CORPORATION LAW

Midterm Exam Reviewer

I. Corporation - Created by operation of law;

- Operation of law – authority of law
- The law authorizing the creation of private corporations: Corporation Code
- Art. XII, Sec. 6, The 1987 Philippine Constitution
The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in
the interest of the common good and subject to the test of economic viability
o National Development Corp. v. Philippine Veterans
 New Agrix, Inc. was created by special decree notwithstanding the
provision of Art. XIV, Sec. 4 of the 1973 Constitution. The new
corporation is neither owned nor controlled by the government. New
Agrix, Inc. is entirely private and so should have been organized
under the Corporation Law in accordance with the above-cited
constitutional provision.
 The new corporation, being neither owned nor controlled by the
Government, should have been created only by general and not
special law

II. Theories 1. Concession Theory

- A corporation is an artificial creature without any existence until it has received
the imprimatur of the state acting according to law through the SEC (Tayag v.
Benguet)
- Tayag v. Benguet Inc.
o It owes its life to the state, its birth being purely dependent on its will
o Berle: A corporation was conceived as an artificial person, owing its
existence through creation by a sovereign power
o CJ Marshall: Corporation is “an artificial being, invisible, intangible, and
existing only in contemplation of law”
o Fletcher: A corporation is not in fact and in reality a person, but the law
treats it as though it were a person by process of fiction, or by regarding
it as an artificial person distinct and separate from its individual
stockholders… It owes its existence to law. It is an artificial person
created by law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter
o Dean Pound: A juristic person, resulting from an association of human
beings granted legal personality by the state, puts the matter neatly
o It rejects the Genossenchaft Theory
2. Genossenchaft Theory
- Treats a corporation as “the reality of the group as a social and legal entity,
independent of state recognition and concession” (Tayag v. Benguet Inc.)

III. Public
Corporation Public Corporation Private Corporation
v. Private As to Government Control
Corporation Subject to Governmental visitation and Not subject to visitation, control, or
control being mere instrumentalities of charge by the State, except in the
the State exercise of police power
As to Consent as to Creation
May be created without the consent of Consent of the incorporators is
the locality to be affected necessary to the creation
As to Governing Law
Special Laws and Local Government Law on Private Corporations
Code

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 Camporedondo v. NLRC
Baluyot v. Holganza
Liban v. Gordon
- Art. VI, Sec. 13, The 1987 Philippine Constitution
No Senator or Member of the House of Representatives may hold any other
office or employment in the Government, or any subdivision, agency, or
instrumentality thereof, including GOCCs or their subsidiaries, during his term
without forfeiting his seat. Neither shall he be appointed to any office which may
have been created or the emoluments thereof increased during the term for
which he was elected

- Camporedondo v. NLRC
- Flores v. Drilon
- What were the contentions of Gordon?
 Lack of standing
 Not a taxpayer suits
 Declaratory Relief which is outside the jurisdiction of the court
 PNRC is not a GOCC
- Ruling:
 PNRC does not fall under the definition of a GOCC
- Dissenting Opinion:
 J. Nachura: It is not a quo warranto. It must be treated as a petition for
prohibition.

IV. Corporation
v. Partnership Corporation Partnership
Commencement
Art. 1784, NCC Sec. 19. Commencement of corporate
A partnership begins from the existence
moment of the execution of the A private corporation formed or
contract, unless it is otherwise organized under this Code
stipulated commences to have corporate
existence and juridical
personality and is deemed
incorporated from the date the
SEC issues certificate of
incorporation under its official
seal; and thereupon the
incorporators,
stockholders/members and
their successors shall constitute
a body politic and corporate
under the name stated in the
articles of incorporation for the
period of time mentioned
therein, unless said period is
extended or the corporation is
sooner dissolved in accordance
with law
As to Creation
Created by mere agreement of the Created by law or by operation of law
parties
Capacity
Doctrine of Limited Capacity Doctrine of General Capacity
The powers of the corporation
are limited by the Corporation
Code, special laws
As to Number of Organizers
May be organized by at least 2 persons Requires at least 5 incorporators
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 (except a corporation sole)
As to Powers
Partnership may exercise any power Corporation can exercise only the
authorized by the partners (provided it powers expressly granted by law or
is not contrary to law, morals, good implied from those granted or incident
customs, public order, public policy) to its existence
As to Management
Unless agreed upon, every partner is The power to do business and manage
an agent of the partnership its affairs is vested in the board of
directors or trustees
As to Effect of management
A partner as such can sue a co-partner The suit against a member of the board
who mismanages of directors or trustees who
mismanages must be in the name of
the corporation
As to Right of Succession
Partnership has no right of succession Corporation has right of succession
As to Extent of Liability to Third Persons
Partners are liable personally and Stockholders are liable only to the
subsidiarily (sometimes solidarily) for extent of the shares subscribed by them
partnership debts to third persons (limited liability rule)
As to Transfer of Interest
Partner cannot transfer his interest in Stockholder has generally the right to
the partnership so as to make the transfer his shares without prior consent
transferee a partner without unanimous of the other stockholders because
consent of all the existing partners corporation is not based on this
because the partnership is based on principle
the principle of delectus personarum
As to Term of Existence
Partnership may be established for any Corporation may not be formed for a
period of time stipulated by the partners term in excess of 50 years extendible to
not more than 50 years in any one
instance
As to Firm Name
Limited partnership is required by law to Corporation may adopt any name
add the word “Ltd” to its name provided it is not the same as or similar
to any registered firm name
As to Dissolution
May be dissolved at any time by any or Can only be dissolved with the consent
all of the partners of the State
As to Governing Law
Governed by the NCC Governed by the Corporation Code

V. Corporation Consequences of being a person

1. It has a Life
2. It has a right of Succession
3. It has Liabilities
4. It has Property Rights
5. It has Obligations
6. It has Nationality
7. It has Residence

A. Artificial Art. 44, NCC

Being (3) Corporations, partnerships and associations for private interest or purpose to
which the law grants a juridical personality, separate and distinct from that of each
shareholder, partner or member.
- If a person, it has a distinct personality
- It must have a life
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 - Consequences

When does the life of a corporation commence?

- Sec. 19. Commencement of corporate existence
A private corporation formed or organized under this Code commences
to have corporate existence and juridical personality and is deemed
incorporated from the date the SEC issues certificate of incorporation
under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period
is extended or the corporation is sooner dissolved in accordance with
law.

Extent of the life of a Corporation

- Sec. 11. Corporate term
A corporation shall exist for a period not exceeding 50 years from the
date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding 50 years in any
single instance by an amendment of the articles of incorporation, in
accordance with this Code: Provided, That no extension can be made
earlier than 5 years prior to the original or subsequent expiry days unless
there are justifiable reasons for an earlier extension as may be
determined by the SEC

Obligation of a Corporation
- To formally organize and commence
- Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation
If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within 2 years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least 5 years, the same shall
be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation

This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the SEC.

B. Powers Classification of Corporate Powers

- Under Sec. 2. Corporation defined
o A corporation is an artificial being created by operation of law, having the
right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.
- Expressly authorized by law
- Incidental to its existence
- Under Sec. 45. Ultra vires acts of corporations
o No corporation under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its articles of incorporation
and except such as are necessary or incidental to the exercise of the
powers so conferred.
- Necessary
- Incidental
o Whether an act is necessary or incidental depends on the logical relation of
the acts
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  Is the relationship substantial?

*Ultra vires acts – acts done outside the powers of the corporation
- Are ultra vires acts necessarily illegal?
o No. It may be legal but it is unauthorized
o Illegal acts can never be ratified.
o Ultra vires acts may possibly be ratified
o Every illegal act is ultra vires. Not all ultra vires acts are illegal
- Illustration:
o A corporation is established to manufacture modern jeepneys. Can it
manufacture taho and fishballs?
 No. The manufacture of such products are far from its primary
purpose
o A corporation that manufactures cars operates 24 hours a day, in 3
shifts. The company established dorms for its employees and rented it to
them for a minimum amount. It built an electricity plant for the dormitory.
Is the electricity plant an ultra vires act? What if it sold the electricity
produced to the public?
 No. Because it is for the benefit of its employees. It is an implied
power of the corporation to take care of its employees. However,
the selling of the electricity to the public is an ultra vires act since
it is different from the primary purpose of the company
 As long as there is a logical relation between the primary and
secondary purpose of the corporation, the corporation acted
within its power.
- Can be void or unenforceable
o It is unenforceable if none of the parties have not yet performed any of
the acts
 Art. 1390
 Art. 1393
 Art. 1392

University of Mindanao v. BSP

- Can a third person’s property be used as collateral for another’s property?
o Art. 2085
- What is the main doctrine from the case?
o Third persons dealing with corporations cannot assume that corporations
have powers. It is up to those persons dealing with corporations to
determine their competence as expressly defined by the law and their
articles of incorporation
- What is the obiter dictum?

A. General Powers
- Art. 46, NCC
- Juridical person may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization
B. Express Powers
- Those expressly authorized by the Corporation Code and other laws, and its Articles
of Incorporation or Charter
- Exercised by the board unless other specific provisions provide otherwise
- Sec. 36. Corporate powers and capacity
1. To sue and be sued in its corporate name
- How to summon a corporation in the Philippines?
Sec. 11, Rule 14, ROC
When the defendant is a corporation, partnership or association
organized under the laws of the Philippines with a juridical
personality, service may be made on the president, managing
partner, general manager, corporate secretary, treasurer, or in-
house counsel
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 If the corporation is not registered and it has no resident agent

Sec. 12, Rule 14, ROC

When the defendant is a foreign private juridical entity which has
transacted business in the Philippines, service may be made on
its resident agent designated in accordance with law for that
purpose, or, if there be no resident agent on the government
official designated by law to that effect, or any of its officers or
agents within the Philippines

If the foreign private juridical entity is not registered in the

Philippines or has no resident agent, service may with leave of
court, be effected out of the Philippines through any of the
following means:
a. By personal service, coursed through the appropriate court
in the foreign country with the assistance of the DFA
b. By publication once in a newspaper of general circulation
in the country where the defendant may be found and by
serving copy of the summons and the court order by
registered mail at the last known address of the defendant;
c. By facsimile or any recognized electronic means that could
generate proof of service; or
d. By such other means as the court may in its discretion
direct

 How do you summon an unincorporated entity?

Sec. 8, Rule 14, ROC
When persons associated n an entity without juridical personality
are sued under the name by which they are generally or
commonly known, service may be effected upon all the
defendants by serving upon any one of them, or upon the person
in charge of the office or place of business maintained in such
name. But such service shall not bind individually any person
whose connection with the entity has, upon due notice, been
severed before the action was brought.

Sec. 15, Rule 3, ROC

When two or more persons not organized as an entity with
juridical personality enter into which a transaction, they may be
sued under the name by which they are generally or commonly
known

In the answer of such defendant, the names and addresses of

the person composing said entity must all be revealed
 When a corporation sues, the corporation must follow:
 Rule 7, Sec. 5. Certification against forum shopping
 Failure to present is a ground for dismissal
 Who will sign for the corporation?
 A person authorized by the Board
 Sec. 23. The board of directors or trustees
Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall
be exercised, all business conducted an all property of
such corporations controlled and held by the board of
directors or trustees x x x
 Liberal Construction Rule
 Cagayan Valley Drug Corporation v. CIR, 545 SCRA
105
 Even without a board authorization, the
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 following can sign because they have personal
knowledge and they are aware if a previous
case has been filed
i. Chairperson
ii. President
iii. General/Acting Manager
iv. Personnel Officer
v. Labor Specialist
 Better practice: Presentation of a Board
authorization
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
 If all incorporators die, it will not affect the life of the corporation
 Illustration: Mr. X is the president of ABC Corporation. ABC Corp. is the
creditor of XYZ Corp. XYZ Corp defaulted. ABC decided to sue. The caption
of the case are as follows
Mr. X, President of ABC Corp. v. XYZ Corp.
Is the caption correct?
 No. Mr. X has no legal standing against XYZ. ABC Corp. has a
distinct and separate juridical personality from Mr. X.
What is the correct caption?
ABC. Corp. v. XYZ Corp.
If XYZ Corp. files a Motion to Dismiss against ABC, what is her ground?
That the pleading asserting the claim states no cause of action
(Rule 16, Sec. 1 (g))
However, the Court should not dismiss the case. Neither misjoinder
nor joinder of parties is ground for dismissal of an action. (Rule 3,
Sec. 11)
The Court should order that ABC be impleaded (Rule 16, Sec. 3)
3. To adopt and use of Corporate seal
A seal is not required for the validity of any corporate act. It is not
indispensable. However, a seal serves as a prima facie evidence
that the instrument to which it is affixed is the act of a corporation
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals or public policy, and to amend
or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with real and personal property, including
securities and bonds of other corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution
Requirements:
 Reasonably and necessarily required by the transaction of
the lawful business of the corporation; and
 Subject to limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in
this Code;
9. To make reasonable donations for public welfare, hospital, charitable,
cultural, scientific, civic or similar purposes
Except: Donations to any
i. Political party
ii. Candidate
iii. Partisan political activity
10. To establish Pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees;
11. To exercise Other powers essential or necessary to carry out its purposes;

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C. Implied powers
- Those that can be inferred from or necessary for the exercise of the express powers
- Sec. 6. Classification of shares
 What is the limitation in classification of shares?
Articles of Incorporation

Preferred shares Common shares

Issued by any corporation that may Basic class of stock ordinarily
be given preference in the distribution and usually issued without
of the assets of the corporation in extraordinary rights and
case of liquidation and in the privileges, and the owners
distribution of dividends, or such thereof of the corporation and in
other preferences as may be stated in its assets upon dissolution and,
the articles of incorporation which are likewise, in the management of
not violative of the provisions of the its affairs without preference or
Code advantage whatsoever

Shares that may be deprived of Have complete voting rights

voting rights
Except:
Why are they deprived of the right to a) Delinquent shares
vote? (Sec. 71)
b) Treasury shares
(Sec. 9)
May be issued only with a stated par
value

Board of directors, where authorized

in the articles of incorporation, may fix
the terms and conditions of preferred
shares of stock or any series; such
terms and conditions shall be
effective upon the filing of a certificate
thereof with the SEC

Terms and conditions – included in

the articles of incorporation and by-
laws

Absent authorization, what will

happen?

Par value Without par value

Definition
Shares with a value fixed in the Shares without any stated value
Articles of Incorporation and appearing on the face of the
certificates of stock certificate of stock

The issued value will be fixed by

the Board of Directors and stated
in the certificates or articles of
incorporation
Advantages
Easily sold as the public is more Issued as fully paid and non-
attracted to buy this kind of share assessable

Greater protection to creditors Price is flexible

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 Enjoy wider distribution because it
is low-priced

Tell no untruth concerning the

value of the stockholder’s
contribution
Disadvantages
Subscribers are liable to the Legalize issuance of large stock for
corporate creditors for their unpaid property
subscription
Conceal money for property
The stated value is not an accurate represented by the shares
criterion of its true value
Promote the issuance of watered
stock

Lesser protection of creditors

- Limitations of no par value

1. Deemed fully paid and non-assessable.
Holder of such shares shall not be liable to the corporation or to its creditors
2. Consideration should not be less than P5.00
3. Entire consideration received shall be treated as capital and shall not be
available for distribution as dividends
4. Corporations not allowed to issue no par value:
a) Banks
b) Trust companies
c) Insurance companies
d) Public utilities
e) Building and loan associations
5. The AOI must state the fact that it issued no par value shares as well as the
number of said shares;
- Sec. 62. Consideration for stocks
Stocks shall not be issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or a combination of any
two or more of the following:
(5) Amounts transferred from unrestricted retained earnings to stated capital

Founders' shares Sec. 7

Classified as such in the articles of incorporation
may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided
that where the exclusive right to vote and be
voted for in the election of directors is granted, it
must be for a limited period not to exceed 5
years subject to the approval of the SEC
Redeemable shares Sec. 8
May be issued by the corporation when
expressly so provided in the articles of
incorporation. They may be purchased or taken
up by the corporation upon the expiration of a
fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and
conditions as may be stated in the articles of
incorporation, which terms and conditions must
also be stated in the certificate of stock
representing said shares
Treasury shares Sec. 9

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 Shares of stock which have been issued and
fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption,
donation or through some other lawful means.
Such shares may again be disposed of for a
reasonable price fixed by the board of directors.

Incorporator Corporator
As to Nature of Membership
Signatory to the Articles of Stockholder (stock corporation)
Incorporation Member (non-stock corporation)
As to Contractual capacity
Must have contractual capacity May be such through a guardian
As to Permanence
Fait accompli; accomplished fact They may cease to be such if they
(the Articles of Incorporation subsequently lose their
cannot be amended to replace shareholdings
them)
As to Number
Number is limited to 5-15 No restriction as to number

- Sec. 16. Amendment of Articles of Incorporation

 Limitations:
Provisions of the Code
Special Law
Legitimate purpose
Voting requirement
a) How does death affect the corporation?
b) Hypo: There are 15 members of the Board of Directors who went out
on an excursion. 3 drowned and died. 1 over-ate and died. How many
are required to vote for amendments?
 Sec. 25. Corporate officers, quorum
(2) x x x Unless the articles of incorporation or the by-laws provide
for a greater majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business and every
decision of at least a majority of the directors or trustees present
at a meeting at which there is a quorum shall be valid as a
corporate act, except for the election of officers which shall require
the vote of a majority of all the members of the board.

 Requirements:
 Majority vote of the board of directors/trustees
 Vote or written assent of the stockholders representing at least:
i. 2/3 of the outstanding capital stock
o Without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of the
Code
ii. 2/3 of the members if it be a non-stock corporation
 Original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation
 Amended articles shall be indicated by underscoring the change/s
made
 Copy thereof duly certified under oath by the corporate secretary and
a majority of the directors or trustees stating the fact that said
amendment/s have been duly approved by the required vote of the
stockholders or members, shall be submitted to the SEC
 Amendments shall take effect upon their approval by the SEC or from the
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 date of filing with the said Commission if not acted upon within 6 months
from the date of filing for a cause not attributable to the corporation
 Should there be a meeting? No.
 Are there amendments that require a meeting?
Yes. Sec. 37. Power to extend or shorten corporate term

D. Specific Powers
1. Power to extend or shorten corporate term
2. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness
3. Power to deny pre-emptive right
4. Sale or other disposition of assets
5. Power to acquire own shares
6. Power to invest corporate funds in another corporation or business or for any
other purpose
7. Power to declare dividends
8. Power to enter into management contracts

a) Sec. 37. Power to extend or shorten corporate term

- Requirements
1. Approval by a majority vote of the board of directors/trustees;
2. Written notice of the proposed action and the time and place of meeting shall
be served to each stockholder or member either by mail or personal service;
- Mere written assent is NOT allowed
3. Ratification by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in case of non-
stock corporations; and
4. A copy of the amended articles of incorporation shall be submitted to the
SEC for approval
- If there is no approval, the amendment is deemed approved upon the
inaction of the SEC for 6 months from the date of filing for a cause
not attributable to the corporation

Nature of such right

To extend term To shorten term
Not inherent since the life of the Inherent right because the decision to
corporation is just a concession of shorten the business life of a certain
the State endeavour should really be addressed
to the decision of the co-venturers. It
may be design to have the effect of
dissolving of the corporation
Note: a dissenting stockholder may exercise his appraisal right whether the
corporate term is to be extended or shortened

- Will stockholders holding non-voting shares participate?

 Yes. Sec. 6 of the Corporation Code includes amendment of articles of
incorporation. When corporation extends or shortens its corporate term it
necessarily amends its articles of incorporation. Power to shorten is implied
from the power to amend. You cannot extend or shorten the corporate term
without first amending the articles of incorporation
- If stockholders do not agree to the extension?
 Dissenting stockholder can exercise appraisal right
- If stockholders do not agree with the shortening, under sec. 37?
 Dissenting stockholder can still exercise appraisal right even if Sec. 37 is
silent. However, it is provided under Sec. 81.
Sec. 81. Instances of appraisal right
Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the
following instances
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 (1) In case any amendment to the articles of incorporation has
the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences
in any respect to those of outstanding shares of any class, or
of extending shortening the term of corporate existence;
b) Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness
- What are the two powers under Sec. 38?
a. Increase/Decrease capital stock
b. Create or increase bonded indebtedness
- What is capital stock?
 Capital stock is just an amount. It is the basis of subscription and the paid up
capital
- Ways of Increasing/Decreasing Authorized Capital Stock
1. Cancelling or retiring its shares, including treasury shares
2. Redeeming redeemable shares
3. It may Accept a surrender of shares and give the holders in exchange
therefore proportionate amount of its assets, provided no rights of creditors
are involved;
4. Cancelling shares which have not yet been issued;
5. By increasing/decreasing the Par value of existing shares without
increasing/decreasing the number of shares;
6. By increasing/decreasing the Number of shares and retaining the par value
7. By increasing/decreasing the Number of shares and increasing/decreasing
the par value

- Limitations:
1. A corporation cannot lawfully decrease its capital stock if such decrease will
have the effect of relieving existing subscribers from the obligation of paying
for their unpaid subscriptions without a valuable consideration for such
release
Reason: Trust Fund Doctrine
- This refers to the principle that the capital stock, property and other
assets of the corporation are regarded as equity in trust for payment of
corporate creditors
2. It cannot issue stock in excess of the amount limited by its articles of
incorporation; and
Note: such issue is ultra vires and the stock so issued is void even in the
hands of a bona fide purchaser for value
An over issued stock is also known as a spurious stock
3. It must follow the manner and conditions provided by the law

- Reasons for increasing:

1. To generate more working capital
2. To have more shares with which to pay for acquisition of more assets; and
3. To have extra shares to meet the requirement for deduction of stock dividend

- Requirements:
1. Prior written notice of the proposed increase or decrease of the capital stock
indicating the time and place of meeting addressed to each stockholder must
be made either by mail or personal service;
2. In case of Decrease in capital stock, the same must not prejudice the right of
the creditors
3. Approval by the majority of the board of directors;
4. Filing of the certificate with the SEC;
5. A Certificate in duplicate signed by a majority of the directors of the
corporation, countersigned by the chairman and the secretary of the
stockholders meeting;
6. Approval thereof by the SEC
7. Ratification by the stockholders holding or representing at least 2/3 of the
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 outstanding capital stock at a meeting duly called for that purpose;
8. In case of increase in capital stock, there must be a Treasurer’s affidavit
showing that at least 25% of the approved increase in the capital must be
subscribed and that at least 25% of the amount subscribed must be paid
either in case or property

Note: If there is no approval, the amendment is deemed approved upon the

inaction of the SEC for 6 months after submission for causes not due to the
fault of the corporation

The capital stock of the corporation stands increased or decreased only from
and after approval and the issuance by the SEC of its certificate of filing that
the capital stock shall stand increased or decreased

The required 25% subscription shall be based on the additional amount by

which capital stock is increased and not on the total capital stock as
increased

An appraisal right is not available to a dissenting stockholder in case of

increase or decrease of the corporation’s capital stock

- Incurring, Creating, or Increasing Bonded Indebtedness

 It is an inherent power and is also expressly recognized
 There is no need to amend the Articles of Incorporation
 A business corporation, in the absence of restriction, may borrow money
whenever the necessity of business so requires and issue security or
customary evidence of debt such as notes, bonds or mortgages
 Same requirements with as the power to increase or decrease

Corporate Bond Obligation to pay a definite sum of money at a future

time at fixed rate of interest, whether secured or
unsecured, evidenced by a written debt instrument
called a bond or debenture

Bonded Loan secured by a mortgage or corporate property

Indebtedness
Debenture Debt secured only by the debtor’s earning power, not
by lien on any specific asset. It is also called
debenture and plain bond

c) Sec. 39. Power to deny pre-emptive right

- Does the corporation code gives stockholders preemptive right?
 It does not. Pre-emptive right did not come from the corporation code. It is a
common law right; it is automatic. When a stock corporation is born, a
stockholder from common law has pre-emptive right it is not codal. What the
corporation does is define it.
- Pre-emptive right – stockholders have preferential right to subscribe
 When a corporation issue shares, it must offer it first to stockholders before
offering it to others
It is not a right of first refusal since the right of first refusal is a result
of contractual relation. While pre-emptive right is inherent right to a
stockholder
 Is always in proportional/equivalent to your present shareholdings, in order
for you to maintain your proportionate control of the corporation, to maintain
your proportionate share of the dividends; to your voting if you have voting
share; and in the distribution of the assets
 Includes treasury right
Reason: “any class” under Sec. 39
Dean’s version: The word used under Sec. 39 is “to subscribe”,
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 under Sec. 60. Subscription contract
 Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract
 Subscription is for unissued shares or virginal, thus treasury
shares (repurchased shares) does not fall under for
subscription but for acquisition/acquire
 Can the by-laws deny pre-emptive right?
No. It must be in the articles of incorporation
 Are there situations that even if there’s no denial, the stockholder cannot
insist his pre-emptive right?
Yes. 2 instances.

Old Law New Law

Stockholder has no right to subscribe To all issues for dispositions of
before shares be offered to the public share of any class
due to the principle/philosophy; that
you have already decided to get only It is broader than the old law
that share, you did not subscribe to
the other.

There’s a form of an implied waiver

on your part

Pre-emptive right under the old law is

only present when there is an
increase but all issues or
disposition of shares of any class
P1,000,000.00 – Total shares P1,000,000.00 – Total Shares
P 600,000.00 – Subscribed P 600,000.00 – Subscribed

If the remaining P400,000 were to be If the remaining P400,000 shares

re-offered, there is no pre-emptive were to be re-offered, there is still a
right pre-emptive right

There must be an increase from the

remaining unsubscribed shares
 Dy. v. SEC
 Datu … case

 To subscribe to all issues or disposition of shares of any class, in proportion

to their respective shareholdings, unless such right is denied by the
Articles of incorporation
Amendment thereto
 Such right shall not extend
To shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
To shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock, in
exchange for property needed for corporate purposes or in payment
of a previously contracted debt

d) Sec. 40. Sale or other disposition of assets

- Requirements:
1. Prior written notice of the proposed action indicating the time and place of
meeting addressed to each stockholder must be made either by mail or
personal service;

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 2. Approval by the majority vote of the board of directors;
3. Ratification by the stockholders holding or representing at least 2/3 of the
outstanding capital stock at a meeting duly called for that purpose;
- In case of a non-stock corporation where there are no members with voting
rights, the vote of a least a majority of trustees in office will be sufficient
authorization
4. Any Dissenting stockholder shall have the option to exercise his appraisal
right; and
- Stockholders have a common law proprietary or beneficial interest on the
corporate business enterprise, and any sale, transfer, disposition, or
encumbrance thereof would be void if effected by the Board of Directors
without the appropriate stockholder’s approval
5. Sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies and the Bulk Sales Law;
- The sale of all or substantially all of the assets of the corporation is not
binding on the creditors if there is violation of the Bulk Sales Law
- SEC approval is not required
 Such power really affects the business enterprise level of corporate
set-up, an area left by the State to the judgment of managers, and
does not in any way affect or alter the juridical entity granted by the
State
“Substantially all” – sale or other disposition shall be deemed to cover
substantially all the corporate assets if:
1. The corporation would be rendered INCAPABLE of continuing the
business; or
2. INCAPABLE of accomplishing the purpose for which it was incorporated
- Is the sale of corporate assets an act of management?
 General rule: Yes. It is an act of management. Therefore, only the board will
decide
 XPN: It ceases to be an act of management and requires the consent of
stockholder
As when it is not in the course of ordinary business of the
corporation, when it covers all or substantially all
All or substantially all, when the corporation can no longer continue
or can no longer accomplish its purpose
- Nell Doctrine
General Rule: Where one corporation sells or otherwise transfer all of its assets
to another corporation, the latter is not liable for the debts and liabilities of the
transferor
Exceptions:

1. Where the purchaser NCC, Art. 2047

expressly or impliedly agrees By guaranty a person, called the
to assume such debts; guarantor, binds himself to the
creditor to fulfil the obligation of the
principal debtor in case the latter
should fail to do so

If a person binds himself solidarily

with the principal debtor, the
provisions of Sec. 4, Chapter 3, Title I
of this Book shall be observed. In
such case the contract is called a
suretyship

Art. 2058
The guarantor cannot be compelled to
pay the creditor unless the latter has
exhausted all the property of the

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 debtor, and has resorted to all the
legal remedies against the debtor.
2. Where the transaction TCC, Art.80(5)
amounts to a consolidation or The surviving or consolidated
merger of the corporations; corporation shall be responsible and
liable for all the liabilities and
obligations of each of the constituent
corporations in the same manner as if
such surviving consolidated
corporation had itself incurred such
liabilities or obligations; and any
pending claim, action or proceeding
brought by or against any of such
constituent corporations may be
prosecuted by or against the surviving
or consolidated corporation. The
rights of creditors or liens upon the
property of any of such constituent
corporations shall not impaired by
such merger or consolidation

3. Where the purchasing Business-Enterprise Transfer

corporation is merely a - The transferee corporation’s
continuation of the selling interest goes beyond the
corporation; and assets of the transferor’s
assets and its desires to
acquire the latter’s business
enterprise, including its
goodwill
- The transferee purchases not
only the assets of the
transferor, but also its
business

TCC, Sec. 40. Sale or other

disposition of assets
A sale, lease, exchange, mortgage,
pledge of all or substantially all of the
corporation’s assets, including its
good will
- It suitably reflects the
business-enterprise transfer
because the purchasing or
transferee corporation
necessarily continued the
business of the selling or
transferor corporation
- Given that the transferee
corporation acquired not only
the assets but also the
business of the transferor
corporation, then the liabilities
of the latter are inevitably
assigned to the former

1. Where the transaction is NCC, Art. 1388

entered into fraudulently in Whoever acquires in bad faith the
order to escape liability for things alienated in fraud of creditors,
such debts shall indemnify the latter for damages

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 suffered by them on account of the
alienation, whenever, due to any
cause, it should be impossible for him
to return them

Art. 1381(3)
The following contracts are
rescissible:
(3)Those undertaken in fraud of
creditors when the latter cannot in any
other manner collect the claims due
them;

- When Ratificatory Vote of Stockholders/Members Not Required:

1. If it is necessary in the usual Regular course of business; or
2. If the proceeds of the sale or other disposition of such property and assets
be Appropriated for the conduct of the remaining business

- Cases where Buyer of the Assets are Liable for the Debts of the Seller:
1. Where the purchaser expressly or impliedly agrees to assume the debts;
2. Where the transaction amounts to a consolidation or merger of the
corporations
3. Where the purchasing corporation is merely a continuation of the selling
corporation; and
4. Where the selling corporation fraudulently enters into the transaction to
escape liability for those debts

e) Sec. 41. Power to acquire own shares

- Acquisition of Corporate Shares Instances
1. To Eliminate fractional shares out of stock dividends
- Fractional shares are shares which are less than one corporation share
 Fractional shares cannot be represented at corporate meetings
2. To Collect or compromise indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale and to purchase delinquent
shares sold during said sale;
3. To Pay dissenting or withdrawing stockholders;
4. To Acquire treasury shares;
5. Redeemable shares regardless of existence of retained earnings;
6. To Effect a decrease of capital stock; and
7. In Close corporations, when there is a deadlock in the management of the
business
*The enumeration provided in Sec. 41 is not exclusive

- Conditions for the Exercise of the Power:

1. That its Capital is not impaired;
2. That it be for a Legitimate and proper corporate purpose;
3. That there shall be Unrestricted retained earnings; and
4. That the corporation acts in Good faith and without prejudice to the rights of
creditors and stockholders
- A corporation can only purchase its own shares when there are unrestricted
retained earnings
- Exceptions:
a. Redemption of redeemable shares in the absence of unrestricted
retained earnings as long as the corporation has sufficient assets to
meet its liabilities
b. When the shares are reacquired by a close corporation in case of a
deadlock

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- Availability of Appraisal Right
 Any dissenting stockholder shall have appraisal right because he will be
exposed to a line of business which is not being pursued when he invested
in the company

- Funds – includes any corporate property to be used in furtherance of business;

includes donations, received by a corporation
 A non-stock, non-profit corporation may invest its funds or subscribe to
shares of another domestic corporation

f) Sec. 42. Power to invest corporate funds in another corporation or business or for
any other purpose
- Limitation:
 Provisions of this Code
- Requisites:
1. To Pursue Primary Purpose:
- Approval of the Majority of the Board
2. To Pursue Secondary Purpose
a. Resolution by the majority of the board of directors or trustees;
b. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock corporation
 The law presumes that when stockholders invest in a corporation, it
is with the primary expectation that the corporation through its
business indicated in the articles of corporation
c. Prior written notice of the proposed investment and the time and place of
the meeting shall be made, addressed to each stockholder or member
by mail or by personal service;
d. Any dissenting stockholder shall have Appraisal right; and
- The ratification must be made at a Meeting duly called for the purposes

g) Sec. 43. Power to declare dividends

Retained The accumulated profits realized out of normal and

Earnings continuous operations of the business after deducting
therefrom distributions to stockholders and transfers to
capital or other accounts

Unrestricted The retained earnings which have not been reserved or set
Retained aside by the board of directors for some corporate purpose
Earnings - For purposes of dividend declaration, the term “surplus
profits” under Sec. 3 may be used synonymously with
unrestricted retained earnings

- Requirements:
1. Unrestricted retained earnings
2. Resolution of the board
- The Board of Directors has the responsibility to declare dividends and
determine the time as well as their amount so long as they act in good
faith
- If stock dividends are declared, there must be resolution of the board
with concurrence of 2/3 of the ownership of the outstanding capital stock
- Reason: The declaration of stock dividends is akin to forced purchase of
stocks. By declaring stock dividends, a corporation ploughs back a
portion of its entire unrestricted earnings either to its working capital or
for capital asset acquisition or investments

h) Sec. 44. Power to enter into management contract

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 - Requisites:
1. Approved by the board of directors and stockholders owning at least the
majority of the outstanding capital stock; or
At least the majority of the outstanding capital stock; or
At least a majority of the members in the case of a non-stock corporation
 Both the managing and the managed corporation, at a meeting duly called
for the purpose
 Provided:
Where a stockholder/s representing the same interest of both the
managing and the managed corporations own or control more than
1/3 of the total outstanding capital stock entitled to vote of the
managing corporation; or
Where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of
the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the
managed corporation owning at least
 2/3 of the total outstanding capital stock entitled to vote
 2/3 of the members of a non-stock corporation
- No management contract shall be entered into for a period longer than 5 years for
any 1 term
- Shall apply to any contract whereby a corporation undertakes to manage or operate
all or substantially all of the business of another corporation, whether such contracts
are called
 Service contracts
 Operating agreements
 Otherwise
- Provided: That such service contracts or operating agreements which relate to the
… may be entered into for such periods as may be provided by the pertinent laws or
regulations:
 Exploration
 Development
 Exploitation
 Utilization of natural resources

C. Nationality Sec. 123.

D. Separate
Personality

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