (n)
A stockholder cannot, thus, complain, to a
dilution of his interest if the corporation later
POWER TO DISPOSE OF ALL OR
offers the unsubscribed portion for
SUBSTANTIALLY ALL OF THE CORPORATE
subscriptions to other persons because he is
ASSETS AND/OR PROPERTIES
deemed to have waived his right of pre-emption
if that be the case.
Section 40. Sale or other disposition of assets.
It appears however, that although these rulings – Subject to the provisions of existing laws on
were handed down during the effectivity of the illegal combinations and monopolies, a
Corporation Code, which became effective May corporation may, by a majority vote of its board
1, 1980, the facts obtaining in these 2 of directors or trustees, sell, lease, exchange,

lOMoARcPSD|7948091
mortgage, pledge or otherwise dispose of all or

substantially all of its property and assets, Q. WHEN IS A SALE OR DISPOSITION
including its goodwill, upon such terms and CONSIDERED AS SUBSTANTIAL SO AS TO
conditions and for such consideration, which REQUIRE STOCKHOLDERS’ APPROVAL FOR
may be money, stocks, bonds or other ITS VALIDITY?
instruments for the payment of money or other
property or consideration, as its board of If the corporation would be rendered incapble
directors or trustees may deem expedient, of continuing business or accomplishing the
when authorized by the vote of the purpose for which it was incorporated = then
stockholders representing at least two-thirds the approval of the stockholders would be
(2/3) of the outstanding capital stock, or in required for its validity.
case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a Q. THE CORPORATION IS ENGAGED IN
stockholder’s or member’s meeting duly called REALTY BUSINESS. THE PRIMARY
for the purpose. Written notice of the proposed PURPOSE SAYS THAT:
action and of the time and place of the meeting
shall be addressed to each stockholder or “THE CORPORATION IS FORMALLY
member at his place of residence as shown on ORGANIZED FOR THE PURPOSE OF
the books of the corporation and deposited to OWNING, ACQUIRING, DISPOSING OR
the addressee in the post office with postage SELLING ANY AND ALL TYPES OF REAL
prepaid, or served personally: Provided, That PROPERTIES”.
any dissenting stockholder may exercise his
appraisal right under the conditions provided THE CORPORATION HAS THE PIECE OF
in this Code. PROPERTY IN BCDA AREA. THE
CORPORATION, THROUGH A BOARD
A sale or other disposition shall be deemed to RESOLUTION, NOW DECIDES TO SELL THAT
cover substantially all the corporate property PIECE OF PROPERTY. IS THE
and assets if thereby the corporation would be STOCKHOLDERS CONSENT OR APPROVAL
rendered incapable of continuing the business REQUIRED EVEN IF THAT IS THE ONLY
or accomplishing the purpose for which it was PROPERTY OF THE CORPORATION?
incorporated.
No. Section 40 provides, that if the sale or
After such authorization or approval by the disposition is in the Usual or Regular course of
stockholders or members, the board of its business, stockholders’ approval is not
directors or trustees may, nevertheless, in its required for its validity or if the proceeds are to
discretion, abandon such sale, lease, exchange, be appropriated for the conduct of its
mortgage, pledge or other disposition of remaining business, stockholders’ approval is
property and assets, subject to the rights of not required for its validity even if that is the
third parties under any contract relating only property of the corporation.”
thereto, without further action or approval by
the stockholders or members. Q. THE CORPORATION IS ENGAGED IN THE
MANUFACTURING BUSINESS AND IT HAS A
Nothing in this section is intended to restrict PROPERTY LOCATED IN ABCD AREA
the power of any corporation, without the WHERE IT HAS ITS FACTORY/PLANT,
authorization by the stockholders or members, WAREHOUSE, INVENTORIES AND OFFICES.
to sell, lease, exchange, mortgage, pledge or IT SELLS ITS PLANT. WILL IT REQUIRE
otherwise dispose of any of its property and STOCKHOLDERS’ APPROVAL?
assets if the same is necessary in the usual
and regular course of business of said GR: Supposed to be, Yes, because if it has no
corporation or if the proceeds of the sale or more plant, it is no longer capable of
other disposition of such property and assets continuing the business for which it was
be appropriated for the conduct of its organized.
remaining business.
XPN: But the intention, however, is that, so
In non-stock corporations where there are no that the corporation will be able to acquire
members with voting rights, the vote of at least more modern or complex facility.
a majority of the trustees in office will be
sufficient authorization for the corporation to If that be the case, then stockholders’ approval
enter into any transaction authorized by this will not be required because the proceeds are to
section. be appropriated for the conduct of its business.
If the corporation sells disposes all or

substantially all of its assets and/or properties.
The stockholders or members consent or

approval is required for its validity, 2/3 of the
Outstanding Capital Stock, or 2/3 of the
members, in cases of a non-stock corporation.

lOMoARcPSD|7948091
Q. WILL THE ACQUIRING CORPORATION OR 3. To pay dissenting or withdrawing

WILL THE PURCHASER BE LIABLE FOR THE stockholders entitled to payment for their
DEBTS AND OBLIGATIONS OF THE SELLING shares under the provisions of this Code. (a)
CORPORATION IF THE ASSETS AND
PROPERTIES ARE SOLD OR
SUBSTANTIALLY ALL OF THE ASSETS ARE Q. WHAT MAY BE A LEGITIMATE PURPOSE
SOLD TO A 3RD PARTY. WILL THE FOR A CORPORATION TO ACQUIRE ITS
PURCHASER, THE 3RD PARTY BE LIABLE OWN SHARES?
FOR THE DEBTS AND OBLIGATIONS OF
THE SELLING CORPORATION?
1. To eliminate fractional shares—arising out
GR: No, by virtue of the Corporate Entity of stock dividends;
Theory.
2. To collect or compromise an indebtedness
In the case of Yu vs. NLRC, Twin Ace Holdings to the corporation arising out of unpaid
acquired all the assets and properties of subscription in a delinquency sale and to
Tanduay Distillery Inc. There was a labor purchase delinquent stocks sold during
problem and the laborers won after Twin Ace that sale;
acquired all the assets of Tanduay Distillery.
The laborers now wanted to enforce the award 3. To pay dissenting or withdrawing
against Twin Ace Holdings. stockholders entitled thereto, as provided
for in Section 81;
The Supreme Court held that Twin Ace exists
separately and independently from Tanduay 4. To redeem redeemable shares;
Distillery Inc. It is not liable for the debts and
liabilities of the selling corporation. 5. To pay withdrawing stockholders in a close
corporation, as provided for in Section 105;
XPN:
6. To eliminate capital surplus;
1. Where the purchaser expressly or impliedly
agrees to assume such debts or liabilities; NB: This is not exclusive because the law
provides that “including but not limited to the
2. Where the transaction amounts to a merger following”
or consolidation under Section 80.
GR: The Corporation must have Unrestricted
The debts and liabilities of the constituent Retained Earnings.
corporations will accrue for and in behalf of the
absorbing or consolidated corporation without XPN:
further act and deed.
1. Redemption of redeemable shares, as
3. Where the purchasing corporation is a mere provided for in Section 8.
continuation of the selling corporation;
2. Withdrawing stockholders in a Close
4. Where the transaction is entered into Corporation; A stockholder in a close
fraudulently in order to escape liability for corporation may, for any reason, withdraw
such debts and/or obligations. therefrom and compel the corporation that
he be paid the value of his shares. Provided
POWER TO ACQUIRE ITS OWN SHARES only that the corporation has sufficient
assets to cover debts and liabilities
Section 41. Power to acquire own shares. – A exclusive of capital, as provided for in
stock corporation shall have the power to Section 105.
purchase or acquire its own shares for a
legitimate corporate purpose or purposes, 3. In cases of Deadlocks in a Close
including but not limited to the following cases: Corporation; the remedy available is for a
Provided, That the corporation has unrestricted stockholder to file a case in court to settle
retained earnings in its books to cover the the matter in cases of deadlocks. The court,
shares to be purchased or acquired: the proper forum, may appoint a
provisional director in order to break the
1. To eliminate fractional shares arising out of deadlock. The court or the provisional
stock dividends; director may compel any stockholder to sell
his shares in favor of the corporation
2. To collect or compromise an indebtedness to irrespective of the existence of unrestricted
the corporation, arising out of unpaid retained earnings, as provided for in
subscription, in a delinquency sale, and to Section 104.
purchase delinquent shares sold during said
sale; and

lOMoARcPSD|7948091
Q. A IS A STOCKHOLDER OF 100 SHARES. 2/3 of the Members in case of Non-Stock

HE PAID 50,000 OF THE VALUE OF HIS Corporation
SHARES. HE DID NOT YET PAY THE
REMAINDER OF 50,000 AND THE The approval or consent of the stockholders
CORPORATION CALLS FOR THE PAYMENT will not be required for its validity if it is
OF UNPAID SUBSCRIPTIONS. HE DID NOT necessary to accomplish the primary purpose
PAY ON THE DATE SPECIFIED. HIS SHARES of its organization.
WERE DECLARED DELINQUENT AND
SUBJECTED TO DELINQUENCY SALE In the case of Dela Rama v. Mao Sugar, Mao
WHERE THE CORPORATION MAY BID. THE Sugar was engaged in the production of sugar
CORPORATION PRECISELY MADE A CALL and it invested its funds in Philippine Fibers
FOR THE PAYMENT OF THE UNPAID engaged in the manufacture of sugar bags. One
SUBSCRIPTIONS OF THE STOCKHOLDERS of the stockholders questioned the Board
BECAUSE IT HAS BEEN INCURRING Resolution investing the corporate funds in the
LOSSES. MAY THE CORPORATION BID FOR manufacture of sugar bags because it did not
ITS SHARES? secure the approval of the stockholders.
No. One of the essential requisites is that it The Supreme Court held that Stockholders’
must have Unrestricted Retained Earnings. approval is not required if it is necessary to aid
in carrying out its primary purpose. The test is
Q. CORPORATION EARNED 500,000 whether or not a logical relation exists between
PROFITS. IT HAS DEBTS TO PAY 250,000. the act done and the corporate purpose in a
THE CORPORATION DECIDED TO MAKE substantial and not in a remote fancible sense.
USE OF THE REMAINING 250,000 AS If there is, then the corporation may engage in
RESERVES FOR POSSIBLE such an activity even without stockholders’
CONTINGENCIES. WHAT HAPPENS? approval.
The entire 500,000 is now restricted. The Q. WHAT IF THE CORPORATION INVEST ITS
corporation cannot reacquire its own shares FUNDS TO CARRY OUT ITS SECONDARY
because it must come from unrestricted PURPOSE? WILL STOCKHOLDERS’
retained earnings. The corporation has no APPROVAL BE REQUIRED?
surplus profits in this case.
EXAMPLE: CORPORATION IS ENGAGED IN
POWER TO INVEST FUNDS IN ANOTHER REALTY BUSINESS. ITS SECONDARY
CORPORATION. PURPOSE IS CONSTRUCTION OF ANY OR
ALL TYPES OF BUILDINGS, TENEMENTS,
Section 42. Power to invest corporate funds in ETC. THE BOARD DECIDES TO INVEST ITS
another corporation or business or for any FUNDS IN THE CONSTRUCTION BUSINESS.
other purpose. – Subject to the provisions of WILL STOCKHOLDERS’ APPROVAL BE
this Code, a private corporation may invest its REQUIRED FOR ITS VALIDITY?
funds in any other corporation or business or
for any purpose other than the primary Yes. Investment of corporate funds in any other
purpose for which it was organized when business or purpose other than the primary
approved by a majority of the board of directors purpose requires the intervention of the
or trustees and ratified by the stockholders stockholders. Thus, stockholders’ approval
representing at least two-thirds (2/3) of the would still be required if it is to carry out any of
outstanding capital stock, or by at least two the secondary purpose or purposes indicated in
thirds (2/3) of the members in the case of non- the Articles of Incorporation.
stock corporations, at a stockholder’s or
member’s meeting duly called for the purpose. POWER TO DECLARE DIVIDENDS
Written notice of the proposed investment and
the time and place of the meeting shall be Section 43. Power to declare dividends. - The
addressed to each stockholder or member at board of directors of a stock corporation may
his place of residence as shown on the books of declare dividends out of the unrestricted
the corporation and deposited to the addressee retained earnings which shall be payable in
in the post office with postage prepaid, or cash, in property, or in stock to all
served personally: Provided, That any stockholders on the basis of outstanding stock
dissenting stockholder shall have appraisal held by them: Provided, That any cash
right as provided in this Code: Provided, dividends due on delinquent stock shall first be
however, That where the investment by the applied to the unpaid balance on the
corporation is reasonably necessary to subscription plus costs and expenses, while
accomplish its primary purpose as stated in the stock dividends shall be withheld from the
articles of incorporation, the approval of the delinquent stockholder until his unpaid
stockholders or members shall not be subscription is fully paid: Provided, further,
necessary. (17 1/2a) That no stock dividend shall be issued without
the approval of stockholders representing not
It may do so with the concurrence or vote of at less than two-thirds (2/3) of the outstanding
least 2/3 of the Outstanding Capital Stock or

lOMoARcPSD|7948091
capital stock at a regular or special meeting Q. A COMPANY ACQUIRED SHARES OF

duly called for the purpose. (16a) STOCKS OF SAN MIGUEL CORPORATION.
THEY BOUGHT 100,000 SHARES OF SAN
Stock corporations are prohibited from MIGUEL CORPORATION (SMC) WAY BACK
retaining surplus profits in excess of one (5) YEARS AGO. A IS NOW ALREADY A
hundred (100%) percent of their paid-in capital STOCKHOLDER OF SMC FOR 100,000
stock, except: (1) when justified by definite SHARES. IN THE COURSE OF TIME, SMC
corporate expansion projects or programs DECLARED STOCK DIVIDENDS IN FAVOR
approved by the board of directors; or (2) when OF A, BEING ONE OF THEIR
the corporation is prohibited under any loan STOCKHOLDERS AND A RECEIVED
agreement with any financial institution or ADDITIONAL 100,000 SHARES OF STOCKS
creditor, whether local or foreign, from OF SMC. A NOW HAS 200,000 SHARES. IF A
declaring dividends without its/his consent, CORPORATION WOULD WANT TO DECLARE
and such consent has not yet been secured; or THESE 100,000 SHARES AS DIVIDENDS TO
(3) when it can be clearly shown that such ITS OWN STOCKHOLDERS, WILL
retention is necessary under special STOCKHOLDERS’ APPROVAL BE REQUIRED
circumstances obtaining in the corporation, FOR ITS VALIDITY?
such as when there is need for special reserve
for probable contingencies. (n) No. These are not stock dividends, these are
Property dividends. It is not their shares that
Of course, this power is granted only to stock were declared. It should have come from the
corporations because non-stock corporations Declarant Corporation because property
cannot allot their surplus profits by way of dividends are those that are paid by way of
dividends. property where there is surplus in that form
like bonds, notes, evidences of indebtedness or
So this power to declare dividends is available shares of stocks. Just like in this situation,
only to stock corporations. The requirement is there was a surplus, so they can declare that
that it must have unrestricted retained as property dividends.
earnings. The corporation cannot thus, declare
dividends if it will use its capital or stated Again, that is not Stock Dividends, therefore,
capital. stockholders’ approval will not be required for
its validity.
The Board of Directors determine the nature of
the dividends to be declared whether they be in Q. ARE SUBSCRIBERS TO SHARES OF
cash, property or stock. STOCKS NOT FULLY PAID ENTITLED TO
THE FULL PAYMENT OF THE DIVIDENDS
But if the Board decides to declare or pay stock DUE THEM?
dividends the approval of at least 2/3 of the
Outstanding Capital Stock will be required for A SUBSCRIBED 100,000 SHARES BUT HE
its validity. Stock dividends, if they are to be STILL DID NOT PAY A SINGLE CENTAVO.
declared, require the consent of the THE CORPORATION DECLARES P1.00 FOR
stockholders. EVERY 1 SHARE HELD BY STOCKHOLDERS.
HOWEVER, HE STILL HASN’T PAID EVEN A
Q. WHAT ARE STOCK DIVIDENDS? SINGLE CENTAVO TO HIS SUBSCRIPTIONS.
IS HE ENTITLED TO P100,000.00?
Those that are to be paid in the form of the
shares of stocks of the declarant corporation. Yes. Unless, he has been declared Delinquent,
subscribers to shares of stock not fully paid
Example: X Corporation declares stock shall have all the rights of a stockholder, as
dividends to be paid out of its unissued stocks.) provided for in Section 72.
Section 43 speaks of the facts that if they are

Delinquent shareholders, they shall be entitled
nonetheless to dividends provided that it is by
way of cash dividends, but it shall first be
applied to the amount of his delinquency plus
costs and expenses, if any, and the remainder
be paid to him.
If it is by way of stock dividends, it shall be

withheld from him until he pays the amount of
his delinquency.
The amount or number of stocks that would be

paid to the stockholders as their shares of the
dividends will be based on their proportionate
interest in the corporation.

lOMoARcPSD|7948091
Q. HOW DO YOU VALUE STOCK Q. MAY THE STOCKHOLDERS COMPEL THE

DIVIDENDS? IS IT THE FAIR MARKET BOARD OF DIRECTORS TO DECLARE
VALUE AT THE TIME OF ITS DECLARATION DIVIDENDS?
OR THE ACTUAL VALUE OF THE ORIGINAL
ISSUANCE? We have to qualify.
In PLDT vs. National Telecommunications Corporations are prohibited under sec. 43, 2nd
Company, the Supreme Court held that it paragraph. From retaining surplus profits or
cannot be said that there is no consideration, Unrestricted Retained Earnings in excess of
because there must be a consideration for the 100% of their paid-up capital.
issuance of shares of stocks, otherwise, there
would be watered stocks involved in the NB: That the basis is paid-up capital not the
issuance of stock dividends. subscribed or authorized capital
Dividends, regardless of the form they are Q. THE CORPORATION HAS PAID UP
declared, whether they be cash, property or CAPITAL IS 1M AND THEY EARNED
stock, are valued at the amount of the declared SURPLUS PROFITS OF 2M. MAY IT BE
dividend taken from the unrestricted retained COMPELLED TO DECLARE DIVIDENDS?
earnings of a corporation.
GR: Yes. At least to the same extent of more
Thus, the value in the declaration in case of than 100% of 1M. They may be forced to
Stock dividends is the actual value of the declare 1m as dividends either by way of
original issuance of the said stocks. In case of property, cash or any combination of them.
Stock Dividends, it is akin to a forced purchase
of stocks. XPN:
In case of stock dividends, it is the amount that 1. Where there is a definitive expansion
the corporation transfers from its surplus program approved by the Board;
profits account to its capital account. This is
why the declaration of dividends is also called 2. When the corporation is prohibited under
as Capitalization of unrestricted retained any loan agreement with any financial
earnings, in the sense that nothing will be lost institution or creditor from declaring
in the net assets of the corporation. dividends without securing his/its consent
and such consent has not yet been secured;
Example:
3. When it is clearly shown that such
Corporation has 1M ACS. It made 1M retention is necessary under special
unrestricted retained earnings. 2M total assets. circumstances as when there is a need for
The corporation decides to declare this 1M as special reserves for possible contingencies;
stock dividends.
Q. WHAT IF IT IS NOT IN EXCESS OF 100%
This may now form part of the capital stock of OF THE PAID UP CAPITAL? MAY THE
the corporation. BOARD BE COMPELLED TO PAY OR
DECLARE DIVIDENDS?
Capitalization of Unrestricted retained
earnings, the amount P1M did not leave the GR: No
coffers of the corporation. It remained as part
and parcel of the assets of the corporation. XPN: Preferred shares. Preferred shares may be
What was issued to the stockholders will only granted the right or the preference to be paid
be a piece of paper the Stock certificate. The their dividends particularly if it is in the
declaration of the dividends may or may not Mandatory-If-Earned type of preferred shares,
effect a decrease in the Total Assets of a those that are mandated to be paid dividends
corporation. Even before they declared the 1M every year that profits are earned. So if there is
dividends, it was already an asset of the that type of share, then he can compel the
corporation because it is the corporation who corporation that he be paid his dividends due
earned it. It forms part of the capital. There is to contractual obligations.
no corresponding decrease in the assets of the
corporation if it is by way of Stock dividends. POWER TO ENTER INTO MANAGEMENT
CONTRACT
However, if it is by way of cash or property
dividends, the 1M was declared as cash Section 44. Power to enter into management
dividends, then the 1M will disappear. There is contract. – No corporation shall conclude a
a corresponding decrease in the total assets of management contract with another corporation
the 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

lOMoARcPSD|7948091
corporation, of both the managing and the ULTRA VIRES ACTS

managed corporation, at a meeting duly called
for the purpose: Provided, That (1) where a Section 45. Ultra vires acts of corporations. –
stockholder or stockholders representing the No corporation under this Code shall possess
same interest of both the managing and the or exercise any corporate powers except those
managed corporations own or control more conferred by this Code or by its articles of
than one-third (1/3) of the total outstanding incorporation and except such as are necessary
capital stock entitled to vote of the managing or incidental to the exercise of the powers so
corporation; or (2) where a majority of the conferred. (n)
members of the board of directors of the
managing corporation also constitute a Those that cannot be performed or executed by
majority of the members of the board of a corporation because they are not within the
directors of the managed corporation, then the express, inherent or implied powers, as defined
management contract must be approved by the by its Charter or Articles of Incorporation)
stockholders of the managed corporation
owning at least two-thirds (2/3) of the total A corporation can only do such acts and things
outstanding capital stock entitled to vote, or by as the law allows it to do; inclusive of the
at least two-thirds (2/3) of the members in the purpose or purposes for which it is formed or
case of a non-stock corporation. No organized.
management contract shall be entered into for
a period longer than five years for any one If it acts beyond such powers and authority,
term. the act performed is “Ultra Vires” act:
The provisions of the next preceding paragraph (1) Allowing a collateral attack on the part of
shall apply to any contract whereby a the contracting parties either on the
corporation undertakes to manage or operate corporation itself, or the 3rd party dealing
all or substantially all of the business of with it; and
another corporation, whether such contracts
are called service contracts, operating (2) Avoid liability therefrom.
agreements or otherwise: Provided, however,
That such service contracts or operating XPN:
agreements which relate to the exploration,
development, exploitation or utilization of (1) Clearly beneficial to the company;
natural resources may be entered into for such
periods as may be provided by the pertinent (2) Necessary to promote the interest/welfare
laws or regulations. (n) of the corporation or even its employees; or
It is now an express power conferred to all (3) In the legitimate furtherance of its
corporations registered under the provisions of business.
the Code.
Any activity or transaction which is merely
The corporation may enter into a management incidental or auxiliary to the main business of
contract by: the corporation may be rightfully undertaken.
(1) Majority vote of the members of the Board There must be a Logical Relation between the
of Directors act done and the corporate purpose or
purposes, in order that the corporation may
(2) Subject to the vote of the stockholders undertake the same. If there is, then it is
owning or representing a majority of the within the implied powers of the corporation
Outstanding Capital Stock. and thus, not ultra vires. (Montelibano v.
Bacolod Mortia Milling)
Higher voting percentage is required, 2/3 of the
Outstanding Capital Stock is required: In the case of Carlos vs. Mindoro Sugar, this
case involves the PhilTrust. PhilTrust, as the
(1) When a stockholder or stockholders name implies, is engaged in the buying, selling
representing the same interest of the and disposition of bonds, notes, evidences of
managing and managed corporation owns indebtedness and other forms of securities.
or controls more than 1/3 of the total PhilTrust guaranteed the payment of these
outstanding stocks entitled to vote, of the bonds. Later on, however, PhilTrust did not
managing corporation; want to comply with the guarantees claiming
that it was an ultra vires act.
(2) when a majority of the Board of Directors
of the managing corporation also The Supreme Court held that it is not Ultra
constitutes a majority of the members of Vires for PhilTrust to guarantee payment
the Board of the managed corporation because it would make the bonds, notes,
evidences of indebtedness more readily
marketable.

lOMoARcPSD|7948091
It is in furtherance of the purpose of its incorporation, a private corporation may

business of acquiring, selling or disposing the provide in its by-laws for:
bonds, notes or evidences of indebtedness.
1. The time, place and manner of calling and
Even if they may be Ultra Vires, if it is not conducting regular or special meetings of the
illegal per se, they may become binding and directors or trustees;
enforceable either by:
2. The time and manner of calling and
1.) Ratification, express or implied; conducting regular or special meetings of the
stockholders or members;
2.) Estoppel.
3. The required quorum in meetings of
BY LAWS stockholders or members and the manner of
voting therein;
Section 46. Adoption of by-laws. – Every
corporation formed under this Code must, 4. The form for proxies of stockholders and
within one (1) month after receipt of official members and the manner of voting them;
notice of the issuance of its certificate of
incorporation by the Securities and Exchange 5. The qualifications, duties and compensation
Commission, adopt a code of by-laws for its of directors or trustees, officers and employees;
government not inconsistent with this Code.
For the adoption of by-laws by the corporation 6. The time for holding the annual election of
the affirmative vote of the stockholders directors of trustees and the mode or manner
representing at least a majority of the of giving notice thereof;
outstanding capital stock, or of at least a
majority of the members in case of non-stock 7. The manner of election or appointment and
corporations, shall be necessary. The by-laws the term of office of all officers other than
shall be signed by the stockholders or members directors or trustees;
voting for them and shall be kept in the
principal office of the corporation, subject to 8. The penalties for violation of the by-laws;
the inspection of the stockholders or members
during office hours. A copy thereof, duly 9. In the case of stock corporations, the
certified to by a majority of the directors or manner of issuing stock certificates; and
trustees countersigned by the secretary of the
corporation, shall be filed with the Securities 10. Such other matters as may be necessary for
and Exchange Commission which shall be the proper or convenient transaction of its
attached to the original articles of corporate business and affairs. (21a)
incorporation.
Section 48. Amendments to by-laws. – The
Notwithstanding the provisions of the preceding board of directors or trustees, by a majority
paragraph, by-laws may be adopted and filed vote thereof, and the owners of at least a
prior to incorporation; in such case, such by- majority of the outstanding capital stock, or at
laws shall be approved and signed by all the least a majority of the members of a non-stock
incorporators and submitted to the Securities corporation, at a regular or special meeting
and Exchange Commission, together with the duly called for the purpose, may amend or
articles of incorporation. repeal any by-laws or adopt new by-laws. The
owners of two-thirds (2/3) of the outstanding
In all cases, by-laws shall be effective only capital stock or two-thirds (2/3) of the
upon the issuance by the Securities and members in a non-stock corporation may
Exchange Commission of a certification that delegate to the board of directors or trustees
the by-laws are not inconsistent with this Code. the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power
The Securities and Exchange Commission shall delegated to the board of directors or trustees
not accept for filing the by-laws or any to amend or repeal any by-laws or adopt new
amendment thereto of any bank, banking by-laws shall be considered as revoked
institution, building and loan association, trust whenever stockholders owning or representing
company, insurance company, public utility, a majority of the outstanding capital stock or a
educational institution or other special majority of the members in non-stock
corporations governed by special laws, unless corporations, shall so vote at a regular or
accompanied by a certificate of the appropriate special meeting.
government agency to the effect that such by-
laws or amendments are in accordance with Whenever any amendment or new by-laws are
law. (20a) adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office
Section 47. Contents of by-laws. – Subject to of the corporation, and a copy thereof, duly
the provisions of the Constitution, this Code, certified under oath by the corporate secretary
other special laws, and the articles of and a majority of the directors or trustees,
shall be filed with the Securities and Exchange

lOMoARcPSD|7948091
Commission the same to be attached to the in pari materia and should therefore be read,
original articles of incorporation and original interpreted, construed and harmonized with
by-laws. one another.
The amended or new by-laws shall only be P.D 902-A is categorical and specific: it is
effective upon the issuance by the Securities merely a GROUND for suspension/revocation
and Exchange Commission of a certification of corporate franchise. Meaning, there must be
that the same are not inconsistent with this Notice and Hearing. (Loyola Grand Villas
Code. (22a and 23a) Homeowners Association v. CA)
All corporations registered under the general The by-laws will become valid and effective
provisions of this Code must adopt and file its only:
by-laws with the SEC, within a period of (1)
month from the date of its registration, if not Upon the approval of the SEC to the effect that
filed simultaneously with the Articles of it is not contrary to law.
Incorporation.
The SEC must go through the provisions of the
However, the By-Laws may be adopted and by-laws and ensure that they are not contrary
filed prior to incorporation or after to law.
incorporation.
REQUISITES OF A VALID BY-LAWS
If it is prior to the incorporation, the SEC, as a
matter of policy, will require their simultaneous 1. It must not be contrary to Law, Morals,
filing with the Articles of Incorporation; Public Order or Public Policy.
The law uses the word ‘must’ adopt and file a There was a by-law provision which granted the
by-law. directors compensation even after they have
served their term of office. This is contrary to
Q. WHAT COULD BE THE EFFECT OF THE law.
NON-FILING OF THE BY-LAW OR THE NON-
ADOPTION OF THE CORPORATE BY-LAWS Any provision in the by-law that runs counter
WITHIN THE PERIOD SPECIFIED BY LAW, to the provisions of the Corporation Code is
WITHIN 30 DAYS FROM DATE OF ITS deemed as if it is not written at all. (Barretto v.
INCORPORATION? WILL IT RESULT TO THE La Previsoria)
AUTOMATIC DISSOLUTION OF THE
CORPORATION? Election of directors who are not members of
the Corporation.
No. The word ‘must’ is not always imperative.
The tendency is to interpret the word as a This is also not valid. It is contrary to law.
reasonable construction of the statute in which (Grace Christian High School v. CA)
it is used will demand or require. The
deliberations of the legislature would show that 2. It must not be inconsistent with the Articles
it was not the intention to make it imperative. of Incorporation.
Taken as a whole and under the principle that Example:

“the best interpreter is the statute itself”,
Section 46 reveals the intent of the legislature Q. ARTICLES OF INCORPORATION STATES
to attach a directory and not a mandatory THAT THERE SHALL BE SEVEN MEMBERS
meaning to the word “must”. OF THE BOARD BUT IN THE BY-LAWS, IT
WAS STATED THAT THERE SHALL BE NINE
Although the Corporation Code requires the MEMBERS OF THE BOARD. IN CASE OF
filing of the by-laws within the period of 1 CONFLICT, WHICH SHOULD PREVAIL?
month, it does not expressly provide for the
consequences of its non-filing. That written in the Articles of Incorporation
should prevail because the Articles of
However, the consequences of non-filing have Incorporation is a 3-fold contract. The by-laws
been rectified by P.D 902-A which granted the are mere rules of governance of the
SEC then the power to: corporation.
Suspend or revoke after proper notice and THREE FOLD CONTRACT

hearing, among others, the certificate of
registration of a corporation for its failure to file a) Between and among the stockholder,
the by-laws within the required period. members, directors and officers;
Failure to file and adopt by-laws would thus, b) Between them or any of them and the
not result to the automatic dissolution of the corporation;
corporation. In this particular case, the
Corporation Code and P.D 902-A are statutes

lOMoARcPSD|7948091
c) The corporation and the State, insofar as

its right to exist as such corporation is Notice of any meeting may be waived, expressly
concerned. or impliedly, by any stockholder or member.
.
3. It must be general and uniform in its effect Whenever, for any cause, there is no person
and applicable to all alike or similarly authorized to call a meeting, the Securities and
situated Exchange Commission, upon petition of a
stockholder or member on a showing of good
4. It must not impair obligations and cause therefor, may issue an order to the
contracts or vested rights. petitioning stockholder or member directing
him to call a meeting of the corporation by
5. It must be reasonable. (Gokungwei v. SEC) giving proper notice required by this Code or by
the by-laws. The petitioning stockholder or
By-laws are also subject to amendment by: member shall preside thereat until at least a
majority of the stockholders or members
(1) The majority vote of the directors. Subject to present have chosen one of their number as
the approval or ratification of at least a presiding officer. (24, 26)
majority of the stockholders owning or
representing at least majority of the Whether they be Board of Directors or Trustees
Outstanding Capital Stock Meeting or Stockholders’ Meeting, there are two
types:
(2) Amendment of the Articles of Incorporation
requirement is 2/3 of the Outstanding Capital 1. Regular
Stock;
2. Special
Amendment of the Article of Incorporation may
take effect: REQUISITES FOR A VALID MEETING
(1) Upon the approval of the SEC 1. Insofar as stockholders’ or members’

meetings are concerned, under Section 50,
In the case of By-Laws, it will never become it must be held on the date fixed in the By-
valid and effective until and unless the SEC Laws or in accordance with law;
gives its stamp of approval, as provided for in
Section 48. If there is no date fixed in the by-laws it shall
be on any date of April as may be determined
The by-laws and the Articles of Incorporation by the Board of Directors.
are (2) separate and distinct document.
2. Prior Notice must be given;
MEETINGS
In stockholders’ meetings, the requirement is
Section 49. Kinds of meetings. – Meetings of that, notice must be sent two weeks before the
directors, trustees, stockholders, or members annual or regular meeting;
may be regular or special. (n)
If it is a special meeting one week before the
Two Types of meetings: meeting;
1. Board of Directors or Trustees’ Meeting NB: The two weeks or one week requirement of
sending out notices may be shortened or
2. Stockholders’ Meeting extended validly by a provision in the Articles of
Incorporation or By-laws;
Section 50. Regular and special meetings of
stockholders or members. - Regular meetings of In the case of Directors v. Tan, the by-laws of
stockholders or members shall be held the corporation required that notices shall be
annually on a date fixed in the by-laws, or if sent at least five days, which is less than 1
not so fixed, on any date in April of every year week prior to the meeting.
as determined by the board of directors or
trustees: Provided, That written notice of The notices were posted only two days before
regular meetings shall be sent to all the scheduled meeting. One of the stockholders
stockholders or members of record at least two questioned the validity of the resolutions
(2) weeks prior to the meeting, unless a passed in that meeting which was actually
different period is required by the by-laws. election of the board of directors.
Special meetings of stockholders or members The Supreme Court ruled that the meeting is
shall be held at any time deemed necessary or invalid. The manner and mode of sending out
as provided in the by-laws: Provided, however, notices must be complied with.
That at least one (1) week written notice shall
be sent to all stockholders or members, unless
otherwise provided in the by-laws.

lOMoARcPSD|7948091
3. It must be held at the Proper Place If the principal office is located anywhere in
Metro Manila, they can also hold their meetings
Section 51. Place and time of meetings of anywhere within Metro Manila.
stockholders of members. – Stockholder’s or
member’s meetings, whether regular or special, Q. SAN MIGUEL CORPORATION HAS ITS
shall be held in the city or municipality where PRINCIPAL OFFICE IN MANDALUYONG CITY
the principal office of the corporation is located, BUT THEY ARE HOLDING THEIR MEETINGS
and if practicable in the principal office of the AT THE PICC GROUNDS, PASAY CITY. IS IT
corporation: Provided, That Metro Manila shall, VALID?
for purposes of this section, be considered a
city or municipality. Yes. Because Metro Manila is considered as
one single city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein. The same holds true in cases of Non-Stock
Corporations.
All proceedings had and any business
transacted at any meeting of the stockholders 4. It must be called by the proper person or
or members, if within the powers or authority officer.
of the corporation, shall be valid even if the
meeting be improperly held or called, provided Section 54. Who shall preside at meetings. –
all the stockholders or members of the The president shall preside at all meetings of
corporation are present or duly represented at the directors or trustee as well as of the
the meeting. (24 and 25) stockholders or members, unless the by-laws
provide otherwise. (n)
It must be held in the city or municipality
where the principal office is located or Meetings are to be called by the President or
established and as far as practicable, at the the Secretary, on orders of the President,
principal office of the corporation unless the By-laws provide for a different
person.
Section 93. Place of meetings. – The by-laws
may provide that the members of a non-stock Q. IF THERE IS A PERSON AUTHORIZED TO
corporation may hold their regular or special CALL THE MEETING, BUT HE FAILS,
meetings at any place even outside the place REFUSES OR NEGLECTS TO DO SO, MAY
where the principal office of the corporation is THE STOCKHOLDERS PETITION THE
located: Provided, That proper notice is sent to PROPER FORUM FOR AN AUTHORITY TO
all members indicating the date, time and place CALL THE SAME?
of the meeting: and Provided, further, That the
place of meeting shall be within the Philippines. EXAMPLE: THE PRESIDENT IS THE ONE
AUTHORIZED TO CALL THE MEETING. HE
Section 93 empowers a Non-Stock Corporation IS THERE AT THE PRINCIPAL OFFICE OF
to validly provide in their by-laws that the THE CORPORATION EVERYDAY. THE
Members’ Meetings may be held anywhere STOCKHOLDERS WANTED TO CALL A
within the Philippines; MEETING BECAUSE THEY FOUND OUT
THAT THE FINANCIAL STATEMENTS THAT
Provided, that proper notice is sent to all WERE PRESENTED TO THEM IN THE LAST
members STOCKHOLDERS’ MEETING 2 WEEKS AGO
CONTAIN DATA REGARDING MISUSE AND
There is no such grant or authority granted MISAPPLICATION OF CORPORATE FUNDS.
empowering a Stock Corporation to validly SO, THEY WANTED TO CLARIFY THE SAME
provide in their Articles or by-laws that WITH ALL OTHER STOCKHOLDERS
stockholders meetings may be held anywhere SIMILARLY SITUATED. BUT THE
within the Philippines. PRESIDENT REFUSE TO CALL THE
MEETING BECAUSE HE KNOWS THAT HE
If there is no provision in the by-laws of the WILL BE FOUND OUT AS THE ONE BEHIND
Non-Stock Corporation empowering to call THE MISUSE AND MISAPPLICATION OF THE
meetings even beyond the territorial CORPORATE FUNDS. WHAT IS THE
boundaries of the city or municipality where it APPROPRIATE REMEDY? MAY THE
has its Principal Office, the rule regarding STOCKHOLDERS PETITION THE PROPER
Stock Corporations will be applicable, as FORUM FOR AN AUTHORITY TO CALL THE
provided for in Section 87. MEETING?
It merely empowers the Non-Stock Corporation Yes. It must be by way of Mandamus. The clear
the power and authority to validly provide in intent of the legislature when they deleted the
the by-laws that meetings of members may be phrase “if the officer fails or refuses to call the
held ANYWHERE in the Philippines. same” is a stockholder can no longer be
authorized by the court to call the meeting and
Metro Manila is considered as one single city or preside thereat. (Afable v. SEC)
municipality

lOMoARcPSD|7948091
NB: Five Essential requisites for a valid Meeting

5. The quorum and voting requirements must
be complied with. 1. It must be held on the date fixed in the by-
laws or in accordance with law;
Section 52. Quorum in meetings. – Unless
otherwise provided for in this Code or in the 2. Prior notice must be given;
by-laws, a quorum shall consist of the
stockholders representing a majority of the 3. It must be held at the proper venue;
outstanding capital stock or a majority of the
members in the case of non-stock corporations. 4. It must be called by the proper
person/officer; and
GR: The stockholders owning or representing at
least a majority of the Outstanding Capital 5. The quorum and voting requirements must
Stock would constitute a quorum; be complied with.
XPN: If the voting requirement would be more Q. A MEETING WAS HELD ON JUNE 10. THE
than a majority necessarily, the quorum BY-LAWS PROVIDE THAT THE ANNUAL
requirement must also be at least equal to the MEETING OF THE STOCKHOLDERS SHALL
voting requirement imposed by the law BE ON THE LAST SUNDAY OF MAY. NOTICE
REQUIREMENT WAS DONE 5 DAYS BEFORE
The VOTING requirement would VARY. THE MEETING. PLACE OF PRINCIPAL
OFFICE IS IN QUEZON CITY BUT THE
2/3 in some instances and majority in other MEETING WILL BE HELD IN BAGUIO CITY.
instances. VICE-PRESIDENT CALLED THE MEETING.
WHAT WOULD BE THE RESULT OF THE
Q. DO YOU INCLUDE NON-VOTING SHARES MEETING IMPROPERLY HELD OR CALLED?
IN ARRIVING AT THE VOTING WHAT WOULD BE THE STATUS OF ANY
REQUIREMENT IMPOSED BY THE LAW? RESOLUTION PASSED BY THE
STOCKHOLDERS AT A MEETING
Section 6 provides that non-voting shares are IRREGULARLY OR ILLEGALLY HELD
not included in determining the voting AND/OR CONDUCTED? WILL THEY HAVE
requirement imposed by the Code, unless: ANY BINDING FORCE OR EFFECT?
They are nonetheless entitled to vote under the GR: Not Valid
penultimate paragraph of Section 6
XPN: It may have a valid force and effect.
If they fall under any of the enumeration
provided in Section 6, then they are included in Section 51, 2nd paragraph provides that any
the determination of the voting requirement meeting improperly held or called shall
imposed by the law. nonetheless be valid if all the stockholders or
members are present or duly represented.
Q. MANAGEMENT CONTRACT. IF THERE
ARE 1M SHARES, 200,000 ARE NON- DIRECTORS’ OR TRUSTEES’ MEETINGS
VOTING, WHAT IS MAJORITY VOTE?
Directors normally would refer to the governing
It shall be based on the 800,000 only, because board of a Stock Corporation. In Non-Stock
you exclude the non-voting shares. They are corporations they are normally called the Board
not entitled to vote. of Trustees.
Q. AMENDMENT OF THE ARTICLES, 1M However, Non-Stock Corporations and other

OUTSTANDING STOCKS; 200,000 NON- special corporations may their governing Board
VOTING; WHAT WOULD BE THE BASIS OF by any other name.
YOUR 2/3? WILL IT BE 2/3 OF 800,000 OR
2/3 OF 1M? Section 138. Designation of governing boards.
– The provisions of specific provisions of this
2/3 of 1M, because even if they are non-voting Code to the contrary notwithstanding, non-
shares, Section 6 states that they are stock or special corporations may, through
nonetheless entitled to vote in cases of their articles of incorporation or their by-laws,
amendments of the Articles of Incorporation. designate their governing boards by any name
other than as board of trustees. (n)
There’s nothing likewise that bar or prevent

Non-Stock corporations from using the term
‘directors’ to designate their governing board.

lOMoARcPSD|7948091
TWO TYPES OF DIRECTORS MEETINGS Q. SHOULD THEY BE PHYSICALLY PRESENT

DURING DISCUSSIONS OF MATTERS THAT
1. Regular - those that are held monthly or as IS BROUGHT BEFORE THEM?
may be provided for in the by-laws;
No. Because of the E-Commerce Law, Directors
2. Special - at any time upon call of the can meet via teleconference or video
President as provided for in the by-laws; conference.
VENUE OF MEETINGS OF DIRECTORS Q. MAY THE DIRECTORS DURING

DIRECTORS’ MEETING VOTE BY PROXY?
Section 53. Regular and special meetings of
directors or trustees. – Regular meetings of the No. Sec. 25 is very clear and specific, Directors
board of directors or trustees of every cannot vote by proxy in directors’ meetings.
corporation shall be held monthly, unless the
by-laws provide otherwise. Q. THE AGENDA IN THE STOCKHOLDERS’
MEETING IS ELECTION OF DIRECTORS.
Special meetings of the board of directors or MR. A IS A DIRECTOR AND HE CANNOT
trustees may be held at any time upon the call ATTEND THE SAID MEETING SO HE SENT A
of the president or as provided in the by-laws. PROXY. CAN HE VOTE BY PROXY?
Meetings of directors or trustees of Yes, because it is a stockholders’ meeting.

corporations may be held anywhere in or What Sec. 25 is saying is that they cannot vote
outside of the Philippines, unless the by-laws by proxy in Directors’ meetings.
provide otherwise. Notice of regular or special
meetings stating the date, time and place of the So if they are acting as ordinary stockholders,
meeting must be sent to every director or then they can vote by proxy.
trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided Q. WHAT IS THE EFFECT OF DIRECTORS’
by the by-laws. A director or trustee may waive MEETING IF IT IS IMPROPERLY HELD OR
this requirement, either expressly or impliedly. CALLED?
GR: Anywhere within or without the Philippines GR: They are without any force and effect.
XPN: Unless otherwise provided for in the by- XPN: They may be ratified expressly or
laws impliedly, or even by estoppel.
QUORUM AND VOTING REQUIREMENT IN Express, if there is a subsequent formal

DIRECTORS’ MEETINGS meeting of the board ratifying the act or
contract.
Majority of their number as fixed in the articles
of incorporation would constitute a Quorum. Implied, from the actuations of the responsible
corporate officers/directors
Majority of those present at which there is a
quorum would constitute Voting Requirement In the case of Lopez Realty v. Fontecha, one
of the directors was not notified of the meeting
Q. MAY THE VOTE OF 3 MEMBERS OF A 7- for the purpose of granting certain benefits to
MAN GOVERNING BOARD PASS A VALID the employees, gratuity pay to the employees. A
CORPORATE ACT OR TRANSACTION? resolution was passed granting the same. The
particular director concerned was not notified
GR: Yes. Because the voting requirement is because he was abroad. He said that the
majority of those present at which there is a resolution is without force and effect on the
quorum. ground of lack of notice.
XPN: The Supreme Court, however, found out that

the objecting director knew of the resolutions
(1) Election of corporate officers because the passed and in fact, she was the very person
law requires a majority vote of the entire who signed the first 2 vouchers to pay the
number of the board. gratuity pay arising out of the questioned
resolution. Therefore, she is estopped.
(2) Unless the Articles of Incorporation or By-
Laws provide for a higher quorum or voting STOCKS AND STOCKHOLDERS
requirement.
A person can be a stockholder, whether natural
Directors are elected because of their business or juridical, only in 3 ways:
acumen or their expertise in the day-to-day
management of the corporate affairs. 1. By a contract of subscription;

lOMoARcPSD|7948091
2. By acquisition or purchase of shares from cannot compel the acquiring stockholder to pay
existing stockholders; the unpaid portion thereof.
3. By purchase or acquisition of treasury Q. A CORPORATION IS ENGAGED IN THE

shares. MANUFACTURING. THERE IS UNISSUED
STOCK IN THE CORPORATION, 750,000
Section 60. Subscription contract. – Any UNISSUED STOCKS. A PERSON WANTS TO
contract for the acquisition of unissued stock ACQUIRE 100,000 OF THE 750,000
in an existing corporation or a corporation still UNISSUED STOCKS. THE AGREEMENT
to be formed shall be deemed a subscription STIPULATES THAT, “HE WILL NOT BECOME
within the meaning of this Title, A STOCKHOLDER UNTIL AND UNLESS HE
notwithstanding the fact that the parties refer PAYS THE FULL AMOUNT OF THE
to it as a purchase or some other contract. (n) ACQUISITION COST”. HE ONLY PAID 50%.
THE CORPORATION WAS DESTROYED BY
Subscription refers to: FIRE INCLUDING ALL ITS PROPERTIES
TURNING EVERYTHING INTO ASHES. MAY
A contract for the acquisition of shares of THE CORPORATION COMPEL THE
stocks of an existing corporation or a ACQUIRING STOCKHOLDER TO PAY THE
corporation still to be formed and the BALANCE OF ITS ACQUISITION COST
agreement to pay the same. DESPITE THE FACT THAT HE WILL NOT BE
CONSIDERED AS ITS STOCKHOLDER UNTIL
Any contract for the acquisition of unissued HE PAYS ITS ACQUISITION COST IN FULL?
stocks in an existing corporation or a
corporation still to be formed, is deemed a Under the Civil Code, he should not be liable to
Subscription Contract, no matter how the pay because there is no consideration. The
parties will refer to it. certificate of stock that will be issued by the
corporation is a mere scrap of paper. It is
Example: valueless.
Q. 1M ACS; 250,000 SUBSCRIBED CAPITAL; But under Section 60 of the Corporation Code
THERE’S A FREE PORTION OF 750,000
STOCKS, THEY ARE UNISSUED STOCKS OF No matter how the parties refer to it, a
THE CORPORATION. IF A PERSON WILL Subscription Contract.
WANT TO ACQUIRE A PART AND PARCEL
OF THAT FREE PORTION OF THE UNISSUED The acquiring stockholder is much bound to
STOCKS, MAY HE BUY OR PURCHASE IT? pay the debt owing to the corporation. Unpaid
subscriptions will be a debt owing to the
Yes. If that is his intention, the law says—that corporation.
is a subscription contract, no matter how it
may be referred to. NB: There is no distinction between purchase
or sale and/or subscription insofar as unissued
There’s no longer such thing as becoming a stocks of the corporation is concerned.
stockholder by purchase of unissued stocks of
a corporation. Section 62. Consideration for stocks. – Stocks
shall not be issued for a consideration less
As long as it came from the unissued stock of a than the par or issued price thereof.
corporation that is a subscription. Consideration for the issuance of stock may be
any or a combination of any two or more of the
The unambiguous interpretation is that the following:
person acquiring the unissued stock of a
corporation immediately becomes a stockholder 1. Actual cash paid to the corporation;
from the effectivity of the contract and acquires
all the rights and the corresponding liability to 2. Property, tangible or intangible, actually
pay the full value of the shares. received by the corporation and necessary or
convenient for its use and lawful purposes at a
The unpaid portion of the subscription will fair valuation equal to the par or issued value
become a debt owing to the corporation and of the stock issued;
just like any other indebtedness, he is bound to
pay the same. 3. Labor performed for or services actually
rendered to the corporation;
Unlike in the case of a sale or purchase:
4. Previously incurred indebtedness of the
Under the Civil Law, the obligation of the corporation;
parties would be reciprocal and dependent on
one another. 5. Amounts transferred from unrestricted
retained earnings to stated capital; and
If the corporation is unable or no longer in a
position to issue a valid stock certificate, you

lOMoARcPSD|7948091
6. Outstanding shares exchanged for stocks in thereof but do not interpose their written
the event of reclassification or conversion. objections with the corporate secretary are
Solidarily Liable with the stockholder to the
Where the consideration is other than actual corporation and its stockholders and its
cash, or consists of intangible property such as creditors for the difference between the par
patents of copyrights, the valuation thereof value/issued value and the amount for which
shall initially be determined by the they were actually issued.
incorporators or the board of directors, subject
to approval by the Securities and Exchange Even passive directors or officers may be held
Commission. Solidarily Liable with the stockholder
concerned if they have knowledge of the
Shares of stock shall not be issued in exchange issuance of the watered stock but did not
for promissory notes or future service. interpose their written objections with the
corporate secretary.
The same considerations provided for in this
section, insofar as they may be applicable, may Q. 10M AUTHORIZED CAPITAL STOCK,
be used for the issuance of bonds by the DIVIDED INTO 1M PER COMMON SHARES
corporation. WITH A PAR VALUE OF P1.00 PER SHARE
AND 9M = NO PAR VALUE SHARES;
The issued price of no-par value shares may be
fixed in the articles of incorporation or by the AMOUNT SUBSCRIBED IS 500,000 SHARES
board of directors pursuant to authority WITH PAR VALUE, 4M SHARES NO PAR
conferred upon it by the articles of VALUE SHARES;
incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at A WANTS TO ACQUIRE THE REMAINING
least a majority of the outstanding capital stock 500,000 OF THE PAR VALUE SHARES AND
at a meeting duly called for the purpose. (5 and THE CORPORATION ISSUES IT IN FAVOR
16) OF A FOR ONLY P0.80.
Shares of stocks cannot be issued for a THERE’S A DIFFERENCE OF P0.20. P0.20 X

consideration less than its par or issued value. 500,000 IS P100,000, IT IS THE WATER IN
THE 500,000 SHARES INVOLVED.
If they are issued below the par/issued value,
they are considered as “watered stocks”. THE NO PAR VALUE SHARES OF 4M HAS
BEEN DULY SUBSCRIBED. A ALSO WANTS
Watered stock are shares of stocks issued by TO ACQUIRE 1M NO PAR SHARES.
the corporation as fully paid up when in fact,
the full value thereof has not been paid or UNDER THE RULES IN CORPORATION LAW,
promised to be paid. THE NO PAR VALUE SHARES SHOULD NOT
BE ISSUED AT LESS THAN P5.00 PER
Example: SHARE AND FOR PURPOSES OF
DETERMINING HOW MUCH SHOULD BE THE
Par value of the shares is P1.00 per share. ISSUE PRICE OF A NO PAR VALUE SHARE,
IT IS DETERMINED BY THE PROVISION IN
The corporation CANNOT issue it for only P0.80 THE ARTICLES OF INCORPORATION. THE
per share, otherwise, it will be considered as ARTICLES OF INCORPORATION MAY
watered stock. PROVIDE THAT IT SHALL BE DETERMINED
BY THE BOARD OF DIRECTORS.
Q. THE PAR VALUE OF THE SHARES is
P1.00 PER SHARE; BUT THE FAIR MARKET ASSUME THAT THE BOARD OF DIRECTORS
VALUE IN THE COURSE OF ITS OPERATION DECIDED THAT THE ISSUE PRICE OF THE
IS ALREADY P12.00 PER SHARE. MAY IT BE NO PAR VALUE SHARES SHALL BE P10.00
ISSUED FOR A CONSIDERATION OF P10.00 PER SHARE. A, IN ACQUIRING 1M NO PAR
WITHOUT VIOLATING THE RULE AGAINST VALUE SHARES, HE ACQUIRES IT FOR
WATERED STOCKS? ONLY P9.00 PER SHARE, A DIFFERENCE OF
P1.00. THERE’S ALSO STOCK WATERING
Yes, it may be issued. For the purpose of TO THE EXTENT OF P1.00 PER SHARE AND
determining whether or not there is stock THEREFORE, 1M IS THE “WATER” IN THE
watering, it is the par value, not the fair market 1M NO PAR VALUE SHARE. IS A LIABLE TO
value. PAY THE DIFFERENCE?
Q. WHAT IS THE EXTENT OF THE 1st scenario, Yes, A is liable solidarily with the
LIABILITY OF DIRECTORS AND THE directors and officers concerned to pay the
STOCKHOLDER HOLDING THE WATERED difference between the P1.00 and P0.80.
STOCK?
2nd scenario, No. A is not liable. Under Section
Those voting or consenting to the issuance of 6, No par value shares, once issued, are
watered stock or those having knowledge

lOMoARcPSD|7948091
deemed fully paid and non-assessable. The authorized to make the transfer. No transfer,
directors are the only ones who are liable. however, shall be valid, except as between the
parties, until the transfer is recorded in the
The consideration for the issuance of shares of books of the corporation showing the names of
stocks may either be any combination of the the parties to the transaction, the date of the
following: transfer, the number of the certificate or
certificates and the number of shares
1. Actual cash paid transferred.
2. Property, Tangible or Intangible, actually No shares of stock against which the

received by the corporation corporation holds any unpaid claim shall be
transferable in the books of the corporation.
3. Labor or Services actually rendered
Stock certificates may be transferred by the
4. Previously incurred indebtedness Delivery of the stock certificate Duly Endorsed
by the owner or his attorney-in-fact.
5. Stock Dividends, amounts transferred from
unrestricted retained earnings to stated No transfer, however, shall be valid except as
capital. between the parties, until the transfer is
recorded in the books of the corporation.
6. Outstanding stocks exchanged for stocks in
the event of reclassification or of No shares of stocks against which the
conversion. corporation holds any unpaid claims shall be
transferrable in the books of the corporation.
Certificates of stocks cannot be issued until:
This word Unpaid Claims means, unpaid
The full amount of the subscription together portion of the subscription of the particular
with the interest and expenses has been paid. stockholder concerned.
No certificate can thus be issued to a It does not include any other kind of
subscriber of shares of stocks to cover what he indebtedness which the shareholder may have
may have already correspondingly paid for. that is due to the corporation.
Q. HE SUBSCRIBED TO 1M SHARES. HE Example:

ALREADY HAS PAID FOR 500,000, P1.00
PER SHARE, OUT OF HIS SUBSCRIPTION OF The shareholder has already paid his shares in
1M. MAY THE SUBSCRIBER BE ISSUED A full and he no longer has any other debts. If he
CERTIFICATE OF STOCK CONSISTING OF transfers his shares, it must be recorded in the
500,000 SHARES? books of the corporation, of course, to be Valid
and Binding against other 3rd parties.
No. Stock subscriptions are now deemed
Indivisible. In the case of Citibank vs. CA, a Stockholder
incurred a debt to the corporation. He has
He has not paid any single share of stock. He already paid his unpaid shares. He is now
has paid P0.50 for each share that he has fully-paid. He wanted to transfer it but the
subscribed. This is applied pro rata to his corporation does not want to.
entire subscription.
The Supreme Court held that he should
He cannot be issued a stock certificate. He is transfer it because there are no unpaid claims
not the owner of a particular number of shares in the shares he subscribed and fully paid.
which may have been sufficient to cover his
payments because they are applied to the total GR: The mode and manner of transferring
number of shares subscribed. shares as provided for by law must be complied
with.
STOCK CERTIFICATES
Endorsement alone, without delivery, of the
Section 63. Certificate of stock and transfer of certificate of stock is not sufficient to effect a
shares. – The capital stock of stock valid transfer. (Embassy farms vs. CA)
corporations shall be divided into shares for
which certificates signed by the president or On the other hand, delivery alone (without
vice president, countersigned by the secretary endorsement is not also a valid transfer of
or assistant secretary, and sealed with the seal shares of stocks. (Razon v. IAC)
of the corporation shall be issued in
accordance with the by-laws. Shares of stock NB: Section 63 uses the word may be
so issued are personal property and may be transferred.
transferred by delivery of the certificate or
certificates indorsed by the owner or his
attorney-in-fact or other person legally

lOMoARcPSD|7948091
XPN: Q. ARE CERTIFICATES OF STOCK

NEGOTIABLE INSTRUMENTS?
(1) It was ruled that a duly notarized deed is
also an effective mode of transferring shares No. They are Non-Negotiable.
(Rural Bank v. Salinas)
While they may be transferred by the delivery of
XPN to (1): Where a certificate of stock has the endorsed stock certificate, they are merely
already been issued by the corporation, a mere quasi-negotiable therefore, they are non-
notarized deed will not be sufficient for a valid negotiable in the sense that the transferee
transfer of shares of stocks. It must also be takes it without prejudice to all the rights and
coupled with the delivery of the endorsed stock defenses which the true or lawful owner may
certificate to the transferee. (Rural Bank of have as may be obtaining under a particular
Lipa vs. CA) set of facts or circumstances, subject only to
the rules governing estoppel.
Rationale: It is necessary to avoid fraudulent
and fictitious transfers. For what would prevent Q. A’S CERTIFICATE OF STOCK WAS
a scrupulous businessman or stockholder to STOLEN BY HIS BROTHER, B. B FORGED
transfer his shares by a notarized deed and A’S ENDORSEMENT AND TRANSFERRED IT
then subsequently selling his shares by TO C, PURCHASER IN GOOD FAITH AND
endorsing and delivering the same to the FOR VALUE. DOES C ACQUIRE A BETTER
transferee? That would result to a Double Sale. TITLE THAN A?
While it may be transferred by endorsement No. Because A can always raise the defense
coupled with the delivery of stock certificate, it that it was stolen from him and the
cannot be by a mere notarized deed without the endorsement was forged. It is subject to all the
certificate being delivered and endorsed to the rights and defenses which the true or lawful
transferee, if the certificate of stock has already owner may have. C, the stock certificate being
been issued by the corporation. non-negotiable, is not even a Holder in Due
Course.
(2) The transferor is in Estoppel.
Even if C will transfer it to another person, D
In the case of Tan v. SEC, the transferee is the also a transferee in good faith and for value, D
brother of the transferor and the transferee will not likewise acquire title no matter how
already exercise his rights as a stockholder and innocent they may be because it is subject to
was in fact elected as a member of the Board of all the rights and defenses which the true and
Directors at a point in time when the transferor lawful owner may have.
was still the President of the corporation.
XPN: Unless the rules governing estoppel will
The transferor in this case was rightfully apply.
considered as in Estoppel.
Q. B DID NOT STEAL A’S CERTIFICATE. A
The Supreme Court held that Endorsement or WAS RUNNING AWAY FROM A CASE FILED
Delivery is not essential, where the person AGAINST HIM IN THE PHILIPPINES SO HE
sought to be considered as a stockholder is an ENDORSED THE STOCK CERTIFICATE TO
officer of the corporation and has custody of HIS BROTHER, B. B SOLD THE STOCK
the stock and transfer. CERTIFICATE TO C, PURCHASER IN GOOD
FAITH AND FOR VALUE. WILL C ACQUIRE
SUMMARY: TITLE?
GR: The basic rule is Endorsement and Yes. A has clothed B with apparent title and
Delivery of the stock certificate. authority over the shares of stocks covered by
the certificate of stock. Whoever is in
XPN: possession is legally presumed to be the owner
thereof. It was endorsed and delivered by the
(1) It may be effected by a mere notarized deed, owner, A. He is now in estoppel. Under Section
if there is no stock certificate issued yet; 63, there is a valid transfer. A has no defense
available.
(2) The transferor is considered as in Estoppel.
GR: The Code requires likewise that these
XPN to the XPN: transfers of shares of stocks should be
recorded in the stock and transfer book. It shall
(1) If a stock certificate has already been not be valid until the same has been duly
issued, then it cannot be effected by a registered in the books of the corporation.
mere notarized deed.
XPN: But insofar as the contracting parties
It must still be coupled with the Delivery of the themselves are concerned, a transfer of shares
Endorsed Stock Certificate of stocks, even if it is not recorded in the books

lOMoARcPSD|7948091
of the corporation is valid and binding between In the case of Tay v. CA, the supposed
them. transferee is not yet a prima facie owner or
holder of the share of stocks.
Section 63 is categorical; no transfer shall be
valid except as between the parties, until the n order that Mandamus may issue, the alleged
transfer is recorded in the books of the transferee must have a Clear Legal Right to the
corporation. thing demanded.
It is valid between the contracting parties even It is the imperative duty on the part of the
if it is not recorded in the books of the respondent to perform the act required. It
corporation. It will not be, however, valid and neither confers nor imposes duties and is never
binding against the corporation or any other 3rd issued in doubtful cases.
party in interest until—they are registered in
the books of the corporation. (Uson Case) In this case, the creditor sought to compel the
corporation to record the transfer by virtue of
If the corporation fails or refuses to register a the failure of the debtor to pay his debts
valid transfer, Mandamus is the appropriate pursuant to a contract of pledge. Debtor
remedy. endorsed stock certificate to the creditor but he
failed to pay. So, the creditor went to the
The right of an assignee or transferee to have corporation to have the transfer of shares
the stock transferred in his name in the books recorded.
of the corporation is an inherent right flowing
from his ownership of shares of stocks. The Supreme Court held that you cannot do
that. Mandamus will not issue. By virtue of the
Whenever the corporation refuses to register failure of that creditor to sell the shares at a
the transfer, Mandamus will lie to compel the public auction or private auction sale pursuant
officer to record the same in the stock and to the contract of pledge. Again, there is good
transfer book of the corporation. cause.
The duty of the corporation to record transfer Take note the provision in the Civil Code: The
of shares of stocks is ministerial, and if it is pledgor remains to be the owner until the
refused without good cause, it may be pledgee sells the thing pledged at a public
compelled to do so by Mandamus. auction sale.
Q. THE TRANSFER OF THE SHARES OF In this case, the creditor is not yet the prima
STOCKS IS VIOLATIVE OF THE facie owner of the shares. Mandamus will not
NATIONALIZATION LAWS. MAY THE issue because there is good cause for the
CORPORATION BE COMPELLED TO refusal on the part of the corporation to record
RECORD THE TRANSFER? the transfer.
No. Because of the “no-transfer clause” in the The right to transfer shares is also an inherent
Articles of Incorporation which would right flowing from ownership of stocks.
guarantee compliance with the statutory However, the right to transfer may be regulated
requirements particularly, the nationalization or restricted reasonably, that is.
laws.
GR: Generally, it is not subject to restrictions
No-transfer clause provides substantially that: or regulations.
No transfer of shares of stocks which will XPN:

reduce the ownership of Filipino citizens to less
than that allowed by law shall be recorded in But may be regulated or reasonably restricted
the books of the corporation. by the law itself or even by agreement of the
parties (Lambert v. Fox)
Valid between the contracting parties; Not Valid
against the corporation and other 3rd parties. (1) For instance, in a case of a Close
corporation, the law itself imposes a
Q. UNDER SEC. 63 ITSELF, THE restriction
CORPORATION HAS UNPAID CLAIMS OVER
THE SHARES OF STOCKS TO BE Section 96 (1). Definition and applicability of
RECORDED AS TRANSFERRED. THE Title. - A close corporation, within the meaning
SHARES WERE TRANSFERRED BUT NOT of this Code, is one whose articles of
YET FULLY PAID. MAY THE CORPORATION incorporation provide that: (1) All the
BE COMPELLED TO TRANSFER IT? corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
No. There is good cause. record by not more than a specified number of
issued stock of all classes shall be subject to
one or more specified restrictions on transfer

lOMoARcPSD|7948091
permitted by this Title; and (3) The corporation subscription, then they are not bound to pay
shall not list in any stock exchange or make any interest.
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a Two Remedies of the corporation to enforce
corporation shall not be deemed a close payment of unpaid subscriptions to its capital
corporation when at least two-thirds (2/3) of its stock:
voting stock or voting rights is owned or
controlled by another corporation which is not 1. By way of a Delinquency Sale
a close corporation within the meaning of this
Code. 2. By a Direct Action in Court
Section 96 provides that the Articles of Section 67. Payment of balance of

Incorporation of a Close Corporation must subscription. – Subject to the provisions of the
provide that: the number of the stockholders contract of subscription, the board of directors
shall not exceed 20 Specified persons. of any stock corporation may at any time
declare due and payable to the corporation
If a stockholder in a Close corporation transfers unpaid subscriptions to the capital stock and
his shares to a person who is not one of those may collect the same or such percentage
specified persons, the corporation will refuse. thereof, in either case with accrued interest, if
any, as it may deem necessary.
(2) Shares transferred when the corporation
has unpaid claims; the law itself imposes a Payment of any unpaid subscription or any
prohibition that the corporation can refuse percentage thereof, together with the interest
registration. accrued, if any, shall be made on the date
specified in the contract of subscription or on
(3) There may also be restrictions imposed by the date stated in the call made by the board.
Special Law. Failure to pay on such date shall render the
entire balance due and payable and shall make
Example: Violation of nationalization Law, the the stockholder liable for interest at the legal
corporation will not record the transfer. rate on such balance, unless a different rate of
interest is provided in the by-laws, computed
(4) Agreement of Parties from such date until full payment. If within
thirty (30) days from the said date no payment
In the case of Lambert v. Fox, the 2 major is made, all stocks covered by said subscription
stockholders agreed not to sell their shares for shall thereupon become delinquent and shall
a period of 1 year which is beneficial to both be subject to sale as hereinafter provided,
parties and the corporation itself. The other unless the board of directors orders otherwise.
stockholder transferred his shares before the 1
year period. Section 68. Delinquency sale. – The board of
directors may, by resolution, order the sale of
The Supreme Court held that the 1 year period delinquent stock and shall specifically state the
is reasonable. It may be reasonably restricted amount due on each subscription plus all
by agreement of the parties. In this particular accrued interest, and the date, time and place
case, it is beneficial not only to the contracting of the sale which shall not be less than thirty
parties but also to the corporation. (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
GR: Subscribers to shares of stocks are not
generally required to pay interest on their Notice of said sale, with a copy of the
unpaid subscriptions. resolution, shall be sent to every delinquent
stockholder either personally or by registered
XPN: They may be required to pay interest if mail. The same shall furthermore be published
the by-laws or the contract of subscription once a week for two (2) consecutive weeks in a
requires the same. newspaper of general circulation in the
province or city where the principal office of the
So if there’s no provision in the by-laws or the corporation is located.
contract of subscription requiring payment of
interest of the unpaid subscriptions of the Unless the delinquent stockholder pays to the
stockholders, then he is not bound to pay any corporation, on or before the date specified for
interest. the sale of the delinquent stock, the balance
due on his subscription, plus accrued interest,
If there is an interest, itt will be at the rate costs of advertisement and expenses of sale, or
indicated in the contract or in the by-laws. unless the board of directors otherwise orders,
said delinquent stock shall be sold at public
If there is an interest but it fails to indicate the auction to such bidder who shall offer to pay
rate, then it shall be the Legal Rate of interest. the full amount of the balance on the
subscription together with accrued interest,
If there is no specification that they are liable to costs of advertisement and expenses of sale, for
pay interest in the by-laws or in the contract of the smallest number of shares or fraction of a

lOMoARcPSD|7948091
share. The stock so purchased shall be Notice and Publication, not earlier than 30
transferred to such purchaser in the books of days but not more than 60 days from the date
the corporation and a certificate for such stock of delinquency.
shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the It will be sold to the bidder who tenders or
delinquent stockholder who shall likewise be offers to pay the full amount of the balance of
entitled to the issuance of a certificate of stock the subscription or inclusive of interest and/or
covering such shares. cost and expenses, if any, for the least number
of shares.
Should there be no bidder at the public auction
who offers to pay the full amount of the The winning bidder in this particular case is
balance on the subscription together with the bidder who tenders to pay the balance of
accrued interest, costs of advertisement and the unpaid portion of the subscription of the
expenses of sale, for the smallest number of stockholder
shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid Q. SO IF IT IS TO BE SOLD AT PUBLIC
for the same, and the total amount due shall be AUCTION, BUT THERE WERE NO BIDDERS
credited as paid in full in the books of the WHO APPEARED DURING THE AUCTION
corporation. Title to all the shares of stock SALE. MAY THE CORPORATION BID?
covered by the subscription shall be vested in
the corporation as treasury shares and may be Yes. Sec. 70 provides that, if there is no bidder,
disposed of by said corporation in accordance the corporation may bid subject to the
with the provisions of this Code. provisions of this Code.
Section 69. When sale may be questioned. – Q. A SUBSCRIBED 100,000 SHARES

No action to recover delinquent stock sold can VALUED AT P1M. HE PAID P500,000, SO HE
be sustained upon the ground of irregularity or HAS A BALANCE OF P500,000. THE
defect in the notice of sale, or in the sale itself CORPORATION IS IN DIRE NEED OF MONEY
of the delinquent stock, unless the party FOR THE OPERATION OF ITS BUSINESS SO
seeking to maintain such action first pays or THE BOARD OF DIRECTORS DECIDED TO
tenders to the party holding the stock the sum MAKE A CALL FOR THE UNPAID PORTION
for which the same was sold, with interest from OF THE SUBSCRIPTION OF A. THE
the date of sale at the legal rate; and no such CORPORATION HAS DEBTS AMOUNTING TO
action shall be maintained unless it is P10M AND IN ORDER TO RAISE FUNDS TO
commenced by the filing of a complaint within PAY THE INDEBTEDNESS, THEY MADE A
six (6) months from the date of sale. (47a) CALL FOR THE UNPAID PORTION OF THE
SUBSCRIPTION OF THE STOCKHOLDERS
INCLUDING A. IT SPECIFIED THE DATE
Section 70. Court action to recover unpaid
WHEN IT SHOULD BE PAID. A DID NOT PAY.
subscription. – Nothing in this Code shall
A’S 100,000 SHARES ARE NOW
prevent the corporation from collecting by
DELINQUENT AND THE BOARD OF
action in a court of proper jurisdiction the
DIRECTORS CAN NOW SELL THESE SHARES
amount due on any unpaid subscription, with
AT A PUBLIC AUCTION SUBJECT TO
accrued interest, costs and expenses. (49a)
PUBLICATION. THERE IS AN ADDITIONAL
COST OF P5,000. SO YOU NOW HAVE
GR: Unpaid portion of subscriptions of the P505,000. THERE ARE NO BIDDERS. NO
shareholders will never become due and BIDDER APPEARED. MAY THE
demandable. CORPORATION BID?
XPN: No, the corporation may bid subject to the
provisions of this Code. This is acquisition of
(1) A call is made by the board of directors for its own shares and as a rule, a corporation
the payment of the unpaid portion or any cannot generally reacquire its own shares if it
part thereof. has no Unrestricted Retained Earnings. The
corporation cannot bid. It must have
(2) The contract stipulates the date or dates unrestricted retained earnings as a General
when they will respectively fall due. Rule.
If a call is made specifying the date or dates Q. IF THE CORPORATION CANNOT BID
when the shareholders or subscribers should BECAUSE IT HAS NO UNRESTRICTED
pay their unpaid subscription and the RETAINED EARNINGS, IS THE
stockholder concerned did not pay on the date CORPORATION NOW LEFT WITHOUT
specified, the shares will thereby become RECOURSE TO ENFORCE PAYMENT OF THE
deliquent and will subject the shares to a UNPAID SUBSCRIPTION OF A?
delinquency sale. The shares will become
subjected to an auction sale subject, of course, No. It can go for a Direct Action in Court.
to:

lOMoARcPSD|7948091
Q. ASSUME THAT THERE IS A

DELINQUENCY SALE HELD AND The winning bidder is Z. He is the Lowest
CONDUCTED BUT IT WAS CONDUCTED NOT bidder, not the highest bidder. Effectively, the
IN ACCORDANCE WITH THE PROCEDURES winning bidder in a delinquency sale is the
LAID DOWN IN THE CODE. Lowest bidder.
EXAMPLE: THERE WAS NO PUBLICATION The 90,000 shares will now be credited or
OF THE AUCTION SALE OR WAS ONLY registered in the name of Z. The 10,000 shares
PUBLISHED ONCE. A’S SHARES WERE SOLD remaining will still remain in the name of the
WITH ONLY ONE PUBLICATION. CAN A delinquent stockholder, he remains to be a
QUESTION THE VALIDITY OF THE SALE OF stockholder.
HIS SHARES AT PUBLIC AUCTION?
Section 71. Effect of delinquency. – No
Two conditions would be required in order that delinquent stock shall be voted for or be
he may question the validity of the sale of his entitled to vote or to representation at any
shares at public auction. stockholder’s meeting, nor shall the holder
thereof be entitled to any of the rights of a
REQUISITES TO ASSAIL A DELIQUENCY stockholder except the right to dividends in
SALE accordance with the provisions of this Code,
until and unless he pays the amount due on
(1) He must tender payment of the acquisition his subscription with accrued interest, and the
cost to the winning bidder; and costs and expenses of advertisement, if any.
(2) He must institute the claim or complaint Q. WHAT HAPPENS IF A’S SHARES HAS
within six months from the date of the sale BEEN DECLARED DELINQUENT? WHAT IS
THE EFFECT OF DELINQUENT SHARES VIS
Absence of any one of them, he cannot A VIS THE RIGHTS OF THE DELINQUENT
question the validity of the sale of his shares at STOCKHOLDER?
public auction even if it was irregularly or
illegally bidded out. He loses his right to vote and be voted upon
and is not entitled to any of the rights of a
Rationale of the 6-month period: There may stockholder, except the right to receive
be an instance that a certain person is dividends in accordance with Section 43.
interested because if the corporation can raise
money, he knows that it will be back in its two Section 43 (1). Power to declare dividends. -
feet. The board of directors of a stock corporation
may declare dividends out of the unrestricted
Q. WHO IS THE WINNING BIDDER IN A retained earnings which shall be payable in
DELINQUENCY SALE? cash, in property, or in stock to all
stockholders on the basis of outstanding stock
The bidder who tenders to pay the full amount held by them: Provided, That any cash
of the delinquency plus cost and expenses, if dividends due on delinquent stock shall first be
any, for the least number of shares. applied to the unpaid balance on the
subscription plus costs and expenses, while
Q. IS THERE SUCH A THING AS “HIGHEST stock dividends shall be withheld from the
BIDDER” IN A DELINQUENCY SALE? delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
None. In fact, the winning bidder is the Lowest That no stock dividend shall be issued without
Bidder from the wordings of the statute, that is. the approval of stockholders representing not
The bidder who tenders to pay the full amount less than two-thirds (2/3) of the outstanding
of the delinquency plus cost and expenses, if capital stock at a regular or special meeting
any, for the least number of shares. duly called for the purpose. (16a)
Example:
Section 43 provides that if the shares are
delinquent, then:
X, Y and Z bidded for the delinquency sale of
shares of A. They have to tender the full
Any cash dividends due the delinquent
amount of the unpaid subscription plus cost
stockholder shall first be applied to the amount
and expenses, if any for the least number of
of his delinquency plus cost and expenses, if
shares. So all of them will bid P505,000 for the
any. If any of it remains, it would be paid to
100,000 shares of A.
him.
X says he will acquire 99,000 shares for
But if it is a stock dividend, it shall be withheld
P505,000.
from him until he pays the amount of his
delinquency.
Y says he will acquire 95,000 shares.
Z said he will acquire 90,000 shares.


lOMoARcPSD|7948091
Q. A’S SHARES ARE DELINQUENT. HE IS A required, effective for a period of one (1) year,
DIRECTOR OF THE CORPORATION. for such amount and in such form and with
PENDING THE SALE OF HIS SHARES, IS HE such sureties as may be satisfactory to the
STILL QUALIFIED TO BE A DIRECTOR? board of directors, in which case a new
certificate may be issued even before the
OWNERSHIP OF SHARES OF STOCKS expiration of the one (1) year period provided
STANDING IN HIS NAME IN THE BOOKS OF herein: Provided, That if a contest has been
THE CORPORATION IS THE QUALIFICATION presented to said corporation or if an action is
IN ORDER THAT ONE MAY BE A DIRECTOR. pending in court regarding the ownership of
WILL HE LOSE HIS RIGHT TO BE A said certificate of stock which has been lost,
DIRECTOR? stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
No, until and unless all his shares are bidded suspended until the final decision by the court
out and sold to the winning bidder, he remains regarding the ownership of said certificate of
the owner of the shares of stock. It is still stock which has been lost, stolen or destroyed.
registered in his name in the books of the
corporation. Therefore, he remains as a Except in case of fraud, bad faith, or negligence
stockholder, and even if it may be sold at on the part of the corporation and its officers,
public auction, he can still continue acting as no action may be brought against any
the director. corporation which shall have issued certificate
of stock in lieu of those lost, stolen or destroyed
LOST OR DESTROYED CERTIFICATE pursuant to the procedure above-described.
(R.A. 201a)
The lost or destroyed certificate may be
replaced after (1) year from the date of the last Q. MAY IT BE ISSUED EARLIER THAN 1
publication. YEAR?
Section 73. Lost or destroyed certificates. – Yes. If the owner files a bond satisfactory to the
The following procedure shall be followed for Board of Directors.
the issuance by a corporation of new
certificates of stock in lieu of those which have CORPORATE BOOKS AND RECORDS
been lost, stolen or destroyed:
Section 74. Books to be kept; stock transfer
1. The registered owner of a certificate of stock agent. – Every corporation shall keep and
in a corporation or his legal representative shall carefully preserve at its principal office a record
file with the corporation an affidavit in of all business transactions and minutes of all
triplicate setting forth, if possible, the meetings of stockholders or members, or of the
circumstances as to how the certificate was board of directors or trustees, in which shall be
lost, stolen or destroyed, the number of shares set forth in detail the time and place of holding
represented by such certificate, the serial the meeting, how authorized, the notice given,
number of the certificate and the name of the whether the meeting was regular or special, if
corporation which issued the same. He shall special its object, those present and absent,
also submit such other information and and every act done or ordered done at the
evidence which he may deem necessary; meeting. Upon the demand of any director,
trustee, stockholder or member, the time when
2. After verifying the affidavit and other any director, trustee, stockholder or member
information and evidence with the books of the entered or left the meeting must be noted in the
corporation, said corporation shall publish a minutes; and on a similar demand, the yeas
notice in a newspaper of general circulation and nays must be taken on any motion or
published in the place where the corporation proposition, and a record thereof carefully
has its principal office, once a week for three (3) made. The protest of any director, trustee,
consecutive weeks at the expense of the stockholder or member on any action or
registered owner of the certificate of stock proposed action must be recorded in full on his
which has been lost, stolen or destroyed. The demand.
notice shall state the name of said corporation,
the name of the registered owner and the serial The records of all business transactions of the
number of said certificate, and the number of corporation and the minutes of any meetings
shares represented by such certificate, and shall be open to inspection by any director,
that after the expiration of one (1) year from the trustee, stockholder or member of the
date of the last publication, if no contest has corporation at reasonable hours on business
been presented to said corporation regarding days and he may demand, in writing, for a copy
said certificate of stock, the right to make such of excerpts from said records or minutes, at his
contest shall be barred and said corporation expense.
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and Any officer or agent of the corporation who
issue in lieu thereof new certificate of stock, shall refuse to allow any director, trustees,
unless the registered owner files a bond or stockholder or member of the corporation to
other security in lieu thereof as may be examine and copy excerpts from its records or

lOMoARcPSD|7948091
minutes, in accordance with the provisions of shall present to such stockholders or members
this Code, shall be liable to such director, a financial report of the operations of the
trustee, stockholder or member for damages, corporation for the preceding year, which shall
and in addition, shall be guilty of an offense include financial statements, duly signed and
which shall be punishable under Section 144 of certified by an independent certified public
this Code: Provided, That if such refusal is accountant.
made pursuant to a resolution or order of the
board of directors or trustees, the liability However, if the paid-up capital of the
under this section for such action shall be corporation is less than P50,000.00, the
imposed upon the directors or trustees who financial statements may be certified under
voted for such refusal: and Provided, further, oath by the treasurer or any responsible officer
That it shall be a defense to any action under of the corporation. (n)
this section that the person demanding to
examine and copy excerpts from the All corporations registered under the general
corporation’s records and minutes has provisions of the Code are required to keep
improperly used any information secured certain books and records.
through any prior examination of the records or
minutes of such corporation or of any other (1) Records of all business transactions.
corporation, or was not acting in good faith or
for a legitimate purpose in making his demand. (2) Minutes of meetings of all stockholders and
the directors
Stock corporations must also keep a book to be
known as the "stock and transfer book", in (3) Stock and transfer book
which must be kept a record of all stocks in the
names of the stockholders alphabetically (4) Membership book, in cases it is non-stock
arranged; the installments paid and unpaid on corporation
all stock for which subscription has been
made, and the date of payment of any (5) Financial statements
installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, These books and records are subject to
and by and to whom made; and such other inspection by the stockholders or members
entries as the by-laws may prescribe. The stock during reasonable hours on any business day.
and transfer book shall be kept in the principal
office of the corporation or in the office of its Either personally, or through his authorized
stock transfer agent and shall be open for representative, either with or without the
inspection by any director or stockholder of the presence of the stockholder himself. (W.
corporation at reasonable hours on business Philpats v. Phil. Manufacturing Corp.)
days.
Non-stockholders, even if they are the heirs of
No stock transfer agent or one engaged the deceased stockholder cannot inspect
principally in the business of registering corporate books and records of the corporation
transfers of stocks in behalf of a stock where their parent may have been such a
corporation shall be allowed to operate in the shareholder.
Philippines unless he secures a license from
the Securities and Exchange Commission and In the case of Joselito Puno vs. Puno
pays a fee as may be fixed by the Commission, Enterprises, the right of inspection of the
which shall be renewable annually: Provided, corporate books and records is based upon his
That a stock corporation is not precluded from ownership of shares in the corporation and the
performing or making transfer of its own necessity of self-protection. After all, a
stocks, in which case all the rules and stockholder has the right to be intelligently
regulations imposed on stock transfer agents, informed about the corporate affairs. Such
except the payment of a license fee herein right rests upon the underlying corporate
provided, shall be applicable. (51a and 32a; assets and property. Similarly therefore, only
P.B. No. 268.) stockholders of record are entitled to dividends
declared by the corporation a right inherent in
Section 75. Right to financial statements. – ownership of shares.
Within ten (10) days from receipt of a written
request of any stockholder or member, the In this case, the owner passed away. The
corporation shall furnish to him its most recent Supreme Court ruled that, upon the death of a
financial statement, which shall include a stockholder, the heirs do not automatically
balance sheet as of the end of the last taxable become the stockholders of the corporation and
year and a profit or loss statement for said acquire the rights and privileges of the
taxable year, showing in reasonable detail its deceased shareholder of the corporation.
assets and liabilities and the result of its
operations. The stocks must be distributed first to the
heirs in estate proceedings and the transfer of
At the regular meeting of stockholders or stock must be recorded in the books of the
members, the board of directors or trustees corporation as required by Sec. 63 of the Code.

lOMoARcPSD|7948091
No. They are not Wholly Owned Subsidiaries of

The corporation, as a rule of thumb, will not Ayala Corporation. In fact, all these 3
look beyond its stock and transfer book to subsidiaries are listed companies. Listed in the
determine who its stockholders are, who may sense that the shares are being traded openly
have the right to vote, be voted upon, receive in the stock exchange.
dividends, inspect the corporate books and
records. No right of inspection on the part of Mr. A who
is a stockholder of Ayala Corporation over the
If you are not one of them listed in the stock subsidiaries of Ayala Corporation because they
and transfer book, you have no right as a are treated separately and independently. In
stockholder at all. fact, under the law, all these corporations have
independent directors as required by law.
Shares must first be transferred in favor of the
heirs of the deceased stockholder through an GR: The corporation Cannot Refuse the
intestate proceeding or extrajudicial. Until and stockholders to inspect the books and records
unless it has been recorded in the books of the if it is during reasonable hours on any
corporation, nobody can vote or receive business day;
dividends for and in behalf of the deceased
stockholders. And if they are refused, the remedy available to
the stockholders again would be:
Q. MR. A IS A STOCKHOLDER OF A
HOLDING COMPANY. EXAMPLE, SAN (1) Mandamus with a claim for damages and/or
MIGUEL CORPORATION, BUT HE IS NOT A attorney’s fees
STOCKHOLDER OF SAN MIGUEL BREWERY
INTERNATIONAL, LTD. IN HONGKONG. CAN (2) Criminal Complaint for a violation of its
HE INSPECT THE BOOKS AND RECORDS OF right under Section 144 of the Code.
SAN MIGUEL BREWERY LTD. IF HE IS NOT
A STOCKHOLDER OF THAT SUBSIDIARY XPN: The corporate officers involved have some
BUT HE IS A STOCKHOLDER OF SAN defensive positions that they may advance in
MIGUEL CORPORATION ITSELF? order to justify their failure or refusal to allow
(Gokongwei vs. SEC) the right of inspection:
GR: No. (1) Improper use of information secured

through previous examination; or
XPN: But in this case, San Miguel Brewery
International is a Wholly Owned Subsidiary of (2) That he is not acting in Good Faith or for a
San Miguel Corporation. Meaning, all the Legitimate Purpose.
shares of stocks are owned and held by San
Miguel Corporation. NB: Note that this right of inspection may also
be Restricted or Regulated.
It would be more in accord with equity, good
faith and fair dealing to construe the statutory In the case of Gonzales v. PNB, Gonzales was
right of the stockholders’ right of inspection to able to acquire 1 share of the capital stock of
cover the books and records of the Wholly the PNB and he wanted to inspect the books
Owned subsidiary. It must, however, be wholly and records of the bank. But PNB was created
owned. by special charter. It has its own charter
created by special law. And the special law
Because apparently, the 2 entities , the holding creating the charter of PNB provides that the
and the subsidiary, are legally being operated financial books and records of the PNB shall be
as separate and distinct companies. There’s no subject to inspection ONLY by the Monetary
such thing as right of inspection that may be Board of the Central Bank.
granted to the stockholder of the holding
company if he is not also a stockholder of the Q. CAN GONZALES INSPECT THE BOOKS
subsidiary. AND RECORDS?
Q. AYALA CORPORATION IS ALSO A No. Section 4 of the Code provides that,

HOLDING COMPANY. AMONG THE Corporations created by law shall be governed
SUBSIDIARIES ARE AYALA LAND, INC., primarily by the law of their creation
GLOBE TELECOMM., BPI. THESE ARE supplemented only by the provisions of the
SUBSIDIARIES OF AYALA CORPORATION. A Code when pertinent.
IS A STOCKHOLDER OF AYALA
CORPORATION BUT HE IS NOT A WHAT APPLIES?
STOCKHOLDER OF AYALA LAND, BPI OR
GLOBE TELECOMM. CAN HE INSPECT THE It is the special charter creating it. It will NOT
BOOKS AND RECORDS OF GLOBE, BPI OR be the Corporation Code.
AYALA LAND?
He is not entitled to inspect the books and
records of the PNB.

lOMoARcPSD|7948091
MERGERS AND CONSOLIDATION affirmative vote of stockholders representing at

least two-thirds (2/3) of the outstanding capital
Section 76. Plan or merger of consolidation. – stock or of two-thirds (2/3) of the members of
Two or more corporations may merge into a each of the constituent corporations. Such
single corporation which shall be one of the plan, together with any amendment, shall be
constituent corporations or may consolidate considered as the agreement of merger or
into a new single corporation which shall be consolidation. (n)
the consolidated corporation.
Section 78. Articles of merger or consolidation.
The board of directors or trustees of each – After the approval by the stockholders or
corporation, party to the merger or members as required by the preceding section,
consolidation, shall approve a plan of merger or articles of merger or articles of consolidation
consolidation setting forth the following: shall be executed by each of the constituent
corporations, to be signed by the president or
1. The names of the corporations proposing to vice-president and certified by the secretary or
merge or consolidate, hereinafter referred to as assistant secretary of each corporation setting
the constituent corporations; forth:
2. The terms of the merger or consolidation and 1. The plan of the merger or the plan of
the mode of carrying the same into effect; consolidation;
3. A statement of the changes, if any, in the 2. As to stock corporations, the number of

articles of incorporation of the surviving shares outstanding, or in the case of non-stock
corporation in case of merger; and, with respect corporations, the number of members; and
to the consolidated corporation in case of
consolidation, all the statements required to be 3. As to each corporation, the number of shares
set forth in the articles of incorporation for or members voting for and against such plan,
corporations organized under this Code; and respectively. (n)
4. Such other provisions with respect to the Section 79. Effectivity of merger or
proposed merger or consolidation as are consolidation. – The articles of merger or of
deemed necessary or desirable. (n) consolidation, signed and certified as herein
above required, shall be submitted to the
Securities and Exchange Commission in
Section 77. Stockholder’s or member’s quadruplicate for its approval: Provided, That
approval. – Upon approval by majority vote of in the case of merger or consolidation of banks
each of the board of directors or trustees of the or banking institutions, building and loan
constituent corporations of the plan of merger associations, trust companies, insurance
or consolidation, the same shall be submitted companies, public utilities, educational
for approval by the stockholders or members of institutions and other special corporations
each of such corporations at separate corporate governed by special laws, the favorable
meetings duly called for the purpose. Notice of recommendation of the appropriate government
such meetings shall be given to all stockholders agency shall first be obtained. If the
or members of the respective corporations, at Commission is satisfied that the merger or
least two (2) weeks prior to the date of the consolidation of the corporations concerned is
meeting, either personally or by registered mail. not inconsistent with the provisions of this
Said notice shall state the purpose of the Code and existing laws, it shall issue a
meeting and shall include a copy or a summary certificate of merger or of consolidation, at
of the plan of merger or consolidation. The which time the merger or consolidation shall be
affirmative vote of stockholders representing at effective.
least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock If, upon investigation, the Securities and
corporations or at least two-thirds (2/3) of the Exchange Commission has reason to believe
members in the case of non-stock corporations that the proposed merger or consolidation is
shall be necessary for the approval of such contrary to or inconsistent with the provisions
plan. Any dissenting stockholder in stock of this Code or existing laws, it shall set a
corporations may exercise his appraisal right in hearing to give the corporations concerned the
accordance with the Code: Provided, That if opportunity to be heard. Written notice of the
after the approval by the stockholders of such date, time and place of hearing shall be given to
plan, the board of directors decides to abandon each constituent corporation at least two (2)
the plan, the appraisal right shall be weeks before said hearing. The Commission
extinguished. shall thereafter proceed as provided in this
Code. (n)
Any amendment to the plan of merger or
consolidation may be made, provided such Section 80. Effects of merger or consolidation.
amendment is approved by majority vote of the – The merger or consolidation shall have the
respective boards of directors or trustees of all following effects:
the constituent corporations and ratified by the

lOMoARcPSD|7948091
Example:
1. The constituent corporations shall become a
single corporation which, in case of merger, A absorbed X company. The absorbed
shall be the surviving corporation designated in corporation has debts of P100M to Z.
the plan of merger; and, in case of
consolidation, shall be the consolidated Such debt is already the debt of the absorbing
corporation designated in the plan of corporation automatically because item 4 says,
consolidation; “Without further Act or Deed”.
2. The separate existence of the constituent Q. A LENT P100M. B ABSORBED A

corporations shall cease, except that of the COMPANY. CAN THE ABSORBING
surviving or the consolidated corporation; CORPORATION ENFORCE THE CLAIM OF A
AGAINST THE DEBTOR?
3. The surviving or the consolidated
corporation shall possess all the rights, Yes. Automatically, without any further act or
privileges, immunities and powers and shall be deed
subject to all the duties and liabilities of a
corporation organized under this Code; Q. IN THE CASE OF BPI V. BPI EMPLOYEES
UNION, BPI ABSORBED FAR EAST BANK
4. The surviving or the consolidated AND TRUST COMPANY (FEBTC). ARE THE
corporation shall thereupon and thereafter EMPLOYEES OF FEBTC ALSO ABSORBED
possess all the rights, privileges, immunities BY BPI?
and franchises of each of the constituent
corporations; and all property, real or personal, The Supreme Court held No.
and all receivables due on whatever account,
including subscriptions to shares and other In legal farlance, human beings are never
choses in action, and all and every other embraced in the term Assets and Liabilities.
interest of, or belonging to, or due to each They are not chattels. Moreover, BPI’s
constituent corporation, shall be deemed absorption of former FEBTC employees was
transferred to and vested in such surviving or neither by operation of law nor legal
consolidated corporation without further act or consequence of the contract.
deed; and
There was no government regulation or law
5. The surviving or consolidated corporation that compelled the merger of the 2 banks or the
shall be responsible and liable for all the absorption of the employees of the dissolved or
liabilities and obligations of each of the absorbed corporation by the surviving
constituent corporations in the same manner corporation.
as if such surviving or consolidated corporation
had itself incurred such liabilities or Had there been such a regulation, the
obligations; and any pending claim, action or absorption of the employees of the non-
proceeding brought by or against any of such surviving entity or the absorbed entity of the
constituent corporations may be prosecuted by merger would have been mandatory on the
or against the surviving or consolidated surviving corporation or the absorbing
corporation. The rights of creditors or liens corporation.
upon the property of any of such constituent
corporations shall not be impaired by such In fact, the Corporation Code does not also
merger or consolidation. (n) mandate the absorption of the employees of the
non-surviving corporation in cases of merger.
EFFECTS OF MERGERS AND/OR Otherwise, this would have been included in
CONSOLIDATION Section 80.
The surviving or consolidated corporation shall The articles of merger and the plan of merger
thereupon and thereafter possess all the rights, dated April 2000 did not contain any specific
privileges and immunities and franchises of stipulation with respect to the employment
each of the constituent corporations. contracts of the existing personnel of the
dissolved or the absorbed corporation.
Constituent corporations – are the parties to
the Merger or Consolidation. Unless expressly assumed, labor contracts
such as employment contracts and CBAs are
All property and all receivables due on not enforceable against a transferee of the
whatever account, including subscriptions to enterprise.
shares and other choses in action and all and
every other interest of, belonging to, or due to Why? Because labor contracts are in personam
each constituent corporations shall be deemed and therefore, binding only between the
transferred and vested in the surviving or parties. A labor contract merely creates an
consolidated corporation without further act or action in personam and does not create any
deed real right which should be respected by 3rd
parties.

lOMoARcPSD|7948091
This conclusion draws its force from the right

of the employer to select who its employees Because the amendment must change or
should be and to decide when to engage them restrict the right of the stockholder involved.
as protected under the Philippine Constitution.
To some, it may not change or restrict the right
The same can only be restricted by law through of the stockholder. To others, it may change or
the exercise of police power. restrict the right of the stockholder.
It is contrary to public policy to declare the
FEBTC employee, the employees of the Under Section 86, one of the instances when
absorbed corporation, as forming part of the the dissenting stockholder may lose his right to
assets and liabilities of FEBTC that were be paid the value of his shares is when the
transferred and absorbed by BPI in the articles proper forum, the SEC, finds that the
of merger. stockholder is NOT entitled thereto.
Assets and liabilities in this instance should be As a general rule, in order that the dissenting
deemed to refer only to Property Rights and stockholder may be able to be paid the fair
Obligations. value of his shares, the corporation must have
Unrestricted Retained Earnings.
APPRAISAL RIGHT
Q. WHAT HAPPENS IF HE IS NOT PAID THE
Section 81. Instances of Appraisal right. – Any VALUE OF HIS SHARES?
stockholder of a corporation shall have the
right to dissent and demand payment of the He will recover his position or rights and
fair value of his shares in the following privileges as a stockholder entitled to receive
instances: dividends.
1. In case any amendment to the articles of Because the effect, from the time of the
incorporation has the effect of changing or demand of the fair value of the shares of stocks
restricting the rights of any stockholder or or until the action, corporate act or transaction
class of shares, or of authorizing preferences in has been abandoned, all rights accruing to the
any respect superior to those of outstanding shares of the stockholder exercising his
shares of any class, or of extending or appraisal right including voting and dividend
shortening the term of corporate existence; rights will be suspended.
2. In case of sale, lease, exchange, transfer, Provided that if the stockholder is NOT paid the
mortgage, pledge or other disposition of all or value of his shares within 30 days after the
substantially all of the corporate property and award, his voting and dividend rights shall be
assets as provided in the Code; and immediately restored.
3. In case of merger or consolidation. (n) Q. MAY THE STOCKHOLDER EXERCISING

HIS APPRAISAL RIGHT, IF ALSO A
Q. WHAT IS APPRAISAL RIGHT? DIRECTOR, LOSE HIS RIGHT TO BE AND
ACT AS A DIRECTOR?
The right of a stockholder to object on certain
corporate acts and transactions and compel the No. Unless his shares have been fully paid by
corporation that he be paid the fair value of his the corporation, he remains the stockholder of
shares. record.
This right is not, therefore, at all times Q. AT WHAT POINT IN TIME OR WHEN WILL
available in all matters where a stockholder THE FAIR VALUE OF THE SHARES OF THE
may dissent on corporate acts or transactions. OBJECTING STOCKHOLDERS BE
It is available only in the instances provided for DETERMINED OR BASED?
by law. Section 81 enumerates the intances
when the dissenting stockholder may exercise The day before the meeting where he
this right. interposed his objection.
But it may also be exercised under Section. 42 NON-STOCK CORPORATIONS

of the Code:
Section 87. Definition. – For the purposes of
Investments of corporate funds in another this Code, a non-stock corporation is one
corporation or business other than the primary where no part of its income is distributable as
purpose, the objecting stockholder, if such be dividends to its members, trustees, or officers,
the case, may exercise his appraisal right as subject to the provisions of this Code on
per specific provision of Sec. 42. dissolution: Provided, That any profit which a
non-stock corporation may obtain as an
NB: Note that this is not available in all incident to its operations shall, whenever
instances, under item 1 of Section 81, in necessary or proper, be used for the
amendments of articles of incorporation. furtherance of the purpose or purposes for

lOMoARcPSD|7948091
which the corporation was organized, subject to GR: Cumulative voting is not generally allowed.
the provisions of this Title.
XPN: The By-laws of a Non-Stock Corporation
The provisions governing stock corporation, may limit, broaden or deny voting rights of the
when pertinent, shall be applicable to non- members. So the articles and by-laws may also
stock corporations, except as may be covered allow members to cumulate their votes in the
by specific provisions of this Title. (n) election of directors.
Section 88. Purposes. – Non-stock GR: The members are entitled to proxy voting.
corporations may be formed or organized for
charitable, religious, educational, professional, XPN: Proxy voting may be denied by a provision
cultural, fraternal, literary, scientific, social, in the articles or by-laws of a non-stock
civic service, or similar purposes, like trade, corporation.
industry, agricultural and like chambers, or Members in Non-Stock corporation may vote by
any combination thereof, subject to the special mail or other similar means subject to the rules
provisions of this Title governing particular and regulations that may be imposed by the
classes of non-stock corporations. (n) SEC.
A non-stock corporation is one where no part of In Stock Corporations, there’s no such thing as
its income is distributable as dividends to the voting by other similar means. They may cast
members, trustees or officers. their written assents in amendment of the
articles of incorporation.
TWO REQUISITES IN ORDER THAT A
CORPORATION MAY BE CONSIDERED AS In Non-Stock, the SEC may allow members to
STOCK: vote by other similar means subject to the
terms and conditions that may be imposed by
(1) Capital stock divided into shares; that government agency.
(2) Authority to distribute allotments of its GR: The nature of membership is generally
surplus profits by way of dividends Personal and Non-Transferrable
The provision under Section 87 governing XPN: Unless the by-laws provide otherwise. It
Stock Corporations, when pertinent, also may however, be subject to transfer if the by-
applies to Non-Stock Corporations, except as laws allow transfer.
may be covered by specific provisions of Title
11. Q. CLUB SHARES, THEIR SHARES ARE
SUBJECT TO TRANSFER BUT WILL THE
VOTING RIGHTS OF MEMBERS IN A NON- TRANSFEREE HAVE THE SAME RIGHT,
STOCK CORPORATION. PRIVILEGE TO COMPEL THE CORPORATION
THAT HE BE RECOGNIZED AS A MEMBER?
Section 89. Right to vote. – The right of the
No. Admission of membership is subject to the
members of any class or classes to vote may be
rules and regulations that may be imposed by
limited, broadened or denied to the extent
the non-stock corporation.
specified in the articles of incorporation or the
by-laws. Unless so limited, broadened or
In the Cebu Country Club Case, a non-profit
denied, each member, regardless of class, shall
and non-stock membership club may have the
be entitled to one vote.
right to approve or disapprove an application
for proprietary membership. The right should
Unless otherwise provided in the articles of
not be exercised arbitrarily.
incorporation or the by-laws, a member may
vote by proxy in accordance with the provisions
In this case, there was an amendment of the
of this Code. (n)
Articles of Incorporation of Cebu Country Club.
Voting by mail or other similar means by
Section 3 of the Cebu Country Club’s by-laws,
members of non-stock corporations may be
requiring the unanimous vote of the directors
authorized by the by-laws of non-stock
for the admission of membership in the club.
corporations with the approval of, and under
But it was not printed in the application form
such conditions which may be prescribed by,
that was handed to the applicant. The original
the Securities and Exchange Commission.
provision of the by-laws was silent regarding
the manner in which one may be admitted as
In the case of a non-stock corporation, under to how many votes.
Section 89: Each member shall be entitled to 1
vote per candidate. So, under the original provision then, majority
vote was required. But the amendment was
introduced requiring now the unanimous vote
of the Board of Directors. The amendment took
place more than 12 years prior to the

lOMoARcPSD|7948091
application of the petitioner. Petitioner filled up trustees of non-stock corporations, which may
the old form. be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-
Cebu Country Club explained that the laws, shall, as soon as organized, so classify
amendment was not printed in the application themselves that the term of office of one-third
due to economic reasons. (1/3) of their number shall expire every year;
and subsequent elections of trustees
The Supreme Court held finds this excuse comprising one-third (1/3) of the board of
flimsy and unconvincing. Such amendment, trustees shall be held annually and trustees so
aside from being extremely significant was elected shall have a term of three (3) years.
introduced. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular
The Court applied Section 19 of the Civil Code: term shall hold office only for the unexpired
Every person must, in the exercise of his rights period.
and in the performance of his duties, act with
justice, give everyone his due and observe No person shall be elected as trustee unless he
honesty and good faith. is a member of the corporation.
True it is that a non-stock corporation may Unless otherwise provided in the articles of
have its own set criteria or standards in the incorporation or the by-laws, officers of a non-
admission of members. It cannot, however, be stock corporation may be directly elected by the
exercised arbitrarily. members.
PLACE OF MEETING Unless otherwise provided for in the articles of

incorporation or by-laws, the number may
Section 93. Place of meetings. – The by-laws exceed 15.
may provide that the members of a non-stock
corporation may hold their regular or special Example:
meetings at any place even outside the place
where the principal office of the corporation is Integrated Bar of the Philippines National
located: Provided, That proper notice is sent to Chapter, they have 21 members. It is a non-
all members indicating the date, time and place stock corporation and rightfully so, they can
of the meeting: and Provided, further, That the have more than 15 members in the Board.
place of meeting shall be within the Philippines.
Other corporate officers like the President,
Anywhere in the Philippines if there is a by-law Secretary, Treasurer, among others may be
provision authorizing it in a Non-Stock directly elected by the members.
Corporation.
However, not all Corporations may elect the
There is no such authority granted to a Stock other corporate officers.
corporation. It must be within the territorial
boundaries of the city/municipality where it Section 97. Articles of incorporation. – The
has its principal office. articles of incorporation of a close corporation
may provide:
So if there’s nothing in the by-laws in a Non-
Stock Corporation authorizing the calling of 1. For a classification of shares or rights and
meetings of members anywhere in the the qualifications for owning or holding the
Philippines, then the same rules apply: same and restrictions on their transfers as may
be stated therein, subject to the provisions of
Only within the territorial boundaries of the following section;
the city or municipality where it has its
principal office. 2. For a classification of directors into one or
more classes, each of whom may be voted for
Because absent any, the rules and elected solely by a particular class of stock;
governing Stock corporations shall also and
apply, as provided for in Section 87
3. For a greater quorum or voting requirements
That is merely an authority under Sec. 93. It in meetings of stockholders or directors than
merely grants a non-stock corporation the those provided in this Code.
power/authority to validly provide in their by-
laws that they can hold meetings anywhere in The articles of incorporation of a close
the Philippines. corporation may provide that the business of
the corporation shall be managed by the
TRUSTEES AND OFFICERS stockholders of the corporation rather than by
a board of directors. So long as this provision
Section 92. Election and term of trustees. – continues in effect:
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of

lOMoARcPSD|7948091
1. No meeting of stockholders need be called to (2) all the issued stock of all classes shall be
elect directors; subject to one or more specified
restrictions on transfer permitted by this
2. Unless the context clearly requires Title; and
otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose (3) The corporation shall not list in any stock
of applying the provisions of this Code; and exchange or make any public offering of
any of its stock of any class.
3. The stockholders of the corporation shall be
subject to all liabilities of directors. Therefore, the fact that husband and wife own
99.98% of the shares of stocks of a corporation,
The articles of incorporation may likewise the .2% being held by their children will not
provide that all officers or employees or that make it a close corporation.
specified officers or employees shall be elected
or appointed by the stockholders, instead of by The family corporation was supposed to have
the board of directors. been organized that way but there were NO
continuing provisions in the Old Corporation
CLOSE CORPORATIONS Law that would guarantee the continued
existence of the family corporation as may have
Section 96. Definition and applicability of been intended by the stockholders.
Title. - A close corporation, within the meaning
of this Code, is one whose articles of The old law did not contain any provision as to
incorporation provide that: (1) All the the number of stockholders in a family
corporation’s issued stock of all classes, corporation. So a family corporation therefore,
exclusive of treasury shares, shall be held of may not necessarily be a close corporation.
record by not more than a specified number of (San Juan Structural Steel v. CA).
issued stock of all classes shall be subject to There was also no provision in the old law as to
one or more specified restrictions on transfer who may qualify to own or hold shares of
permitted by this Title; and (3) The corporation stocks in a family corporation. Whereas Section
shall not list in any stock exchange or make 96, in relation to Sec. 99 requires that they
any public offering of any of its stock of any shall be held by specified persons.
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close The old law likewise did not mandate the family
corporation when at least two-thirds (2/3) of its corporation to provide in its articles of
voting stock or voting rights is owned or incorporation that its shares of stocks shall be
controlled by another corporation which is not subjected to one or more specified restrictions
a close corporation within the meaning of this on their transfer.
Code.
While the law as it stands now, requires the
Any corporation may be incorporated as a close Close corporation to provide for restrictions on
corporation, except mining or oil companies, transfers of shares of stocks in all of its classes
stock exchanges, banks, insurance companies, of shares. All of its shares of any class are
public utilities, educational institutions and subjected to one or more specified restrictions
corporations declared to be vested with public allowed by the Code.
interest in accordance with the provisions of
this Code. In the old law, there was no prohibition for the
family corporation to list their shares in the
The provisions of this Title shall primarily stock exchange or to make public offering with
govern close corporations: Provided, That the respect to their shares. While the law now bars
provisions of other Titles of this Code shall close corporations from listing their shares in
apply suppletorily except insofar as this Title the stock exchange or make any public offering
otherwise provides. of any of its shares of stock.
Note that not any type of business or endeavor

All the 3 qualifying conditions provided for
may be undertaken by a close corporation.
under Sec. 96 must be present in order for it to
be considered as a close corporation. (San
2nd paragraph of Section 96 provides that Close
Juan Structural Steel v. CA)
corporations cannot be formed for purposes of
engaging in:
THE QUALIFYING CONDITIONS REQUIRED
BY LAW MUST ALL BE PRESENT:
(1) Mining/of oil companies,
(1) All the corporation’s issued stock of all
(2) Stock Exchange;
classes, exclusive of treasury shares, shall
be held of record by not more than a
(3) Banks;
specified number of persons, not exceeding
twenty (20);
(4) Insurance companies;

lOMoARcPSD|7948091
or appointed by the stockholders, instead of by

(5) Public utilities; the board of directors.
(6) Educational institutions and corporations If there are 20 stockholders and the
declared to be vested with Public Interest. stockholders themselves are considered
directors, then effectively, you have 20
DISTINCTION OF CLOSE AND ORDINARY directors.
CORPORATION
Ordinarily in stock corporations, not less than
The special provisions of Title XII of the Code 5, not more than 15;
applies only to a Close corporation. As a matter
of comparison between the close corporation (3) Shares of Stock
and the ordinary regular corporation, there are
numerous actual and possible distinctions In a Close corporation, all of its shares of any
between the close corporation and the class are subjected to one or more specified
regular/ordinary stock corporation: restrictions on transfers of share.
(1) The Number of Stockholders. While in ordinary stock corporation, generally,

there are no restrictions. Generally in the sense
In a Close corporation, 20 specified persons; that, it is discretionary on the part of other
In an Ordinary stock corporation there is no stock corporations to also provide certain
limitation as to their numbers and ordinarily, it reasonable restrictions on transfers of shares
does not specify who may become a but they are merely discretionary. Unlike in a
stockholder Close corporation, where it is mandatory.
(2) The Number of Directors Shares of stocks of a Close corporation cannot

be sold openly to the general public or listed in
Section 97. Articles of incorporation. – The the stock exchange;
articles of incorporation of a close corporation
may provide: There is no such prohibition in the other type
of Stock corporation.
1. For a classification of shares or rights and
the qualifications for owning or holding the (4) Management of the Corporation
same and restrictions on their transfers as may
be stated therein, subject to the provisions of Stockholders in a close corporation can take
the following section; active part in the management of the
corporation by vesting management unto them.
2. For a classification of directors into one or
more classes, each of whom may be voted for Unlike in the case of ordinary stock
and elected solely by a particular class of stock; corporation, where it is specifically provided
and that all corporate powers, all business are
conducted and all properties are controlled by
3. For a greater quorum or voting requirements the Board of Directors.
in meetings of stockholders or directors than
those provided in this Code. (5) Liability
The articles of incorporation of a close Section 100(5). Agreements by stockholders. -

corporation may provide that the business of
the corporation shall be managed by the 5. To the extent that the stockholders are
stockholders of the corporation rather than by actively engaged in the management or
a board of directors. So long as this provision operation of the business and affairs of a close
continues in effect: corporation, the stockholders shall be held to
strict fiduciary duties to each other and among
1. No meeting of stockholders need be called to themselves. Said stockholders shall be
elect directors; personally liable for corporate torts unless the
corporation has obtained reasonably adequate
2. Unless the context clearly requires liability insurance.
otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose Those active in the management in a close
of applying the provisions of this Code; and corporation are personally liable for corporate
tort unless the corporation has obtained an
3. The stockholders of the corporation shall be adequate liability insurance.
subject to all liabilities of directors.
While directors of ordinary stock corporations
The articles of incorporation may likewise are liable only if they have acted fraudulently,
provide that all officers or employees or that in bad faith or in gross negligence.
specified officers or employees shall be elected
(6) Validity of Corporate Act

lOMoARcPSD|7948091
indebtedness or for property needed by the

Directors in a close corporation, if there is any, corporation. It speaks of all issues without any
can validly act even without a meeting. exception.
While directors in ordinary stock corporations, Q. FIRST EXCEPTION: THOSE THAT ARE
as a rule, they must act as a body at a duly ISSUED IN COMPLIANCE WITH THE LAW
constituted meeting. REQUIRING MINIMUM STOCK OWNERSHIP
Agreements between stockholders of a close BY THE PUBLIC, WILL THIS NOT APPLY TO
corporation regarding the operation and affairs A CLOSE CORPORATION?
of the corporation can be validly made, under
Section 100, which would have no binding There’s no such animal as public offering in a
force and effect in ordinary stock corporations close corporation. It cannot list in the stock
since stockholders agreements cannot limit the exchange or make any public offering of any of
discretion of the board in the management of its shares of any class. That is why it is said
the corporate affairs. that if it is not denied by a provision in the
articles of incorporation or any amendment
(7) Articles of Incorporation thereto, the pre-emptive rights of stockholders
in a close corporation will thereby be absolute.
The articles of incorporation of a close
corporation may also provide that all officers (9) Appraisal Rights
and even employees shall be elected or
appointed by the stockholders. Section 105. Withdrawal of stockholder or
dissolution of corporation. – In addition and
Whereas, in ordinary stock corporations, they without prejudice to other rights and remedies
are elected by the Board of Directors. available to a stockholder under this Title, any
stockholder of a close corporation may, for any
Likewise, the articles of incorporation of a close reason, compel the said corporation to
corporation may provide for a greater quorum purchase his shares at their fair value, which
and voting requirement in meetings of shall not be less than their par or issued value,
Stockholders And Directors, as provided for in when the corporation has sufficient assets in
Section 97. its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any
Whereas in case of ordinary stock corporation, stockholder of a close corporation may, by
while the articles or by-laws may provide for a written petition to the Securities and Exchange
greater quorum and voting requirements in Commission, compel the dissolution of such
Directors’ Meetings, under Sec. 25, those for corporation whenever any of acts of the
the stockholders’ meeting cannot be altered directors, officers or those in control of the
corporation is illegal, or fraudulent, or
Rationale: Doctrine of Limited Capacity dishonest, or oppressive or unfairly prejudicial
to the corporation or any stockholder, or
(8) Pre-Emptive Right whenever corporate assets are being misapplied
or wasted.
Section 102. Pre-emptive right in close
corporations. – The pre-emptive right of Likewise, a stockholder of a Close Corporation
stockholders in close corporations shall extend can withdraw therefrom and compel the
to all stock to be issued, including reissuance corporation that he be paid the value of his
of treasury shares, whether for money, property shares for any reason. With a limitation only
or personal services, or in payment of corporate that the corporation has sufficient assets to
debts, unless the articles of incorporation cover its debts and liabilities exclusive of
provide otherwise. capital.
The Pre-emptive rights of a stockholder in a Meaning, there is no need for the corporation to
Close Corporation is absolute if not denied by a have unrestricted retained earnings in order
provision in the articles of incorporation. that the withdrawing stockholder may be paid
the value of his shares.
Example: Those issued in compliance with good
faith with the approval of the stockholders While in ordinary stock corporation, they may
owning or representing at least 2/3 of the do so only in the exercise of their appraisal
outstanding capital stock in exchange of right, under Sec. 81 or unless, of course, they
property needed by the corporation or sell their shares to another person.
previously incurred indebtedness, Pre-Emptive
rights cannot be exercised in Ordinary Stock (10) Business Judgment Rule
Corporation even if it is not denied by a
provision in the articles. The Business Judgment Rule which is
obtaining in Ordinary Stock Corporation may
If a Close Corporation is involved, the situation not apply to a Close Corporation in cases of
is different. Section 102 provides that it may be Deadlocks. (sec.104)
exercised even for money or previously incurred

lOMoARcPSD|7948091
The proper forum may interfere in the holders of record of its stock, and if the
management of the corporate affairs in a Close certificate for such stock conspicuously states
Corporation in cases of deadlocks and may such number, and if the issuance or transfer of
even order the dissolution, among others, of stock to any person would cause the stock to
the corporation even if the stockholders and/or be held by more than such number of persons,
directors are acting in good faith within the the person to whom such stock is issued or
scope of their powers and authority. transferred is conclusively presumed to have
notice of this fact.
If that is the case in Ordinary Stock
Corporation, the courts cannot interfere in the 3. If a stock certificate of any close corporation
business judgment of the directors, conspicuously shows a restriction on transfer
stockholders. of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice
But in a Close Corporation, Section 104 is of the fact that he has acquired stock in
specific and it may even appoint a provisional violation of the restriction, if such acquisition
director who will break the deadlock. violates the restriction.
In a Close Corporation, it may provide for a 4. Whenever any person to whom stock of a
greater quorum and voting requirement in close corporation has been issued or
stockholders’ meeting so if the articles provide transferred has, or is conclusively presumed
that the voting requirement in investments of under this section to have, notice either (a) that
corporate funds in another purpose or he is a person not eligible to be a holder of
business other than the primary purpose shall stock of the corporation, or (b) that transfer of
be 3/4 (75%), if this is not met, there will be a stock to him would cause the stock of the
deadlock. corporation to be held by more than the
number of persons permitted by its articles of
Q. WHAT IS THE REMEDY AVAILABLE? incorporation to hold stock of the corporation,
or (c) that the transfer of stock is in violation of
Any stockholder may file a petition before the a restriction on transfer of stock, the
proper forum that it interferes and the proper corporation may, at its option, refuse to register
forum may even appoint a provisional director the transfer of stock in the name of the
who will break the deadlock. He may cast a transferee.
deciding vote.
5. The provisions of subsection (4) shall not be
Q. WHO IS THE PROVISIONAL DIRECTOR? applicable if the transfer of stock, though
contrary to subsections (1), (2) or (3), has been
Appointee of the court. He is the extension of consented to by all the stockholders of the
the court. He directly interferes in the close corporation, or if the close corporation
management of the corporate affairs. has amended its articles of incorporation in
accordance with this Title.
The court or even the provisional director
himself may even compel a stockholder that he 6. The term "transfer", as used in this section,
sell his shares to the corporation irrespective of is not limited to a transfer for value.
the existence of unrestricted retained earnings.
The court/the provisional director may even 7. The provisions of this section shall not
prevent the implementation of any provision or impair any right which the transferee may have
any resolutions passed by the stockholders or to rescind the transfer or to recover under any
the directors. applicable warranty, express or implied.
(11) Transfer of Shares Likewise, the transferee of the shares of stocks

of a Close Corporation cannot compel the Close
Section 99. Effects of issuance or transfer of Corporation to register in its books the transfer
stock in breach of qualifying conditions. - at the objection of any one stockholder, if it
breaches any of the qualifying conditions
1. If stock of a close corporation is issued or provided for in the articles of incorporation
transferred to any person who is not entitled under Section 99.
under any provision of the articles of
incorporation to be a holder of record of its Q. A STOCKHOLDER SOLD HIS SHARES TO
stock, and if the certificate for such stock A PERSON NOT SPECIFIED. CAN THAT
conspicuously shows the qualifications of the TRANSFEREE COMPEL THE CORPORATION
persons entitled to be holders of record thereof, TO REGISTER THE TRANSFER?
such person is conclusively presumed to have
notice of the fact of his ineligibility to be a No. At the objection of any one stockholder of a
stockholder. Close Corporation, it cannot be registered.
2. If the articles of incorporation of a close Whereas, in the case of Ordinary Stock

corporation states the number of persons, not corporation, it is generally a ministerial duty on
exceeding twenty (20), who are entitled to be the part of the corporation to register the

lOMoARcPSD|7948091
transfer, as provided for in the case of Rural must be incorporated within a period of 90
Bank of Lipa v. CA. If it is refused without good days under the provisions of the Corporation
cause, it may be compelled to do so by Code. This refers to institutions of learning
mandamus. issuing certificates of completion in the
academic field.
(12) Dissolution
The governing board in an Educational Stock
Any stockholder in a Close Corporation may corporation should not also be less than 5 but
petition the proper forum for the corporate not more than 15. It can be anywhere between
dissolution of the said company on the 5-15. But this is not entirely true.
grounds, among others, provided for under
Section 105. Because if it is an Educational Non-Stock
Corporation, the number of the governing
If you take a look at Sec. 105, even mere board should be in multiples of 5 only.
dishonesty or any act that is detrimental to any
stockholder is a ground for the dissolution of Q. WHO MAY BE MEMBERS OF THE BOARD
the Close Corporation. OF DIRECTORS?
Whereas dissolution may be had only in Art. XIV, sec. 4, 1987 Constitution—
Ordinary Corporations on the grounds provided Educational Institutions other than those
for by the Corporation Code, PD 902-A, and established by religious order, mission boards
other special laws. and charitable organizations shall be owned
solely by citizens of the Philippines or
Dissolution is not the appropriate remedy of a corporations 60% of the capital is owned by
stockholder if they are protected or they may be such citizens. The control and administration
protected in some other legal means. of educational institutions shall be vested in
citizens of the Philippines.
In the case of Republic v. Bisaya Land
Transport Co, there was misuse and GR: Therefore, foreigners may own or hold
misapplication of the funds of the corporation shares in an Educational Corporation, but they
by certain corporate officers to the detriment of are not generally qualified to be members of the
the corporation and the stockholders. It is an Board of Directors.
Ordinary corporation.
Because directors are corporate managers and
The 2 stockholders went to court and sought the management of educational institutions are
for the dissolution of the corporation. vested solely to citizens of the Philippines.
The Supreme Court held that, no you have XPN: Nonetheless, they may still qualify to sit
other remedies available in law and act as members of the Board if the
educational involved is established by religious
Q. WILL THIS APPLY IN A CLOSE order, mission board and charitable
CORPORATION? organization.
No. Because even mere dishonesty, any act Q. MAY AN EDUCATIONAL INSTITUTION
that may be detrimental to any of the ISSUING CERTIFICATES OF COMPLETION
stockholders or the corporation itself is a IN THE ACADEMIC FIELD BE FORMED OR
ground for the dissolution of a Close ORGANIZED AS A STOCK CORPORATION?
Corporation.
No. Educational institutions issuing certificates
SPECIAL CORPORATIONS of completion in the academic field can no
longer be organized as a stock corporation by
TWO TYPES OF SPECIAL CORPORATIONS: virtue of B.P Blg. 232. It now prohibits the
formation of an institution of learning issuing
(1) Educational (Stock or Non-Stock) certificates of completion in the academic field
as a stock corporation. They may only be
(2) Religious (Corporation Sole or Religious organized now as a non-stock corporation.
Society)
In fact, under that B.P Blg. 232, those that
EDUCATIONAL CORPORATIONS were formed or organized as Stock corporations
are being urged to convert themselves into
Section 106. Incorporation. – Educational Non-Stock corporations.
corporations shall be governed by special laws
and by the general provisions of this Code. (n)
The special law spoken here is the Education

Act of the Philippines and under the provision
of this law, once they are recognized by the
government as such institutions of learning, it

lOMoARcPSD|7948091
RELIGIOUS CORPORATIONS
The corporation sole has the same right, power
Section 110. Corporation sole. – For the and privilege to own, hold and acquire
purpose of administering and managing, as properties like any other corporation.
trustee, the affairs, property and temporalities
of any religious denomination, sect or church, Q. BUT IS THE CORPORATION SOLE
a corporation sole may be formed by the chief POSSESSED WITH THE SAME POWER,
archbishop, bishop, priest, minister, rabbi or RIGHT OR PRIVILEGE TO DISPOSE, SELL,
other presiding elder of such religious MORTGAGE ITS REAL PROPERTIES LIKE
denomination, sect or church. ANY CORPORATION?
Corporation Sole can be formed not by any Section 113. Acquisition and alienation of
person. It is formed and organized by one property. – Any corporation sole may purchase
single person or individual, either by the: and hold real estate and personal property for
its church, charitable, benevolent or
(1) Chief Archbishop; educational purposes, and may receive
bequests or gifts for such purposes. Such
(2) Bishop; corporation may sell or mortgage real property
held by it by obtaining an order for that
(3) Priest; purpose from the Court of First Instance of the
province where the property is situated upon
(4) Rabbi; proof made to the satisfaction of the court that
notice of the application for leave to sell or
(5) Presiding Elder; or mortgage has been given by publication or
otherwise in such manner and for such time as
(6) Head of any religious Denomination, Sect or said court may have directed, and that it is to
Church. the interest of the corporation that leave to sell
or mortgage should be granted. The application
Section 112. Submission of the articles of for leave to sell or mortgage must be made by
incorporation. – The articles of incorporation petition, duly verified, by the chief archbishop,
must be verified, before filing, by affidavit or bishop, priest, minister, rabbi or presiding
affirmation of the chief archbishop, bishop, elder acting as corporation sole, and may be
priest, minister, rabbi or presiding elder, as the opposed by any member of the religious
case may be, and accompanied by a copy of the denomination, sect or church represented by
commission, certificate of election or letter of the corporation sole: Provided, That in cases
appointment of such chief archbishop, bishop, where the rules, regulations and discipline of
priest, minister, rabbi or presiding elder, duly the religious denomination, sect or church,
certified to be correct by any notary public. religious society or order concerned
represented by such corporation sole regulate
From and after the filing with the Securities the method of acquiring, holding, selling and
and Exchange Commission of the said articles mortgaging real estate and personal property,
of incorporation, verified by affidavit or such rules, regulations and discipline shall
affirmation, and accompanied by the control, and the intervention of the courts shall
documents mentioned in the preceding not be necessary. (159a)
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall GR: No. It needs a court order under Section
become a corporation sole and all 113. True it is, under that same provision, it
temporalities, estate and properties of the may own, hold, acquire properties. It cannot
religious denomination, sect or church dispose or even encumber or even mortgage
theretofore administered or managed by him as real properties. Thus, it must obtain an order
such chief archbishop, bishop, priest, minister, by application for leave from the RTC where the
rabbi or presiding elder shall be held in trust real property is located for the purpose of its
by him as a corporation sole, for the use, disposition or encumbrance.
purpose, behalf and sole benefit of his religious
denomination, sect or church, including XPN: Unless it has rules and regulations or
hospitals, schools, colleges, orphan asylums, discipline providing for the method of
parsonages and cemeteries thereof. (n) disposition or encumbrance of real properties
such court order will no longer be required for
In comparison with Ordinary corporations, it its validity.
commences to exist and is vested with juridical
personality upon the filing of the Articles of The religious societies just like any other
Incorporation with the SEC. ordinary non-stock corporation organized by
not less than 5 but not more than 15
In comparison to the provisions of Sec. 19 incorporators created for the purpose of
which provides that a corporation commences securing secular purposes.
to exist and will be vested with a juridical
personality upon the issuance of the certificate
of registration or incorporation by the SEC.

lOMoARcPSD|7948091
DISSOLUTION AND WINDING UP Voluntary Dissolution where creditors are

thereby affected.
Dissolution is the extinguishment of corporate
franchise and the termination of corporate Section 119. Voluntary dissolution where
existence. creditors are affected. – Where the dissolution
of a corporation may prejudice the rights of any
THERE ARE 3 MODES OF DISSOLUTION creditor, the petition for dissolution shall be
filed with the Securities and Exchange
(1) Expiration of the corporate term; Commission. The petition shall be signed by a
majority of its board of directors or trustees or
(2) Voluntary Surrender of the Corporate other officers having the management of its
Franchise; affairs, verified by its president or secretary or
one of its directors or trustees, and shall set
(3) Involuntary Dissolution forth all claims and demands against it, and
that its dissolution was resolved upon by the
EXPIRATION OF THE CORPORATE TERM affirmative vote of the stockholders
representing at least two-thirds (2/3) of the
When the period of corporate life expires, the outstanding capital stock or by at least two-
corporation ceases to be a body corporate for thirds (2/3) of the members at a meeting of its
the purpose of continuing the business for stockholders or members called for that
which it is organized. purpose.
There is no need to institute a quo warranto If the petition is sufficient in form and
proceeding to determine up to what point in substance, the Commission shall, by an order
time it was dissolved because the period is reciting the purpose of the petition, fix a date
provided for in the Articles of Incorporation. on or before which objections thereto may be
filed by any person, which date shall not be
When such period expires without any less than thirty (30) days nor more than sixty
extension having been made pursuant to law, (60) days after the entry of the order. Before
the corporation is dissolved automatically such date, a copy of the order shall be
insofar as the continuation of its business is published at least once a week for three (3)
concerned (PNB v. CFI) consecutive weeks in a newspaper of general
circulation published in the municipality or city
VOLUNTARY DISSOLUTION where the principal office of the corporation is
situated, or if there be no such newspaper,
Voluntary Dissolution where no creditors are then in a newspaper of general circulation in
affected the Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in three
Section 118. Voluntary dissolution where no (3) public places in such municipality or city.
creditors are affected. – If dissolution of a
corporation does not prejudice the rights of any Upon five (5) day’s notice, given after the date
creditor having a claim against it, the on which the right to file objections as fixed in
dissolution may be effected by majority vote of the order has expired, the Commission shall
the board of directors or trustees, and by a proceed to hear the petition and try any issue
resolution duly adopted by the affirmative vote made by the objections filed; and if no such
of the stockholders owning at least two-thirds objection is sufficient, and the material
(2/3) of the outstanding capital stock or of at allegations of the petition are true, it shall
least two-thirds (2/3) of the members of a render judgment dissolving the corporation and
meeting to be held upon call of the directors or directing such disposition of its assets as
trustees after publication of the notice of time, justice requires, and may appoint a receiver to
place and object of the meeting for three (3) collect such assets and pay the debts of the
consecutive weeks in a newspaper published in corporation. (Rule 104, RCa)
the place where the principal office of said
corporation is located; and if no newspaper is Shortening of the corporate term under Section
published in such place, then in a newspaper 120 will partake of the nature of an
of general circulation in the Philippines, after amendment of the articles of incorporation. It
sending such notice to each stockholder or may have the effect also of the dissolution of
member either by registered mail or by the corporation.
personal delivery at least thirty (30) days prior
to said meeting. A copy of the resolution Section 120. Dissolution by shortening
authorizing the dissolution shall be certified by
corporate term. – A voluntary dissolution may
a majority of the board of directors or trustees
be effected by amending the articles of
and countersigned by the secretary of the incorporation to shorten the corporate term
corporation. The Securities and Exchange pursuant to the provisions of this Code. A copy
Commission shall thereupon issue the of the amended articles of incorporation shall
certificate of dissolution. be submitted to the Securities and Exchange
Commission in accordance with this Code.
Upon approval of the amended articles of

lOMoARcPSD|7948091
incorporation of the expiration of the shortened (10) In cases of gross mismanagement and
term, as the case may be, the corporation shall fraudulent conduct of its affairs
be deemed dissolved without any further
proceedings, subject to the provisions of this Other grounds provided for by special laws like
Code on liquidation. (n) the Securities Regulation Code:
Example: Any violation of the provision of the Securities

Regulation Code may cause the revocation of
The corporation was organized 25 years ago. the certificate of registration of a brokerage firm
Term of existence is 50 years so 25 years from or those engaged in the buying or selling of
now, it will be dissolved by expiration of term. securities for the account of their clients.
But the corporation shortens the corporate
term to the effect that it shall exist for a period This is Involuntary Dissolution and involuntary
of 50 years from the date of its registration, it dissolution is an extreme remedy and the
shall exist only for the period of 25 years from courts proceed with extreme caution which
the date of its registration. So, effectively, have for their object the forfeiture of a
dissolving the corporation. corporate franchise and forfeiture will not be
allowed except upon express limitation or for
It will never become valid and effective until plain abuse of power for which the corporation
and unless the SEC gives its stamp of approval. fails to fulfill the design or purpose of its
organization.
Unlike in ordinary amendments of the articles
under Section 116 not acted upon by the SEC But when the abuse or violation constitutes or
it shall become valid and effective on the day of threatens a substantial injury to the public or
its filing if not acted upon by the SEC without such as to amount to a violation of the
cause attributable to the corporation. The fundamental conditions of its charter
amendment shortening the corporate term will dissolution will be granted.
have the effect of a dissolution, Section 120
requires the approval of the SEC. In most cases, the courts will merely enjoy the
further commission of the questioned act.
INVOLUNTARY DISSOLUTION
In the case of Republic v. Bisaya Land, there
Section 121. Involuntary dissolution. – A was misuse or misapplication of the corporate
corporation may be dissolved by the Securities funds and the stockholders complained seeking
and Exchange Commission upon filing of a for the dissolution of the corporation. The
verified complaint and after proper notice and courts should not have imposed the extreme
hearing on the grounds provided by existing penalty of dissolution because there are other
laws, rules and regulations. (n) remedies available to the stockholders
concerned.
Upon filing of the verified petition or motu
proprio on grounds provided for by law, there In the first place, it does not threaten a
may also be grounds provided for by other substantial injury to the public. It is between
special laws. and among themselves.
(1) Non-user of corporate franchise Q. WHAT IS THE EFFECT OF A

DISSOLUTION?
(2) Continuous inoperation for at least 5 years
(1) The dissolution of a corporation not only
(3) Failure to organize terminates its primary franchise to be and
act as a corporation but generally it also
(4) Failure to file by-laws prevents it from exercising other or
secondary franchises which may have been
(5) Fraud in procuring its certificate of conferred to it.
registration under P.D 902-A
(2) It terminates its power to enter into
(6) Serious misrepresentation as to what a contract or to continue the business as a
corporation can do or is doing to the going concern.
damage and prejudice of the investing
public and/or the corporation itself (3) It has been held that a corporation whose
corporate life expired cannot legally pursue
(7) Violation, refusal to comply with the lawful the business for which it is organized. It
orders of the SEC cannot apply for a new certificate or a
secondary franchise for it is incapable of
(8) Violation of any of the provisions of the receiving a grant. (Buenaflor vs.
Code Camarines Sur Industry)
(9) In cases of deadlocks in a close corporation (4) It is no longer possessed with a juridical
personality to continue its business.

lOMoARcPSD|7948091
Neither can it enforce a contract entered the payment of all its debts, liabilities and
into it prior to its dissolution for the obligations and the ultimate distribution of the
purpose of continuing the business of its remaining assets to the stockholders in
organization. (Cebu Port Labor Union vs. proportion to their respective subscription or in
State Marine) accordance with their contract of subscription.
(5) In general, debts due to or by a corporation Because there may be, of course, shares of
are not extinguished by its dissolution. This stocks that are preferred in the distribution of
is the clear import of Sec. 145 under the the remaining assets of the corporation. If that
Miscellaneous provisions of the Code, when be the case, then the preferred shareholders
it provides that: shall be entitled to receive the preference
indicated in their contract of subscription
Section 145. Amendment or repeal. – No right before they may, of course, transfer or give the
or remedy in favor of or against any stockholders their share of the remaining
corporation, its stockholders, members, assets or properties of the corporation.
directors, trustees, or officers, nor any liability
incurred by any such corporation, Despite the termination of the corporate
stockholders, members, directors, trustees, or existence and the extinguishment of the
officers, shall be removed or impaired either by corporate franchise, a dissolved corporation,
the subsequent dissolution of said corporation however, under Section 122 of the Code, is still
or by any subsequent amendment or repeal of possessed with a juridical personality for
this Code or of any part thereof. (n) another period of 3 years for the purpose of
prosecuting or defending suits filed for or
LIQUIDATION AND WINDING UP against it or to distribute its assets and close
and settle its affairs.
Section 122. Corporate liquidation. – Every
corporation whose charter expires by its own But this 3-year period provided for under
limitation or is annulled by forfeiture or Section 122 should not be for the purpose of
otherwise, or whose corporate existence for continuing the business for which it is formed
other purposes is terminated in any other or organized. Upon the expiration of the 3-year
manner, shall nevertheless be continued as a period, the juridical personality of the
body corporate for three (3) years after the time corporation ceases to exist for all intents and
when it would have been so dissolved, for the purposes and as a general rule, it can no longer
purpose of prosecuting and defending suits by sue or be sued. It no longer exists and has no
or against it and enabling it to settle and close more valid existence. (Gelano v. CA)
its affairs, to dispose of and convey its property
and to distribute its assets, but not for the This 3-year period of liquidation provided
purpose of continuing the business for which it under Section 122, however, is not an absolute
was established. rule.
At any time during said three (3) years, the THERE ARE 3 MODES OF LIQUIDATION:
corporation is authorized and empowered to
convey all of its property to trustees for the 1. It may be undertaken by the Board of
benefit of stockholders, members, creditors, Directors themselves;
and other persons in interest. From and after
any such conveyance by the corporation of its 2. By the appointment of an assignee or
property in trust for the benefit of its trustee;
stockholders, members, creditors and others in
interest, all interest which the corporation had 3. By the appointment of a receiver or a
in the property terminates, the legal interest liquidating trustee.
vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or If the corporation opts to undertake the
other persons in interest. liquidation itself through the governing Board
of Directors, it will only have a period of 3 years
Upon the winding up of the corporate affairs, within which to finish the task of liquidation.
any asset distributable to any creditor or
stockholder or member who is unknown or Claims for or against the corporation not filed
cannot be found shall be escheated to the city within the 3-year period will become
or municipality where such assets are located. unenforceable as there exist no more corporate
entity against which they can be enforced.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation Actions pending for or against the corporation
shall distribute any of its assets or property when the 3-year period expires are abated
except upon lawful dissolution and after since after that period, the corporation ceases
payment of all its debts and liabilities. to exist for all intents and purposes and is no
longer capable of suing or of being sued.
Liquidation and Winding up refers to the act of
collecting all assets, properties and rights and

lOMoARcPSD|7948091
But if the liquidation is undertaken by a member who is unknown or cannot be found

trustee, assignee, receiver, or liquidator, the 3- shall be escheated to the city or municipality
year period will not apply. Why not? where the property is located or organized.
If a trustee, assignee, receiver or liquidator is FOREIGN CORPORATIONS

appointed, the assets, rights properties of the
dissolved corporation will be conveyed to them. Q. WHETHER IT MAY SUE OR BE SUED IN
The effect of the conveyance will make that THE PHILIPPINES?
person the legal owner of the properties
conveyed subject only to the beneficial interest GR: It is not the lack of the required license but
of the stockholders and creditors alike. doing business without the license, which bars
a foreign corporation from access to our courts.
So, being the legal owner, he can continue (Universal Shipping v. IAC)
defending, to sue or of being sued for the
benefit of the stockholders and creditors alike. Doing or transacting business without a license
(Sumera v. Valencia, National Abaca v. Fore is what the law says so as to bar the foreign
and Board of Liquidators v. Kalaw) corporation from access to our courts.
Being the legal owner, he or they can continue Q. SO WHAT CONSTITUTES “DOING OR
defending or prosecuting the case for the TRANSACTING BUSINESS” SO AS TO BAR
benefit of the stockholders and creditors alike. THE FOREIGN CORPORATION FROM
ACCESS TO OUR COURTS IF IT DOES
Q. MAY A CORPORATION DISSOLVED BUSINESS WITHOUT THE REQUISITE
TRANSFER ITS ASSETS AND/OR LICENSE?
PROPERTIES TO A NEW CORPORATION FOR
THE PURPOSE OF REINCORPORATING A The term “doing business or transacting
NEW AND CONTINUE THE BUSINESS OF business” implies a continuity of commercial
THE DISSOLVED ONE? dealings. First thing that you have to
remember, is there continuity of commercial
EXAMPLE: THE CORPORATION DISSOLVED dealings?
AND THERE IS LIQUIDATION. IT GATHERED
ALL ITS ASSETS, PROPERTIES, RIGHTS The performance of acts or works or the
AND AFTER PAYING ALL ITS DEBTS AND exercise of some of the functions normally
LIABILITIES, THERE REMAINED MANY incident to and in the progressive prosecution
MORE PROPERTIES. INSTEAD OF of the purpose or objects of its organization.
DISTRIBUTING THESE TO THE
SHAREHOLDERS IN ACCORDANCE WITH XPN: A foreign corporation can sue and/or gain
THEIR STOCKHOLDINGS, THE access to our courts or other administrative
CORPORATION WITH THE CONSENT OF ALL agencies if:
THESE STOCKHOLDERS TRANSFERS THE
PROPERTIES TO A NEW CORPORATION (1) The act involved is an isolated one or one
WHICH WILL CONTINUE THE BUSINESS OF single transaction because there is no
THE DISSOLVED ONE. IS THAT POSSIBLE? continuity of commercial dealings; or
Yes. In the case of Chung Ka Bio v. IAC, the (2) The corporation is not here seeking to
Board of Directors is not permitted to enforce any legal or contractual rights
undertake any activity outside of the usual arising from or growing out of any business
liquidation of the business of the dissolved transaction which it has transacted in the
corporation. Philippines; (Western Equipment v.
Reyes, Universal Products v. CA) or
But there is nothing to prevent the
stockholders from conveying their respective (3) The purpose of the suit is to protect its
stockholdings towards the creation of a new corporate name, trademark, trade name,
corporation to continue the business of the old reputation, or goodwill; (General garments
one. v. Director, Converse Rubber v. Universal
Products, Fuma v. IAC) or
The Supreme Court stressed, winding up is the
sole activity of a dissolved corporation that Because we have the Treaty of Paris to which
does not intend to incorporate anew. But if it the Philippines became a signatory in 1965.
does it is not unlawful for the old Board of
Directors to negotiate and transfer the The member nations, the signatory countries
remaining assets of the dissolved corporation to there allows each other’s national to sue on
the new corporation intended to be created as other’s court even without registration in its
long as the stockholders themselves have given forum for the protection of industrial property
their consent. rights, protection of corporate name, goodwill,
trademark and its reputation whether or not it
3rd par of Section 122 provides that any assets is doing or it is not doing business in the
distributable to a creditor, stockholder or forum.

lOMoARcPSD|7948091
(4) Or if it is based on a violation of the Revised P. D. 902-A

Penal Code; (Lacoste v. Fernandez)
P.D 902-A was signed into law by the then
In this case, Lacoste filed a criminal complaint President Marcos in the 70’s at a point in time
for infringement under the Revised Penal Code. when he was still possessed with legislative
powers an authority.
The Supreme Court held, No, it is not doing
business. Why? Because the distributor has an It granted the SEC extensive powers and
independent status. The mere fact of authority from administrative, supervisory,
appointing a distributor or a representative regulatory, investigative, prosecutory, and even
domiciled in the Philippines will not necessarily adjudicative or quasi-judicial powers and
result to its “doing business”. functions carved out of the original
jurisdictions of the Regional Trial Court.
Because if that distributor has an independent
status that is not doing business. For more than 20 years, the SEC was vested
with original and jurisdiction provided for
Independent Status, if the agent or distributor under Sec. 5 of the Presidential Decree,
is acting for and in its own name, for and its Original and Exclusive. This original and
own account not in the name and/or for the exclusive jurisdiction of the SEC, particularly
account of the foreign corporation. Sec. 5 and 6 of the P.D was however
transferred to the courts of regular jurisdiction
If that is the case, then the appointment of the that may be designated by the Supreme Court
representative or distributor is NOT doing pursuant to Sec. 5.2 of R.A 8799, Securities
business. Regulation Code of the Philippines, in the year
2000.
(5) The party is Estopped to challenge the
personality of the corporation by merely November 2002, the high Court made the
entering into a contract or transaction with designation of these regular trial courts as the
it. (Communication Materials and Special Commercial Courts. Only them can
Designs v. CA) hear and decide controversies falling squarely
under Sec. 5 and Sec. 6 of the P.D.
(6) It is not instituting an action but it is
merely defending a suit filed against it. P.D says: It is possessed with original and
(Time v. Reyes) exclusive jurisdiction to hear and decide cases
involving, among others, under Sec. 5:
WITHDRAWAL OF A LICENSE OF A FOREIGN
CORPORATION a. Devises or schemes employed by or any act
of the board of directors, business
Section 136. Withdrawal of foreign associates, its officers or partners,
corporations. – Subject to existing laws and amounting to fraud and misrepresentation
regulations, a foreign corporation licensed to which may be detrimental to the interest of
transact business in the Philippines may be the investing public and/or the corporation,
allowed to withdraw from the Philippines by partners, members or associations or
filing a petition for withdrawal of license. No organizations registered with the
certificate of withdrawal shall be issued by the commission;
Securities and Exchange Commission unless
all the following requirements are met; This is the provision relied upon by the SEC in
pursuing revocation proceedings and the
1. All claims which have accrued in the institution of criminal actions for violation of
Philippines have been paid, compromised or the securities laws against persons engaged in
settled; what is commonly known as “Pyramiding
Schemes” or those engaged in the sale of
2. All taxes, imposts, assessments, and investment contracts with a promise of a very
penalties, if any, lawfully due to the Philippine high rate of return. Most of them are not
Government or any of its agencies or political authorized to engage in that particular activity.
subdivisions have been paid; and
b. Controversies arising out of intra-corporate
3. The petition for withdrawal of license has or partnership relations, between and
been published once a week for three (3) among the stockholders, members, or
consecutive weeks in a newspaper of general associates; between any or all of them and
circulation in the Philippines. the corporation, partnership or association
of which they may be stockholders,
members or associates, respectively; and
between the corporation, the partnership or
association and the State as it concerns
their individual franchise to be and act as a
corporation, partnership or association.

lOMoARcPSD|7948091
c. Controversies in the election or The first element requires the existence of

appointment of directors, trustees or intra-corporate relationship. The second
officers or managers of such corporations, element requires that the dispute between and
partnerships or associations. among the parties must be intrinsically
connected with the regulation of the
d. Petitions of corporations, partnerships or corporation.
associations to be declared in a state of
suspension of payments in cases where the If the nature of the controversy involves
corporation, partnership or association matters that are purely civil in character,
possesses sufficient assets to cover its necessarily, the case does not involve intra-
debts and liabilities but foresees the corporate controversy and the case may be
impossibility of meeting them when they heard by the courts of general jurisdiction and
respectively fall due or in cases where the not the special commercial courts.
corporation, partnership or association has
no sufficient assets to cover its liabilities In Peneyra v. IAC, a stockholder entered into a
but is under management committee or a contract with his own corporation for the
rehabilitation receiver created pursuant to operation and management of the canteen in
the same decree. the corporate headquarters. The controversy
arose out of a breach thereof.
With respect to item (b), intra-corporate
controversies: The same cannot qualify to be an intra-
corporate controversy. Its roots being a
the sole criteria of determining the existence of contractual breach separate and distinct from
intra-corporate controversy to place the case the corporate relationship between the
within the exclusive and original jurisdiction of stockholder and the corporation.
the sec, which is now the special commercial
courts was only one, that there must be an The controversy did not arise out of intra-
intra-corporate relationship. corporate relationship but by virtue of a
contractual breach.
If there is an intra-corporate relationship, then
it is an intra-corporate controversy and intra- Q. TRANSFERS OF SHARES OF STOCK. THE
corporate relationship is a relationship between TRANSFEREE OF THE SHARES OF STOCK
stockholders, members, directors, partners, IS NOT AN ORIGINAL STOCKHOLDER. HE IS
associates, the officers, directors, etc.; or AN OUTSIDER AND HE ACQUIRED SHARES
between any or all of them and the corporation; FROM A SELLING STOCKHOLDER. HE GOES
and third, the corporation and the State insofar TO THE CORPORATION TO REGISTER THE
as the right of the corporation to exist as such TRANSFER SO THAT IT MAY BE RECORDED
is concerned. If there is such a relationship, it IN HIS NAME AND CAN EXERCISE HIS
is an intra-corporate controversy to place the RIGHTS AS A STOCKHOLDER. THE
case within the ambit of the original and CORPORATION REFUSED TO REGISTER
exclusive jurisdiction now of the special THE TRANSFER. IS THIS INTRA-
commercial courts. CORPORATE IF HE SUES THE
CORPORATION FOR MANDAMUS? WILL
In PSBA v. Leano, the Supreme Court held THIS BE AN INTRA-CORPORATE
that, other than the intra-corporate CONTROVERSY SUBJECT TO THE
relationship, the controversy must arise out of ORIGINAL AND EXCLUSIVE JURISDICTION
that relationship. OF THE SPECIAL COMMERCIAL COURTS?
OR MAY IT BE HEARD BY ANY ORDINARY
So there are 2 things to be considered in order REGULAR COURT?
to place the case within the specialized
jurisdiction of the special commercial courts. In Rivera v. Florendo, respondents are merely
seeking to register as stockholders due to an
In Speed Distributing v. CA, the Supreme alleged sale of shares of stock.
Court stressed, to determine whether a case
involves an intra-corporate controversy and if it The same is not an intra-corporate controversy
is to be heard originally and exclusively by the and the regular courts have jurisdiction. They
special commercial courts, 2 elements must are not yet stockholders.
therefore concur:
In this case, the alleged vendor did not endorse
1. The status of the relationship of the parties. the certificate of stock that was allegedly sold
That is, there is an intra-corporate by him in favor of the purchaser and he even
relationship; specifically resisted that registration of the
transfer in the stock and transfer book of the
2. The nature of the questioned, that is, the corporation. There was therefore no compliance
subject of the controversy. Meaning, the with the mode and manner of transferring
controversy must arise out of that shares as mandated by Section 63 which says,
relationship. “Endorsement and Delivery of the stock
certificate”.

lOMoARcPSD|7948091
In Abejo v. Dela Cruz, the Supereme Court It is cognizable originally and exclusively by the
ruled, that there is no requirement that a special commercial courts.
stockholder of a corporation must be a
registered one in order that the SEC may take XPN: This exclusive and original jurisdiction
exclusive and original cognizance of the suit will not apply:
seeking to enforce his right as a stockholder.
(1) If the controversy is PURELY a labor
Because the SEC under the mandate of the dispute;
P.D, Section 5 has absolute jurisdiction,
supervision and control over corporations and (2) If the main cause of action is for the
it’s even called upon to enforce the provisions recovery of unpaid wages, separation pay
of the Corporation Code, among others, the and attorney’s fees without questioning the
stock purchaser’s right to have his name validity of his removal or his ouster.
recorded in the books of the corporation. (Midland Construction v. Mobilia)
In this case: The certificate was endorsed and So the main consideration therefore, for
delivered to the transferee and the corporation purposes of determining whether it is the NLRC
was notified of the transfer. But the corporation or the special commercial court that is
refused the registration. possessed with jurisdiction is, whether or not
the corporate officer involved asserts his right
The Supreme Court held that this is intra- as such officer or questions the manner or the
corporate dispute because the transferor has validity by which he was removed or ousted
done all that he can and within his powers and therefrom.
all that is required in order that he may be
considered as a stockholder. The provisions of If that is the case, then it is the special
Sec. 63 regarding transfers of shares have been commercial court.
duly complied with.
If he does not question the manner in which he
If he is merely seeking to be recognized as a was removed, but he merely seeks for
stockholder and the requirements for a valid separation pay, backwages, etc.—then the
transfer has not been complied with, it will not NLRC.
be an intra-corporate controversy.
Sec. 5 also speaks of suspension of payments.
But if the law or the manner in which transfer
is to be effected has been duly complied with, Petitions of corporations or associations to be
he is for all intents and purposes already a declared in a state of suspension payments
stockholder under the Abejo ruling and it will
become an intra-corporate controversy. Note the Financial Rehabilitation and
Insolvency Act of 2010:
So it depends whether or not he has already
complied with all the requirements of the law in This matter rehabilitation, suspension of
order that he may be rightfully considered as a payments is now covered by the Financial
stockholder. Rehabilitation and Insolvency Act.
If not, then it is not within the exclusive or But the basics of suspension of payment and
original jurisdiction of the special commercial rehabilitation is similarly situated with the P.D
court. 902-A.
But if it is in compliance with the law, then it is P.D 902-A, this was an amendment introduced
intra-corporate only within the original and during the effectivity of P.D 902. It was
exclusive jurisdiction of the special commercial amended by insertions of these provisions on
courts suspensions of payments and rehabilitation of
distressed corporations.
For as long as the controversy revolves around
the question of the validity of the appointment, The proper forum may issue an order
election, or of removal of corporate directors suspending payments of claims against a
and officers Elected or Appointed by the Board distressed corporation in accordance with
Of Directors, then the controversy is exclusively Section 5(d) of the P.D.
cognizable by the special commercial court and
not the NLRC. (Tabang v. NLRC) The last sentence of Sec. 16 also provides that
upon appointment of a Management
As long as the particular officer involved was Committee, Rehabilitation Receiver Board or
elected by the Board of Directors and he Body:
questions the propriety or the manner or the
questions the validity by which he was removed All actions for claims against the distressed
or ousted: corporation, partnership or association under
management or receivership pending before

lOMoARcPSD|7948091
any court, tribunal, board or body shall be If it is without a rehabilitation plan, the
suspended accordingly. Receiver or the Management Committee will be
tasked to study the best way to put the
THERE ARE 3 TYPES OF SUSPENSION OF company back on its two feet and will thereby
PAYMENTS recommend proper course to be taken in the
proper forum.
1. Simple suspension of payments, which
would be the mere deferments of the This is what Philippine Airlines did. It had
payment of corporate liabilities or debts of over $2B in the early 90s and the
obligations where the corporation has European creditors were already bent on
sufficient assets to cover its debts and foreclosing the properties of PAL. PAL went to
liabilities but merely foresees the the SEC and filed a petition for suspension of
impossibility of meeting them when they fall all actions for claims against it with a
due without appointment of a receiver or a rehabilitation plan and the appointment of a
rehabilitation plan. Management Committee. The SEC then issued
a suspension order and based on the
Example: rehabilitation plan it submitted, the
Management Committee studied the plan and
A Construction company engaged in general recommended to the SEC the approval of the
construction enters into a contract with the said rehabilitation plan which was also
GSIS, Pag-Ibig and/or SSS for the construction implemented by the Management Committee.
of 1,500 medium-sized housing units for the
members of these government agencies. 3. Suspension of payments with the
appointment of a Receiver or Management
The stipulation provides that they will be paid Committee with or without a rehabilitation
50% upon of 50% completion of the project and plan where the corporation has no
the remainder, upon the completion of the sufficient assets to cover its debts and
entire project. There was a stipulation as to liabilities.
when the 50% payment will be made but there
are circumstances which prevented the This happened in the case of Victorias Milling.
completion of the project. Of course, the Victorias Milling expanded its business. It is
construction company secured a loan to engaged primarily in the manufacture of sugar.
mobilize the project. The financial institution is It expanded its business and it used its funds
now bent on foreclosing the assets of the supposedly to continue its production of sugar
corporation including the buildings or the thinking that in a period of 2 years, they will
houses they have already constructed. have an ROI, which it did not happen. So the
creditors were already bent on foreclosing the
Of course, it has collectibles from GSIS, Pag- manufacturing plant of Victorias Milling.
Ibig and SSS but it cannot yet collect because
the project has not yet been completed. This What did the management do? At a point in
particular company can go to the proper forum time when it is still within the exclusive and
and seek for an order suspending the payment original jurisdiction of the SEC, they went to
of all actions or claims against it. the SEC, filed for a petition for suspension of
all actions for claims against the corporation
Let’s say for another 6 months until the entire with the appointment of a Management
project will have been completed and it can Committee without a rehabilitation plan and
already collect from the SSS, Pag-Ibig and/or prayed that the Management Committee to be
GSIS. Considering the facts attendants and of appointed shall study the best way to bring
course, the contract executed between the back the corporation back on its 2 feet. The
particular corporation and GSIS, Pag-Ibig and SEC did just that.
SSS, the court will suspend actions for claims
against the corporation and it will say that they One of the main tasks of the Management
should start paying the creditor on a certain Committee or the Receiver in cases of
specified date. suspensions of actions for claims against the
corporation is to meet with the creditors to
It has sufficient assets to cover its debts and discuss the possibility of putting the
liabilities but it merely foresees the corporation back on its 2 feet and become
impossibility of meeting them when they fall operational again.
due.
What did the Management Committee do? It
2. Suspension of payments with the asked the financial creditors, banking
appointment of a Management Committee institutions and other financial creditors of
or a Receiver and with or without a Victorias Milling if they can convert their claims
Rehabilitation Plan where the corporation into equity. They did. What happened?
has sufficient assets to cover its debts and
liabilities but merely foresees the The liabilities of Victorias Milling were erased
impossibility of meeting them when they because the claims of the banking institutions
respectively fall due. and financial institutions were converted into

lOMoARcPSD|7948091
equity and barely 7 years thereafter, Victorias 2. Secured creditors will retain their
Milling was already back on its 2 feet and had preference over unsecured ones but
this institutional creditors foreclose the enforcement of their preference will be
properties of Victorias Milling, they would have equally suspended upon the issuance of the
incurred losses instead of making profits. stay order or upon the appointment of the
Management Committee, Rehabilitation
When the corporation was back on its 2 feet, Receiver, Board or Body.
they sold their equity in Victorias Milling and
made much more money than if they should However, in the event that rehabilitation is no
have foreclosed the assets or properties of longer feasible and claims against the secured
Victorias Milling. or distressed corporation would eventually be
settled, the secured creditors will regain their
Yes, a corporation without sufficient assets to preference.
cover its debts and liabilities may be granted a
breathing spell in order that they may get back For instance, let’s say there are preferred
on its 2 feet and become operational again. creditors but the court issues a suspension
order and appoints a rehabilitation receiver,
Q. WHAT IS THE REASON, THEREFORE, OF board or body.
SUSPENDING ALL ACTIONS FOR CLAIMS
AGAINST THE CORPORATION? In this case, the preferred creditors and the
unsecured or the unpreffered or secured will
The reason for suspending actions for claims have the same status. No one can assert a
against the corporation is not really to enable preference over any other creditor. They will be
the Management Committee or the paid in accordance with the approved
Rehabilitation Receiver to substitute the rehabilitation plan.
defendant in any pending action against it
before any court, tribunal, board or body. (PAL Q. UNDER WHAT CIRCUMSTANCES MAY A
v. Spouses Kurangking) RECEIVER BE APPOINTED?
Obviously, the real justification is to enable to Sec. 6, PD 902-A: A Receiver may be appointed
Management Committee or the Rehabilitation whenever:
Receiver to effectively exercise its or his powers
free from any judicial or extra-judicial 1. It is necessary in order to preserve the
interference that might unduly hinder or rights of the parties litigants; and/or
prevent the rescue of the debtor company. To
allow such other actions to continue would 2. To protect the rights of investing public and
only add to the burden of the Management creditors
Committee or the Rehabilitation Receiver whose
time, effort and resources would be wasted in The situations contemplated in these instances
defending claims against the corporation are serious in nature. There must exist a clear
instead of being directed towards restructuring and imminent danger of losing corporate assets
and/or rehabilitation. if a Receiver or Management Committee is not
appointed.
EQUALITY IN EQUITY
Absent such a danger, such as where there are
In cases of suspension of all actions for claims sufficient assets to sustain the rehabilitation
against a corporation, All preferred creditors plan and both investors and creditors are
will lose their preference. (RCBC v. IAC) amply protected the need of appointing a
Receiver will not exist.
Q. WHAT IS THE EFFECT OF THE
APPOINTMENT OF A MANAGEMENT SERIOUS SITUATION TEST
COMMITTEE, REHABILITATION RECEIVER
OR BOARD/BODY OR ORDER OF Simply put, the purpose of the law in directing
SUSPENSION OF PAYMENTS FOR ALL the appointment of a Receiver is to protect the
ACTIONS FOR CLAIMS AGAINST THE interest of the corporate investors and
CORPORATION? creditors.
For the guidance of the bench and the bar: In the case of Price v. China Banking
Corporation, the only basis of the Court in
1. All claims against the corporation that are appointing a receiver was the finding that the
pending before any court, tribunal or body petition is sufficient in form and in substance.
without distinction as to whether or not the
creditor is secured or unsecured shall be However, it did not specify the reason or
suspended effective upon the order of ground to sustain such a finding. Clearly, the
suspension of payments or upon the petition failed to comply with the serious
appointment of a Management Committee, situation test.
Rehabilitation Receiver, Board or Body.

lOMoARcPSD|7948091
Claims as used in the law would refer to debts In Philippine Islands Corporation v.
or demands of pecuniary nature. All actions for Victorias Milling, unlike the provisions in the
claims against the corporation will be Insolvency Law which exempts secured
suspended accordingly. It refers to debts or creditors from the suspension effect of the
demands of pecuniary nature. It means the order issued by the court in an ordinary
assertion of right to have money paid. It refers suspension of payments proceedings, the
to the right of payment whether reduced or not provisions of PD 902-A, when it comes to the
to a judgment: appointment of a Management Committee or of
a Rehabilitation Receiver, does not contain an
 Liquidated or Unliquidated; exemption for the secured creditor. All creditors
will stand on equal footing.
 Fixed or Contingent;
In Consuelo Metal Corporation v. Planters
 Matured or Unmatured; Development Bank, the Supreme Court held
that a secured creditor’s right for closed
 Disputed or Undisputed; mortgage will merely be suspended upon the
appointment of a Management Committee,
 Equitable; Rehabilitation Receiver, Board or Body, or the
issuance of the stay order. Thus, the creditor or
 Secured or Unsecured. the mortgagee may exercise his right to
foreclose the mortgage upon the termination of
As long as your demand is pecuniary in nature, the rehabilitation receiver proceedings or upon
that will be suspended upon the issuance of the lifting of the stay order.
the stay order by the court or upon the
issuance of an order appointing a Management Because there are instances when, of course,
Committee, Receiver, Board or Body. the court, may have approved a Rehabilitation
Plan. It is to be implemented by the
Once suspension of payments becomes Rehabilitation Receiver or the Management
effective, all actions for claims against the Committee. But there may be supervening
corporation are suspended. (PAL v. Zamora) events that would cause the impracticability of
enforcing or of carrying out the plan as
They are ipso jure automatically suspended in indicated therein.
whatever stage the action may be found.
Q. ARE THE PROPERTIES OF AN
Even in the stage of foreclosure, execution INDIVIDUAL DIRECTOR OR STOCKHOLDER
and/or consolidation, it cannot proceed. They USED AS A SECURITY FOR THE
will all be suspended. CORPORATE OBLIGATION COVERED BY A
SUSPENSION PAYMENTS ORDER BE
In PAL v. Heirs of Zamora, it was ruled that LIKEWISE SUSPENDED?
he suspension of all actions for claims against
the corporation involved embraces all phases of EXAMPLE:
the suit. Be it before the trial court or any
tribunal or before the Supreme Court. A CORPORATION NEEDS MONEY AND IT
SECURES A LOAN FROM A FINANCIAL
No other action may be taken including the INSTITUTION. THE FINANCIAL INSTITUTION
rendition of a judgment. SAYS, “I WILL GIVE OUT THE LOAN,
PROVIDED THAT YOU PUT UP A SECURITY.”
What are automatically suspended are the BUT THE CORPORATION HAS NO
proceedings of a suit and not just payment of SUFFICIENT ASSETS. THE PRESIDENT OF
claims during the execution stage after the case THE CORPORATION THEN PUT UP HIS
had become final and executory. PERSONAL PROPERTY AS SECURITY FOR
THE LOAN. THE LOAN WAS GIVEN BUT THE
Once the process of rehabilitation, however, is CORPORATION WAS STILL UNABLE TO PAY.
completed, the Court naturally will complete THE CREDITOR IS NOW BENT ON
the proceedings on the suspended action. FORECLOSING THE MANSION OF THE
PRESIDENT USED AS SECURITY FOR THE
The actions that are suspended cover all claims LOAN AND THE CORPORATION GOES TO
against the corporation. Whether for damages THE REHABILITATION COURT AND FILED A
founded on a breach of contract of PETITION FOR THE SUSPENSION OF ALL
carriagelabor cases are not also excluded, ACTIONS FOR CLAIMS AGAINST THE
collections suit, or any other claims of CORPORATION. THE APPROPRIATE COURT
pecuniary nature. No exemption in favor of ISSUED THE STAY ORDER. CAN THE
labor claims is mentioned in the law. Neither FINANCIAL CREDITOR PROCEED WITH THE
the claims of plan holders in a pre-need plan FORECLOSURE OF THE PROPERTY USED
are exempted. AS SECURITY FOR THE LOAN OF THE
CORPORATION?

lOMoARcPSD|7948091
Yes. It is not an action for claims against the may be made upon any of the statutory or
corporation. corporate officers indicated in the by-laws or
their respective secretaries. So if it is served
In Union Bank v. CA, the Supreme Court held upon any of the directors, it is valid. The court
that a creditor can demand payment from the will acquire jurisdiction. In fact, if there is an
surety solidarily liable with the corporation assistant finance manager indicated in the by-
seeking rehabilitation. It being not included in laws as one of the officers of the corporation,
the list of stayed claims. Surety whose liability then it is also valid.
is solidary cannot claim protection from the
rehabilitation court, they not being the “Any of the statutory officers or their respective
financially distressed corporation that may be secretaries”.
restored. That is not a claim against the
corporation. Since it is not a claim against the Appointment of Management Committee, Board
corporation, it is not suspended and the action or Body without suspension of actions for
may proceed or the foreclosure may proceed. claims against the corporation
The wording of the law is that, “all actions for
claims against the corporation will thereby be Q. WHEN MAY THE COURT APPOINT A
suspended accordingly.” MANAGEMENT COMMITTEE, BOARD OR
BODY EVEN WITHOUT THE PRAYER FOR
It is the obligation of the receiver or the THE SUSPENSION OF ALL ACTIONS FOR
management committee to enforce or carry out CLAIMS AGAINST THE CORPORATION?
the approved rehabilitation plan. The approved
rehabilitation plan would normally carry the Under Sec. 6[D], 2 requisites must concur:
manner in which the creditors will be paid,
sources and application of funds and the like. 1. It must be shown that the corporate
Under P.D 902-A, for so long as they are acting property is in danger of being wasted or
in good faith, they are not subject to suits. destroyed. That the business of the
They are immune from suits. corporation is being diverted from the
purpose for which it is organized and
Speaking of intra-corporate controversies, (Sec.
5B) it is subject to another set of rules. 2. That there is a serious paralyzation of its
Although the Rules of Court will supplement operations.
the said rules—the interim rules on intra-
corporate controversies. It is semi-summary in In the absence of a strong showing of imminent
nature. danger of dissipation, loss or destruction of
assets or other properties of the corporation,
You have to attach the affidavits of your and the paralysis of its business, the mere
witnesses in the pre-trial which will serve as apprehension of future misconduct based upon
their direct testimony in court. If you do not prior mismanagement will NOT authorize the
attach them, you will not have any evidence. appointment of a management committee,
Subject, of course, to cross examination by the receiver, board or body.
other contending parties. There are prohibited
pleadings inclusive of postponement, motions If you appoint a management committee, you
for reconsideration, and the like. are resting control of the corporate affairs from
the duly elected governing board of the
Venue of actions in intra-corporate corporation. Note, however, in the case of RJ
controversies would be the special commercial Jacinto v. First Women’s Credit Corporation
courts where the principal office of the
corporation is located or is established. Like for The Supreme Court upheld the appointment of
instance, election or appointment of directors a management committee for First Women’s
or officers. Credit Corporation based upon the findings of
the SEC hearing officer. It was based on an
If it is intra-corporate controversy: it can be audited financial statement the accuracy of
filed only in the special commercial court where which was not questioned by the petitioner RJ
the principal officer of the corporation is Jacinto and the defendants in this particular
located or established. case.
In cases of intra-corporate controversies, the The SEC appointed an interim management

ruling laid down to the effect that service of committee based on the audited financial
summons must be made upon the persons statements which was never questioned by RJ
named in the statute does not apply in cases of Jacinto.
intra corporate controversies. It is subject to a
different rule, the interim rules on intra The funds of the corporation were being
corporate controversies. transferred to the RJ Group of Companies
without corresponding board resolutions. There
Under sec. 5, rule 2 of the interim rules on was suspension of lending operations.
intra-corporate controversies: If the defendant
is a domestic corporation, service of summons

lOMoARcPSD|7948091
The limitation of FWCC’s operations as a mere Even pre-need plans are considered as
collection of receivables as well as the inability securities under the definition of Sec. 3. This
to pay its pending obligations amply support definition of pre-need plans already came out
the conclusion that there is imminent danger of in a decision of the SC in the case of Abrera v.
dissipation, loss, wastage or destruction of Barsa.
corporate assets and/or properties.
Pre-need is a contract which provides for the
Imminent Danger of dissipation, loss, wastage performance of future services or the payment
or destruction of corporate assets and the of future monetary consideration at the time of
paralysis of its business. These are the twin actual need for which the planholders pay in
requirements before the proper forum may be cash or installment at stated prices with or
justified in appointing a Management without interest or insurance coverage and
Committee, Board or Body under Sec. 6 [D] of would include life pension, education,
P.D 902-A. interment and other plans which the SEC may
from time to time approve.
Note that the court cannot unilaterally appoint
a Management Committee in businesses which So it is the SEC that enforces and implements
are under the supervision of other government the provisions of the Securities Regulation
agencies. Code and therefore, it has jurisdiction over
these pre-need plans of the moment.
Q. FOR INSTANCE, IN CASE OF BANKING,
CAN THE COURT PROCEED WITHOUT THE These securities enumerated in Sec. 3 as said
INTERVENTION OF THE CENTRAL BANK? cannot be sold, offered for sale or distributed or
issued to the public without a registration
No. It must be with the consent of the Central statement having been filed and approved by
Bank or the Insurance Commission if it is an the SEC.
insurance company.
Note Sec. 9 and 10 which enumerate certain
SECURITIES REGULATION CODE securities as exempted from the registration
statement of the SEC and exempt transactions.
The Securities Regulation Code was passed and They need not be registered with the SEC
it replaced the old law which used to be what is before they may be sold openly to the general
called as Merit Regulation where corporations public.
who wanted to list their shares in the stock
exchange would file an application for the sale Even if they are duly registered pursuant to a
of its securities in the stock exchange and it registration statement filed and approved by
will be the SEC who will determine whether or the Securities and Exchange Commission, no
not the public should risk their money and buy person can engage in the buying or selling of
the shares of stocks in the said exchange to securities either as broker, dealer, salesman or
what is called now as the “Full Disclosure associated person unless they are duly
Rule”. registered and licensed by the SEC. They have
to pass a qualifying exam before they may be
For so long as there is full and complete qualified to act as brokers, dealers or
disclosure of the security or the shares of the salesman.
issuer, the issuer is what we call the
corporation whose shares are being listed in If you want to buy or sell securities in the stock
the stock exchange or whose shares will be exchange, you do it you course it through your
transacted or sold openly in the said exchange. broker.
For as long as there is complete and full Example:

disclosure of the issue in the market will be up
to the investing public whether or not they will You have a stock certificate of San Miguel
venture into that particular market or the Corporation. You want to sell those shares of
issue. It’s no longer the SEC which will stock. You have to course it through your
determine whether it is worth investing into. broker. You must either have a cash account or
margin account with your broker in order that
Securities as defined under Sec. 3, cannot be you may engage in the buying or selling of
sold, offered for sale or distributed to the public securities in the stock exchange.
without a registration statement having been
filed and approved by the said SEC under Sec. Brokers are persons who are engaged in the
8 thereof. business of buying and/or selling securities for
their customers or for the account of others.
The definition of securities under Sec. 3 is
broad enough particularly the last item thereof Salesman, agent, of course, would be those
to cover any type of instrument which may in that are employed by the broker for the
the future be determined by the SEC to have purchase and sale of securities.
the same effect like any bonds, notes,
evidences of indebtedness or shares of stocks.

lOMoARcPSD|7948091
Dealers on the other hand are those engaged in SEC may prescribe of the outstanding shares of
the buying and selling of securities for their the issuer, they shall submit a report
own account. identifying the beneficial owners of the shares.
The Issuer is what is called the corporation This is not required in ordinary stock
whose shares are being traded or listed in the corporations.
stock exchange.
This is for the protection of public investors.
Q. WHAT IS TENDER OFFER? WHEN
SHOULD A PERSON MAKE A TENDER Even if the management now will solicit
OFFER? proxies, the management is now required to
submit what is called as “Proxy Statement”
Section 19 is the provision involved. attaching therewith the Proxy Form. The Proxy
Statement consists of no less than 28 pages. It
(1) Any person or group of persons acting in contains data as to why management is
concert and who intends to acquire at least soliciting proxies including the agenda that will
15% of any class of an equity security of a be taken up for that meeting. If you do not
listed corporation, those whose shares are comply with that, then you will be opening
listed in the stock exchange for trading; or yourself to the penal sanctions provided for
under Sec. 73 of the SRC.
(2) Any class of equity security of a corporation
with assets of at least 50M and having 200 or The penal sanctions of Sec. 73 of the SRC
more stockholders with at least 100 shares include any violation of the provisions of the
each; or SRC including the rules and regulations
implemented being enforced by the SEC
(3) Those who intend to acquire at least 30% of pursuant to its rule-making power. The penal
such equity over a period of 12 months shall sanction is a fine of not less than P50,000 nor
make a tender offer to all stockholders by filing more than P5M and/or 7-21 years
with the SEC a declaration to that effect. imprisonment at the discretion of the court.
If you want to acquire 15% of the shares of INDEPENDENT DIRECTOR

stocks of a listed company, you have to offer to
all existing stockholders to acquire their shares He is there supposedly to protect the interest of
at the same amount or under the same terms the general investing public. He must have an
and condition that you intend to acquire the independent judgment from the management
15%. itself.
The rules and regulations of the SEC is very This is covered by Sec. 38 of the SRC.
clear. Once that 15% has been filled up, let’s
say: Just like the Tender Offer rule, any corporation
with a class of equity securities listed for
Example: trading in an exchange, or
100 of the existing stockholders offered to sell With assets in excess again of 50M and having
their shares under the terms and conditions 200 or more shareholders, at least 200 of them
which the person intending to acquire 15% of holding at least 100 shares
the shares will be able to accommodate. Then if
it is fully accommodated, then that’s the end of Must appoint or elect at least 2 independent
the tender offer. It’s a first-come-first-serve directors or such independent directors shall
basis. Or, of course, 30%, that is, if he wants to constitute at least 20% of the membership in
acquire 30% of such an equity security over a the Board of Directors whichever is lesser.
period of 12 months. Same rule applies.
Q. WHO MAY QUALIFY TO BE AN
PROXY SOLICITATION INDEPENDENT DIRECTOR?
Under the Corporation Code, Proxies is a An independent director is a person other than
matter of right to stockholders and for the an officer, or employee of the corporation, its
validity of the proxy, it is enough that it be parent or subsidiaries or any other individual
signed by the stockholder. It need not be having any relationship with the corporation
notarized. If you solicit proxies under the which would interfere with the exercise of
Corporation Code and it is not listed in the independent judgment in carrying out the
stock exchange, nobody cares. responsibilities of a director apart from his fees
and shareholdings which should not exceed 2%
But under the Proxy Solicitation Rules of the of the outstanding stocks
Securities Regulation Code:
If it exceeds 2%, you are not qualified to be an
A broker or dealer who holds or acquire proxies independent director. Your stockholdings
for at least 10% or as such percentage as the should not be less than 2%

lOMoARcPSD|7948091
Is INDEPENDENT of management and free If that is the case and he is in possession of a

from any business or other relationship which material non-public information, he cannot buy
could or could reasonably perceive to materially or sell the security involved.
interfere with its exercise of independent
judgment in carrying out his responsibilities as Q. MANILA GAS CORPORATION IS ENGAGED
a director in the corporation. IN THE SEARCH AND DRILLING OF
NATURAL GAS. IT WAS ABLE TO DRILL A
In the case of Equitable, the independent NATURAL GAS OF COMMERCIAL QUANTITY.
director they elected is also a director of a THEY DID NOT DISCLOSE THE SAME TO
subsidiary of Equitable Bank and therefore, THE GENERAL PUBLIC. WHAT THEY DID
based on this rules of the SEC, he cannot WAS, THE DIRECTORS AND OFFICERS
qualify to be an independent director. Because BOUGHT THE SHARES IN THE STOCK
it says, “a person other than officer or employee EXCHANGE OF MANILA GAS ITSELF. THEY
of the corporation or its parents or DID NEVER DISCLOSE TO THE PUBLIC. ON
subsidiaries.” THE FOLLOWING DAY, KNOWING THAT IT
IS ILLEGAL FOR THEM TO TRADE IN THE
He is not qualified to be an independent PARTICULAR SECURITY, THEY WENT TO A
director because he has a relationship with the PRINTER IN ORDER TO DISSEMINATE THE
corporation itself through the subsidiary of the INFORMATION THAT IN FACT THEY WERE
corporation. It will interfere with the ABLE TO DRILL A NATURAL GAS OF
management judgment of the particular COMMERCIAL QUANTITY. THE PRINTER,
director concerned and he will not qualify to be LOOKING AT THE DATA, INSTEAD OF
an independent director. PRINTING IT IMMEDIATELY, ALSO BOUGHT
THE SHARES OF MANILA GAS BEFORE HE
INSIDER TRADING PRINTED THE MATERIAL. WHAT IS THE
OFFENSE COMMITTED BY THE OFFICER OF
Under Sec. 27, it is unlawful for an insider to THE CORPORATION AND/OR OF THE
buy or sell the security of an issuer while in PRINTER IF ANY?
possession of a material non-public
information Insider Trading.
With respect thereto of the securities, that is, is Q. IS THE PRINTER ALSO LIABLE? WHY?
not generally available to the public unless: WHO IS AN INSIDER?
(1) The insider proves that the information was Yes. Section 3.8
not gained from such relationship; or
The issuer, director or officer or any person
(2) If the other party selling to or buying from performing similar functions or a person
the insider is identified and the insider controlling the issuer. A person whose
proves that he disclosed the information to relationship or former relationship to the issuer
the other party; or gives or gave him access to material
information about the issuer or the security
(3) He had reason to believe that the other that is not generally available to the public.
party is also in possession of the
information. The printer in this case was able to gain access
to material information about the issuer that is
While in possession of a material non-public not generally available to the public. He’s a
information, the insider cannot buy or sell the person whose relationship or former
security involved. It is illegal under Sec. 27 of relationship with respect to the issuer gave him
the SRC. access to the information. He is also an insider.
Q. WHAT IS “MATERIAL NON-PUBLIC Even government employees, directors or

INFORMATION” SO AS TO BAR THE officers of an exchange or clearing agencies or
INSIDER FROM BUYING OR SELLING THE any person who learns such information by
PARTICULAR SECURITY? communication from any of these persons
would be considered insiders.
Material non-public information, if it has not
been generally disclosed to the public and And while they are in possession of this
would likely affect the market price of the material non-public information, they cannot
security after being disseminated to the public buy or sell the particular security involved.
and the lapse of reasonable time for the market
to absorb the information or would be Even investment contracts are included in the
considered by a reasonable person important enumeration of securities. Normally, this is
under the circumstance in determining his also what is being used by the SEC and the
course of action, that is, whether or not to buy DOJ in pinning down the operators of what is
or sell the security or hold on to the particular generally called, “The Pyramiding Scheme
security. Operators”.

lOMoARcPSD|7948091
For purposes of the coverage of the meaning of security almost at the same time, almost at the
securities, investment contract is: same price and almost at the same issue.
A contract, transaction, or scheme whereby a Example:

person invests his money in a common
enterprise and is led to expect profits solely Mr. X called Broker 1 to Buy 1M shares of A
from the efforts of the promoter or the 3rd corporation at P1.20 per share at 9:30am;
party. Trading starts at 9:30
In People v. Petralba, the Supreme Court held: 9:32, he called Broker 2 to sell 1M shares at
The touchstone is the presence of an P1.20 per share.
investment in a common venture premised on a
reasonable expectation of profits to be derived The same, he matched his own order. Mr. X
from the entrepreneurial or managerial efforts placed an order for the buy and sale of the
of others. particular security in the same issue, almost
the same volume, the same price. That is
You cannot sell these securities to the general Match Order.
public without a registration statement having
been filed an approved by the SEC. The Q. IS THIS ACTUATION OF MR. X ILLEGAL?
“general public” meaning, more than 19
persons. Not just yet. It must have the effect of showing
a false of active trading in the particular issue.
If you sell securities to more than 19 persons One transaction will not make a false
and it is not covered by exempt securities or appearance of active trading in the particular
exempt transactions under Sec. 9 and 10, you security. Mr. X has only 1 transaction so it is
cannot do so without a registration statement not yet illegal.
having been filed and approved by the SEC.
It will only become illegal only if it creates false
If you do that, you are violating the SRC and or misleading appearance of active trading in
you will find yourself facing the penal sanctions the particular issue.
provided for under Sec. 73 or even perhaps as
what the DOJ did, they may file a criminal Example:
action for Syndicated Estafa which is non-
bailable. Mr. X had actually 7 Broker firms, broker 3, 4,
5 and 6. Let us assume that account #1 is
OTHER FORMS OF FRAUDULENT AND under his name, account #3 is under his name,
MARKET MANIPULATIONS account #5 under his name and vice versa. All
of them were under his name.
(1) Wash Sale
At 9:40, he calls broker 3 to buy 1M shares at
Any transaction in a security which involves no P1.30 per share.
change in the beneficial ownership thereof is
Wash Sale. He then call broker 4 to sell 1M shares at P1.30
per share at 10:05 all the way down until 11:59
Example: before lunch.
Mr. X is the owner of 10M shares of the He calls broker 5 and says, “Buy 1M shares at
particular shares of stocks. He has brokers, P2.00 per share” and during that particular
Broker 1 and Broker 2. day, Mr. X has placed 22 buy and sell orders
for the same security, using the same scheme
He calls his Broker 1 and say, “Buy 1M shares Wash Sale and Match Order.
of A company at P1.20 per share.”
Now, you have a false or misleading
He says to Broker 2, “Sell 1M shares of the appearance of active trading in the particular
same corporate issue for P1.20”. issue. It now becomes illegal.
They matched and there was a trade. Mr. X He may have also committed what we call
sold 1M shares in his name and he bought 1M “Painting the Tape” and “Marking the Close”
shares also in his account with Broker 2. There
was no change in the beneficial ownership of (3) Painting the Tape
the particular issue at hand. This is Wash Sale.
Refers to the buying and selling of securities to
(2) Match orders fix the price of the particular security either of
increasing or of decreasing the value of the
The buying or selling of a particular security shares or the security during regular trading
knowing that another interested party will also hours.
offer to buy and/or sell the same type of

lOMoARcPSD|7948091
Pushing up the price of the security, that is Sept. 9, the bombing happened. American
Painting the Tape. Airlines is the airline involved. The value of the
shares of American Airline on that very same
(4) Marking the Close day went down to $0.50. Sept. 10, the insider
called his broker to buy 1M shares of American
If you place a buy or sell order near or very Airlines at $0.50. He now has shares.
near the closing hours of the trading day. So
much so that no person can match your order On the 4th day, a buyer will ask for the shares.
anymore. He will say that the shares are with his broker.
There you have it. The transaction has been
Example: completed. He complied with his part of the
obligation.
You placed an order at 11:59, 1 second left
before the market closes, of P2.00 per share. SETTLEMENT OFFERS
You have Marked the Close. Meaning, the At any time during an investigation or
following trading day, all others selling their proceeding under this Code, the parties being
shares, will of course, sell their shares at investigated and/or charged, may propose in
P2.00. writing an offer of settlement with the SEC.
Upon receipt of such offer or settlement, the
(4) Insider Trading Commission may consider the offer based on
timing, the nature of the investigation or
While in possession of material information proceeding, and the public interest.
non-public, you cannot trade or deal in the
particular issue of the said shares of stocks. It The commission may only agree to a settlement
is also illegal. based on its finding that the settlement is in
the public interest. Any agreement to settle
(5) Short Sale shall have no legal effect until publicly
disclosed and such decision may be made
Selling of security which the vendor or the without a determination of the guilt on the part
seller does not own, possess or hold. of the person making it.
Under the Code, Short Sale is illegal if it is not Example:

in accordance with the rules and regulations of
the SEC. There was a short sale. The SEC has no rules.
It is therefore, illegal. So the SEC conducts an
Short sale, therefore, is illegal per se at this investigation regarding the matter at hand.
point in time if the SEC is not yet or has not During the investigation, he makes an offer
yet come out with the rules and regulations with the SEC, “I will pay P2M as fine for what I
governing Short Sale. did.”
(6) T3 or T4 Rule Considering the timing, the public interest

involved, and the disclosure made to the
Transaction date plus 3 days or Transaction public, the SEC may accept the offer that he
date plus 4 days pay P2M instead. If the SEC will accept the
offer, that will be the end of the investigation
Example: without finding the guilt of the party involved.
You transacted with the particular security, for Of course, if it will have an effect on the general
instance: public, the SEC will decline.
T3: Today you buy, 3 days thereafter, you must LIMITATIONS OF ACTION
pay the acquisition cost of the share; Today you
sold 100M shares, plus 3 days, you must No action shall be maintained to enforce any
deliver the stock certificate. liability created under any other provision of
the Code unless:
Example:
(1) Brought within 2 years after the discovery
Assume that there is an insider that knew that of the facts constituting the cause of action;
the twin towers in New York will be bombed by and
Osama Bin Laden, using the American Airlines
Planes. American Airlines shares are being (2) Within 5 years after such cause of action
traded in most of the cities of the world. The accrued.
value of American Airlines shares is $1.20 per
share. The insider then sells 1M shares of
American Airlines at $1.00 per share. But in
reality, he has no shares.

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lOMoARcPSD|7948091

Revised Corporation Reviewer pdf

Accounting (Lyceum of the Philippines University)

StuDocu is not sponsored or endorsed by any college or university

AUSL/CORPORATION LAW REVIEWER/AJP-SFO

ARELLANO UNIVERSITY SCHOOL OF LAW awarded. (MERALCO vs. Team Electronics

By: PARRENO, ANTONY J. DOCTRINE OF LIMITED CAPACITY in the

DEFINITION OF A CORPORATION Thus, the definition that it has the powers,

When the corporation has a reputation that is

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Q. WHAT WOULD BE THE IMPORTANCE OF This cannot be done in case of a Stock

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Cummulative Voting is a matter of Right in LAWS GOVERNING EMPLOYER-EMPLOYEE

Whereas, in Non-Stock Corporations unless (2) Civil Service Law

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COMMENCEMENT OF CORPORATE 4. The term for which the corporation is to

Section 19. Commencement of corporate 5. The names, nationalities and residences of

1. The name of the corporation; Section 15. Forms of Articles of Incorporation.

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ARTICLE 2. PURPOSE CLAUSE. Also true in a Non-Stock Corporation, unless

This is corollary to the Doctrine of Limited (3) Service of Summons

Allowing a collateral attack on the part of the ARTICLE 4. CORPORATE TERM

(2) Venue of Meetings of stockholders XPN:

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Stockholders or Members originally forming the Q: IN THIS CASE, ALL THE

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Again, there is no Citizenship Requirement, Section 27. Disqualification of directors,

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ARTICLE 10. TREASURER Q. WHAT IS CAPITAL?

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DOCTRINE OF EQUALITY OF SHARES The provisions of this Title shall primarily

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In Voting and Non-Voting shares COMMON SHARES

Founder’s Shares It must be observed, however, if there are more

Example: However, they are not absolutely denied the

Minimum Ownership of Filipino is (60%). So “Except as otherwise provided in the

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