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CORPORATION LAW  General rule: Moral damages cannot be granted to


corporations
 Corporation is one of the types of business
organizations. It is also the most important in
economic development.
 Exception: Filipinas Broadcasting Network Inc. vs. Ago
Med
INTRODUCTION
- In cases of slander, libel and other forms of
defamation (should not qualify because the code does
 Sole proprietorship
not qualify whether natural or juridical) Art. 2219 of
the civil code:
- One man form of business entity, personally answers
all liabilities, but enjoys all the profits with the
exclusion of others Art. 2219. Moral damages may be recovered
in the following and analogous cases:
- Limited shareholders responsibility
(1) A criminal offense resulting in physical injuries;
- Paid subscription in full, you are no longer liable
(2) Quasi-delicts causing physical injuries;
 Partnership

(3) Seduction, abduction, rape, or other lascivious


- Based on mutual trust and confidence acts;

 Joint venture
(4) Adultery or concubinage;

- one time grouping of persons whether they be natural


or juridical (5) Illegal or arbitrary detention or arrest;

- does not entail continuity because after the (6) Illegal search;
undertaking is completed it is already the end

(7) Libel, slander or any other form of defamation;


- particular partnership and joint venture would be
similar, but there is already a decision of the Supreme (8) Malicious prosecution;
Court declaring them as different

(9) Acts mentioned in Article 309;


- when they do not register, it does not exist

- Foreign corporations enters into an agreement with a (10) Acts and actions referred to in Articles 21, 26, 27,
domestic corporation, it must be registered. Generally 28, 29, 30, 32, 34, and 35.
they do not need to be registered.
The parents of the female seduced, abducted, raped,
 Corporations or abused, referred to in No. 3 of this article, may also
recover moral damages.
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are The spouse, descendants, ascendants, and brothers
exceptions allowed by the SEC: the 3 exceptions must and sisters may bring the action mentioned in No. 9 of
go hand in hand this article, in the order named.

1. The articles of incorporation expressly authorized  Advantages (SEE LADIA BOOK)


the corporation to enter into contracts of
partnership; - No. 2 may also be a disadvantage

2. The agreement or articles of partnership must - No. 5 may also be a disadvantage


provide that all the partners will manage the
partnership; and
 A corporation is a person, therefore protected by the
3. The articles of partnership must stipulate that all due process clause and equal protection clause of the
the partners are and shall be jointly and severally Constitution
liable for all obligations of the partnership.
CLASSIFICATION OF CORPORATIONS
DEFINITION AND ATTRIBUTES
 Section 3 Stock and non-stock
 4 attributes of a corporation
- Importance of knowing, determining what provisions of
1. Artificial being the code or the law may be applicable

2. Created by operation of law Section 3. Classes of corporations. -


Corporations formed or organized under this Code may
3. Right of succession be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are
authorized to distribute to the holders of such shares
4. Powers, attributes and properties expressly authorized
dividends or allotments of the surplus profits on the
by law or incident to its existence. basis of the shares held are stock corporations. All
other corporations are non-stock corporations. (3a)
 Doctrine of limited capacity

 Non-stock- title 10
- Only such powers as are expressly granted to it by law
and by its articles of incorporation including others
 Stock- section 51
which are incidental to such conferred powers, those
reasonably necessary to accomplish its purpose and
those which may be incidental to its existence  Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
- Can do things as the law asks or allows it to do creating them

- If it does anything beyond, it shall be considered as Section 4. Corporations created by special


ULTRA VIRES laws or charters. - Corporations created by special

Notes on Corporation Law


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2

laws or charters shall be governed primarily by the - If incorporated under the laws of the Philippines it is a
provisions of the special law or charter creating them domestic corporation
or applicable to them, supplemented by the provisions
of this Code, insofar as they are applicable. (n)
• ME Gray vs. CA

 Section 3 - Parent or Holding/ subsidiaries and affiliates

- The two requisites must always concur - Affiliates- no majority vote

1. That they have a capital stock divided into shares; SMC 12%
and,

2. That they are authorized to distribute dividends or


HERSHEY CBPl 12%
allotments as surplus profits to its stockholders on the
CBP
basis of the shares held by each of them.
12%

 Section 4 Affiliate is subject to common control by the 12 % owners


 De jure
- Created by a special law, they have their own
character - cannot be attached by the state even in a quo
warranto proceeding
- They are not immune from suit unless provided by the
law of their creation  De facto

- Primarily governed by the law creating them - exists by virtue of colorable compliance

- Their subsidiaries are entirely different or independent - Attached directly only by the state in a quo warranto
from that of the other proceeding

 Close corporation  Corporation by estoppel

- There is no exemption it is absolute - So defectively formed, but still considered corporation,


but only in relation to those who cannot deny their
existence section 20 and 21
 Public corporation
FORMATION AND ORGANIZATION
- Political or governmental purposes

 3 stages
- Those formed or organized for the government or a
portion of the State or any of its political subdivision
1. Creation
and which have for their purpose the general good and
welfare
2. Re-organization or quasi-reorganization

 Private Corporation
3. Dissolution/winding-up

- Immediate benefit, aim or advantage of private


 Purpose clause
individuals

- Defining the scope of authority of the corporate


- Those formed for some private purpose, benefit, aim
enterprise pr undertaking. Both confirmed and limited
or end

- Distinction: public for governmental purpose  4 limitations of purpose clause

1. Lawful
 Corporation Sole

2. Specific or stated concisely


- Exemption to the rule because it is composed only of
one person 3. More than one, the primary and secondary must
be specified
- An incorporator may also be a juridical person
4. Lawfully combined

 Close corporation
- Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued
- There is exclusivity of shares of stock
less than par

- Section 96-105
 A corporation commences only upon issuance of the
- Restrictions to transfer shares certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a
- Only those indicated can own shares projected corporation

- Article must provide that there will be no public


 Metro Manila- paid up capital requirement is 10 M
offering

 Non- stock- mere mention of the operating capital


 Open corporation

 Mention the authorized capital


- openly admit investors

- example: stock exchange  Restrictions

 Domestic/ Foreign - Mandatory in close

 Test - Not mandatory in ordinary

- Incorporation test
Notes on Corporation Law
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©GTan; ASoguilon; VVillanueva
3

 Non-stock - venue of actions for or against the corporations

- If value is not more than 100,000 - venue of meetings

- section 51 meetings may only be within the


 A corporation cannot use any other name unless it has
boundaries of the city where the principal office
been amended
- non-stock may be held anywhere in the Philippines, if
 Section 19 provided in its by-laws

- If confusingly similar it will not be allowed to be - where summons may be served


registered
- registration of chattel mortgage must be registered in
the register of deeds where the principal office is
- Verification slip from the records officer located

Section 19. Commencement of corporate • Clavecilla Radio System vs. Antillon


existence. - A private corporation formed or organized
under this Code commences to have corporate - action not upon a written contract
existence and juridical personality and is deemed
incorporated from the date the Securities and
- city where the defendant resides
Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their  term of existence
successors shall constitute a body politic and
corporate under the name stated in the articles of - corporate term required
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is
sooner dissolved in accordance with law. (n) - determining what point in time the juridical personality
will cease to exist

- Words corporation or inc. either in full or abbreviated


- enter into contract only when it has juridical
form must be included
personality

Section 18. Corporate name. - No - once it ceases to exist, it no longer has personality
corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of - exist for another 3 years only for purposes of
any existing corporation or to any other name already liquidation
protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the
- Dissolution- it is automatic
corporate name is approved, the Commission shall
issue an amended certificate of incorporation under
the amended name. (n)  When should extension be made?

 Doctrine of secondary meaning - General rule: Not earlier than 5 years

- Exception: unless there are justifiable reasons

- A word or phrase originally incapable of exclusive  May it be extended after expiration?


appropriation [usually generic] with reference to an
article in the market, because of geographically or - Alhambra cigar vs. SEC once it ceases to exist it has
otherwise descriptive, might nevertheless have been no vested politic, exist only for a period of 3 years only
used so long and so exclusively by one producer with for liquidation and for that purpose only
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase
 Article 5 How many incorporators should there be?
has become to mean that the article was his product.

- 5-15
 Section 18

 May a corporation be an incorporator?


- Lyceum of the Philippines case, the additional
geographical name does not make it confusingly - General rule: only natural persons
similar
- Exception: cooperatives and corporation primarily
- actual confusion is not necessary- Philips case “it is organized to hold equities in rural banks
enough that there is probable confusion”
 How about minors?
 2 requisites must be proven
- NO, because they must be of legal age
- that the complainant corporation acquired a prior right
over the use of such corporate name  May a corporation organized by incorporators
consisting solely of foreigners
- identical, deceptively or confusingly, patently
deceptive - Yes, there is no nationality requirement only
residence, as long as majority are residents of the Phil
 principal office
 Define incorporators <sec.5>
- statement of principal office is required
- Those person mentioned in the articles as originally
- city and municipality not only province must be forming the corporation and who are signatories of the
specified articles of incorporation.

- principal office NOT operations office - Must be signatories to be incorporators

- necessary because it will establish the residence of


Section 5. Corporators and incorporators,
corporations
stockholders and members. - Corporators are those
who compose a corporation, whether as stockholders
Notes on Corporation Law
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©GTan; ASoguilon; VVillanueva
4

or as members. Incorporators are those stockholders Except as otherwise provided in the articles
or members mentioned in the articles of incorporation of incorporation and stated in the certificate of stock,
as originally forming and composing the corporation each share shall be equal in all respects to every other
and who are signatories thereof. share.

Corporators in a stock corporation are called Where the articles of incorporation provide
stockholders or shareholders. Corporators in a non- for non-voting shares in the cases allowed by this
stock corporation are called members. (4a) Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:

 Define corporators <sec.5>


1. Amendment of the articles of incorporation;
- All persons who compose the corporation at any given
time and need not be among those who execute the 2. Adoption and amendment of by-laws;
articles of incorporation at the start of its formation
and organization.
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
- Originally or subsequently property;

- Section 5 provides:
4. Incurring, creating or increasing bonded
indebtedness;
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
5. Increase or decrease of capital stock;
stock corporation are called members. (4a)

 May a corporation be a corporator? 6. Merger or consolidation of the corporation with


another corporation or other corporations;
- YES. There is nothing to prevent a corporation from
being a stockholder 7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
 Incorporator must subscribe to 1 share

8. Dissolution of the corporation.


 There are those that are exclusively reserved to
Filipinos Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall
 An incorporator maybe a corporator as long as he is a be deemed to refer only to stocks with voting rights.
stockholder (5a)

 section 6  How many directors should there be?

Section 6. Classification of shares. - The - General rule: Not less than 5 not more than 15
shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which - Exceptions:
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may 1. Educational corporations registered as non stock
be deprived of voting rights except those classified corporation whose number of trustees, though not less
and issued as "preferred" or "redeemable" shares, than five and not more than [15] should be divisible by
unless otherwise provided in this Code: Provided,
five [5], meaning they must have either five, ten, or
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of fifteen trustees and no other;
the shares or series of shares may have a par value or
have no par value as may be provided for in the
articles of incorporation: Provided, however, That
2. In close corporations where all the stockholders are
banks, trust companies, insurance companies, public considered as members of the board of directors
utilities, and building and loan associations shall not thereby effectively allowing twenty members in the
be permitted to issue no-par value shares of stock. board.

Preferred shares of stock issued by any 3. The by-laws of a corporation may provide for
corporation may be given preference in the
additional qualifications and disqualifications of its
distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such members of the board of directors or trustees.
other preferences as may be stated in the articles of However it may not do away with the minimum
incorporation which are not violative of the provisions disqualifications lay down by the Code.
of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board  Qualifications of the governing board
of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: - Requires mere residency <sec. 23>
Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with
the Securities and Exchange Commission. Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this
Shares of capital stock issued without par Code shall be exercised, all business conducted and all
value shall be deemed fully paid and non-assessable property of such corporations controlled and held by
and the holder of such shares shall not be liable to the the board of directors or trustees to be elected from
corporation or to its creditors in respect thereto: among the holders of stocks, or where there is no
Provided; That shares without par value may not be stock, from among the members of the corporation,
issued for a consideration less than the value of five who shall hold office for one (1) year until their
(P5.00) pesos per share: Provided, further, That the successors are elected and qualified. (28a)
entire consideration received by the corporation for its
no-par value shares shall be treated as capital and
shall not be available for distribution as dividends. 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
A corporation may, furthermore, classify its the books of the corporation. Any director who ceases
shares for the purpose of insuring compliance with to be the owner of at least one (1) share of the capital
constitutional or legal requirements. 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

Notes on Corporation Law


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©GTan; ASoguilon; VVillanueva
5

the directors or trustees of all corporations organized reasonable per diems: Provided, however, That any
under this Code must be residents of the Philippines. such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
 May a domestic corporation have a governing board capital stock at a regular or special stockholders'
consisting solely of foreigners? meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
- YES, section 23 majority of them must be residents of ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
the Philippines, no nationality requirement

 Anti-dummy act <sec.2-A>  Minimum for a domestic corporation?

- If the business undertaking or activity is only partially - In no case shall the paid- up capital be less than 5k
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number
 Is there a minimum authorized capital imposed by the
shall only be in proportion to their equity or
code?
participation in the capital stock of the corporation.

- If there is minimum paid-up logically there should also


 Disqualifications <sec.27>
be a minimum capital =5000

- The disqualifications provided for is absolute and may


not be done away with. Corporate by-laws may,  Minimum paid-up capital for a financing company
however, provide for additional qualifications and metro manila 10 M if located in MM
disqualifications.
 Shares of stock
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final  Purpose of classification
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of - To specify and define the rights and privileges of the
this Code committed within five (5) years prior to the
stockholders;
date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers
 Section 27 and 23 minimum disqualifications and and stockholders.
qualifications
- As a management control device.
• Lee vs. CA
- To comply with statutory requirements particularly
- By laws may provide for additional those which provide for certain limitations on foreign
ownership and shares like overseas employment
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC agencies requiring to own at least 75% of the shares of
stock thereof.
Capital structure
- To better insure return on investment which can be
Foundation- minimum paid-up capital 3M affected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof,
Authorized capital 1 M No. of shares 1M shares preference as to dividends and/or distribution of assets
par value 1.00 in case of liquidation; and,

Amount of shares subscribed - For flexibility in price, particularly, no par shares may
be issued or sold from time to time at different price
50 K A depending on the net worth of the company since they
do not purport to represent an actual of fixed value.
50 K B
 Section 6
C 250K
- Each shall be equal in all respects to every other share
D
 Preferred shares
E
- Specific preference
PAID UP =62,500
- Dividends or during liquidation
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended  No par

Maximum shares it can issue is 1M shares unless amended - Can sell it with the network of the corporation

 How much shares should be subscribed?  Distinction between the subscribed and outstanding
stocks?
- Must be at least 25% of the authorized capital stock
- Section 137
 Paid- up must be at least 25%-minimum

Section 137. Outstanding capital stock


 Section 30 defined. - The term "outstanding capital stock", as
used in this Code, means the total shares of stock
- Total subscription compliance with minimum 25% total issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (n)
- Any combination would comply with the minimum
required by section 30
- Voting and dividend rights, it refers to the outstanding
capital stocks
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any - Only outstanding stocks are allowed to vote and
compensation, as such directors, except for receive dividends

Notes on Corporation Law


“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
6

- Actually the same (1) when justified by definite corporate expansion


projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
 Treasury shares
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
- are also subscribed shares declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
- while they remain in the treasury, no voting and under special circumstances obtaining in the
dividend rights corporation, such as when there is need for special
reserve for probable contingencies. (n)

- may be reissued by the corporation


- It depends because there are three types of non-
cumulative preferred shares
- once reissued they become outstanding stocks again
- Discretionary dividend type
 common shares
- Mandatory if earned
- carry the right to vote
- Earned cumulative or dividend credit type
 preferred shares
 Compare cumulative share from non-cumulative,
- grants the holder preference earned cumulative or dividend credit type

- preference as to dividends - Cumulative share –whether or not earned

- preference as to distribution of the remaining assets


upon dissolution or - Non-cumulative earned cumulative or dividend credit
type- only if earned
- both
 Par
- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE EQUAL - stated par value; shall not be issued less than par

- It may include such other preferences not inconsistent  No par


with the Code. This is so because Section 6 of the said
law allows a stock corporation to issue preferred - without stated par value
shares subject only to the limitations imposed therein
which are: - once fully paid no longer liable

a. They can be issued only with sated par value; and,  Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise,
 Voting
each share shall be, in all respect, equal to every other
share.
- entitled to vote at any motion brought up in writing

 Participating
 Non-voting

- Must be stated because the presumption is that it is


- not entitled to vote
participating

 What types of shares may be denied of the right to


 Cumulative
vote?

- Irrespective of whether or not they where earned


- Preferred and redeemable shares

 Preferred
 Is it correct to state that common shares can never be
denied the right to vote?
- May be denied

- Only preferred and redeemable shares are denied


- Unless denied they are still entitled
unless provided in this code

 What if hindi i-declare kahit na may dividends rights - PWEDENG MA-DENY YUNG COMMON SHARES, KASI
for the previous years? May they be denied dividend YUNG FOUNDER’S SHARES MERON SILANG EXCLUSIVE
rights because they are non holders of non- RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG
cumulative? NOTE: YOU CANNOT COMPEL THE BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA
CORPORATION TO DECLARE DIVIDENDS UNLESS IT SAKOP NG COMMON SHARE RIGHTS
EXCEEDS 100 % PAID UP CAPITAL SEC. 43
- Example: founders shares- may be given certain rights
Section 43. Power to declare dividends. - and privileges
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained - Even common shares may be denied the right to vote
earnings which shall be payable in cash, in property, or
of founders’ shares issued <sec.7>
in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the Section 7. Founders' shares. - Founders'
unpaid balance on the subscription plus costs and shares classified as such in the articles of
expenses, while stock dividends shall be withheld from incorporation may be given certain rights and
the delinquent stockholder until his unpaid privileges not enjoyed by the owners of other stocks,
subscription is fully paid: Provided, further, That no provided that where the exclusive right to vote and be
stock dividend shall be issued without the approval of voted for in the election of directors is granted, it must
stockholders representing not less than two-thirds be for a limited period not to exceed five (5) years
(2/3) of the outstanding capital stock at a regular or subject to the approval of the Securities and Exchange
special meeting duly called for the purpose. (16a) Commission. The five-year period shall commence
from the date of the aforesaid approval by the
Stock corporations are prohibited from Securities and Exchange Commission. (n)
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
Notes on Corporation Law
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 Do you include non-voting shares in passing a valid - The corporation may cancel them; in effect there will
corporate act?
be a reduction in the outstanding capital stocks

- Even non-voting shares are entitled to vote under


- The code does not require ordinary corporations to
section 6
provide for restrictions, but it does not likewise
prohibit restrictions
 Redeemable shares
- Example: right of first refusal
- Discretionary/optional
- The restriction must be contained in the articles of
- Obligatory or mandatory incorporation

 Generally a corporation can reacquire its own shares if - If provided in by-laws but not in the articles of
it has unrestricted retained earnings incorporation then it will not be binding

 Exception: redeemable shares may be reacquired - Restrictions and preferences are mandatorily required
irrespective of retained earnings in close corporations

Treasury shares

- If it does not provide restrictions it is not a close
corporation
- They are treasury while in the treasury account of the
corporation
- Specified persons- close corporations

 May they be reissued by the corporation?


- If not one of those specified you are not included
because there is exclusivity in close corporations
- YES
- Should also be in the by-laws not only in the articles of
 If they are reissued will they be denied the right to incorporation
vote?
 No transfer clause
- Once reissued they shall become outstanding stocks
again and purchasers shall be entitled to all the rights
 Execution clause
and privileges as the other holders have

 Acknowledgment
 Section 57 treasury shares have no voting and
dividend rights. Why not?
 Treasurer affidavit part of the articles of incorporation

Section 57. Voting right for treasury


shares. - Treasury shares shall have no voting right as  Section 23-27 minimum qualifications, but there may
long as such shares remain in the Treasury. (n) be additional

 Grounds for disapproval


- Answer: commissioner vs. manning page 62 first par.

- Only substantial and not strict is required


“Although authorities may differ on the
exact legal and accounting status of so-called treasury
 May the SEC refuse or reject registration?
shares, they are more or less in agreement that
treasury shares are stocks issued and fully paid for
- <Section 17>
and reacquired by the corporation either by purchase,
donation, forfeiture or other means. Treasury shares
are therefore issued shares but being in the treasury Section 17. Grounds when articles of
they do not have the status of outstanding shares. incorporation or amendment may be rejected or
Consequently, although a treasury share, not having disapproved. - The Securities and Exchange
been retired by the corporation re-acquiring it, may be Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not
re-issued or sold again, such shares, as long as it is
in compliance with the requirements of this Code:
held by the corporation as a treasury share, Provided, That the Commission shall give the
participates neither in dividends, because dividends incorporators a reasonable time within which to
cannot be declared by the corporation to itself, nor in correct or modify the objectionable portions of the
meetings of the corporation as voting stock, for articles or amendment. The following are grounds for
otherwise equal distribution of voting powers among such rejection or disapproval:
stockholders will be effectively lost and the directors
will be able to perpetrate their control of the 1. That the articles of incorporation or any amendment
corporation, though it still represents a paid for thereto is not substantially in accordance with the
interest in the property of the corporation. The form prescribed herein;
foregoing essential features of a treasury stocks are
lacking in the questioned shares. 2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary
In this case, and under the terms of the trust to government rules and regulations;
agreement, the shares of stock of Reese
participated in dividends which the trustee received 3. That the Treasurer's Affidavit concerning the
and the said shares were voted upon by the trustee in amount of capital stock subscribed and/or paid is false;
all corporation meetings. They were not, therefore,
treasury shares.”
4. That the percentage of ownership of the capital
stock to be owned by citizens of the Philippines has
 When the law speaks of outstanding rights it does not not been complied with as required by existing laws or
the Constitution.
include treasury shares

No articles of incorporation or amendment


 Treasury shares may be reissued to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan
associations, trust companies and other financial
- They are actually assets of the corporation intermediaries, insurance companies, public utilities,
educational institutions, and other corporations
governed by special laws shall be accepted or
- Once re-issued they become outstanding stocks again approved by the Commission unless accompanied by a

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favorable recommendation of the appropriate - Strict or substantial compliance


government agency to the effect that such articles or
amendment is in accordance with law. (n)
 De facto

- But the grounds in section 17 are not exclusive - 4 requisites must go hand in hand take out anyone of
them there can be no de facto corporation

 When will the corporation commence to exist?


1. There is a valid statute under which the corporation
could have been created as a de jure corporation.
- Section 19
2. An attempt, in good faith, to form a corporation
Section 19. Commencement of corporate according to the requirements of law, which goes far
existence. - A private corporation formed or organized enough to amount to a “colorable compliance” with
under this Code commences to have corporate the law;
existence and juridical personality and is deemed
incorporated from the date the Securities and
Exchange Commission issues a certificate of 3. A user of corporate powers, the transaction of business
incorporation under its official seal; and thereupon the in some way as if it were a corporation; and,
incorporators, stockholders/members and their
successors shall constitute a body politic and 4. Good faith in claiming to be and doing business as a
corporate under the name stated in the articles of corporation.
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is
sooner dissolved in accordance with law. (n)  Are the rights and obligations between officers and
directors of a de jure and de facto the same?

 A corporation de jure can come into existence only


- YES. Governed by the same law, rules and regulations
upon the issuance of the certificate of registration by
the SEC? TRUE OR FALSE?
 Only important in determining, is for the purpose of
applying the rules with regards to the direct and
- TRUE
collateral attack

- EXCEPTION: CORPORATION SOLE <sec. 112>  The existence of a de jure cannot be questioned even
by the State, either directly or indirectly

Section 112. Submission of the articles of


incorporation. - The articles of incorporation must be  Existence of a de facto can be questioned only by the
verified, before filing, by affidavit or affirmation of the State directly in a quo warranto proceeding only
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied • Municipality of Malabang vs. Benito
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly certified - What is the missing link so as to consider it a de facto?
to be correct by any notary public.
A law, because the executive order is unconditional

From and after the filing with the Securities - An unconditional act affords no rights, creates no
and Exchange Commission of the said articles of office
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, - Legal contemplation it was never passed at all
priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or - It can therefore be questioned by any person
church theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister, rabbi  If the certificate of registration has not been issued,
or presiding elder shall be held in trust by him as a may a corporation de facto exist?
corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, - NO!
parsonages and cemeteries thereof. (n)
- Number 4 requirement, good faith in claiming to be
and doing business as a corporation
- CORPORATION SOLE- upon filing of the verified articles
of incorporation, once filed it is vested with a judicial
capacity • Hall vs. Piccio

 General rule section 19 - Missing link is good faith

- Vested with judicial capacity upon issuance of the - The certificate was not yet issued by the SEC, the
certificate by the SEC members knew and therefore they were not acting in
good faith, therefore anybody can question its
o However it is not accurate according to atty. existence
Ladia because there are those that can issue
for example cooperatives- BUREAU OF  Corporation by estoppel
COOPERATIVES which register, home
insurance guaranty corporation- HOME - So defectively formed so that they are not to be
OWNERS considered a de jure or de facto

• Cagayan Fishing vs. Sandika - General partners- liable even beyond his promise even
his personal properties are prone to attachment
- Corporations are created by law
• Lozano vs. Delos Santos
- Commence to exist upon issuance by the CONCERNED
government corporation or agency - Founded on principle of equity

- Prior there to it has no being - Exercise corporate powers

- The transfer of the property was not valid, it likewise - Enters with business with 3rd parties
did not have the right to transfer

 De jure
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- When there is no 3rd persons involved and the problem


o office, it is in legal contemplation, as inoperative as
though it had never been passes
arises between there members, therefore they
themselves know that there is no corporation by
estoppel  Hall vs. Piccio

- No good faith
• Albert vs. University

- 1965 case, no section 21 yet  Corporation by estoppel

- Applied where the rules governing agency - Admission, conduct or agreement

- A person purporting in behalf of a non existing - Will not apply among members themselves there must
corporation be a 3rd party

- Section 21, you arrive at the same decision - Cannot escape when benefited

• Chiang Kai Siek vs. CA - General rule: you deal with a corporation, as to estop it

- SC based its decision from the provision of the


education act
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those members,
2. 3rd party will not be estopped if he is not trying to
- It cannot immune itself by virtue of its non compliance
escape liability
with the law

 2 possible remedies
 Assuming there was no law?

- Chiang kai siek case


- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
- Albert case
juridical personality

 What would be the effect if the corporation failed to


 General rule: a 3rd party transacting with a non commence transaction?
existent corporation shall be estopped to deny
- Automatic
• Asia banking vs. standard products
 Operated but becomes subsequently inoperative for 5
- General rule: absence of fraud a person who has dealt years only a ground for suspension, proper notice and
with a non incorporated corporation shall be stopped hearing
to deny from actions in which it had benefited
 Commencement
- Exemptions: when there is fraud the general rule shall
not apply - Example realty company

• Salvatierra vs. Garlitos CORPORATE CHARTER AND ITS AMENDMENTS

- As a general rule a person who has contracted it a  What do you understand by the word charter? Is it the
corporation lacking personality same as articles of incorporation?

- Doctrine is not applicable where fraud takes part in the - Corporate charter is broader
transaction
 Franchise
 Another exemption
- Primary power granted by the state to be and act as a
• International express travel and tours vs. CA corporation

- No fraud in this case - Secondary franchise is the right or privilege that the
corporation may exercise
- How come Kahn was made liable?
 You cannot issue investment contracts without a
- Doctrine of incorporation secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not
- Applies only if that person is trying to escape from a exist until issued with a certificate of registration or
contract where he is benefited incorporation

- In this case petitioner is not trying to escape liability,  Corporate entity


but rather the one claiming from the contract
- Corporation exist separately and independently from
 Would this apply to foreign corporation? the stockholders

- YES, it may apply - Stockholders cannot bring an action, to bring back the
properties of a corporation
- Georg Grotjahn vs. Isnami
- Corporation has no interest in the individual properties
 A foreign corporation cannot gain access to our courts of its members
unless they attain a license to engage in business in
the Philippines but applying corporation by estoppels, • Sulo ng Bayan vs. Araneta
the court allowed
- Corporation cannot bring an action for the recovery of
the properties of its members
 Municipality of Malabang case

• Caram vs. CA
- No law, hence may be questioned by any person

- An unconstitutional act is not a law, t confers no rights,


it imposes no duties, it affords no protections, it crates
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- Stockholders cannot be held liable for the legitimate • Yutivo and sons vs. Court of Tax Appeals
obligations of the corporation, they exist separately
and independently from one another - What where the facts or circumstances arrived by the
court here?
• Cruz vs. Dalisay
- Subscribed capital where all advanced by Yutivo, the
- Final judgment against a corporation cannot be board where the same as Yutivo
enforced against stockholders
• Commissioner of Internal Revenue vs. Norton and
• Rustan Pulp vs. CA Harrison

- Court applied the general rule


- Corporation exist separately and independently

- Mere substantial ownership does not mean that it


- Corporation are juridical entities, they exist only in
has a same corporate entity
legal contemplation, can act only through its
authorized representatives
• La Campana Coffee Factory, Inc. vs. KKM

• Soriano vs. CA
- Two corporations managed by the same family,
workers were made interchangeably
- They are not personally liable

• Emilio Cano vs. CIR


- They where signed for and in behalf of the corporation

- Sued in there official capacity


• Palay inc. vs. Clave

- Liabilities incurred by the corporation cannot be - Reverse of Soriano vs. CA (signed in their official
enforced against stockholders, etc., even if capacity)
stockholders, etc. happens to own a substantial
interest in the corporation, mere ownership does not • Tesco vs. WCC
disregard the corporate entity theory
- The two corporations where located in the same office
 Corporate entity for legal or legitimate purposes only
• Claparols vs. CIR
 Two or more corporations, one of them will be treated
as a mere alter-ego - Same as NAFLU and A.C. Ransom

• Concept builders vs. NLRC


 You cannot pierce the veil of corporate fiction when
there are no facts attendant in the case
- Instrumentality rule. What is the instrumentality rule?
“where one corporation is so organized and controlled
 Corporate Entity Theory
and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the
- The corporation is possessed with a personality
fiction of the corporate entity of the “instrumentality”
separate and distinct from the individual stockholders
may be disregarded.”
or members and is not affected by the personal rights,
obligations or transactions of the latter
- Has no separate mind of its own. What is the degree of
control?
 Instrumentality rule
1. Control, not mere majority or complete stock control,
- Where one corporation is so organized and controlled but complete domination, not only of finances but of
and its affairs are conducted so that it is, in fact, a policy and business practice in respect to the
mere instrumentality or adjunct of the other, the transaction attacked so that the corporate entity as to
fiction of the corporate entity of the “instrumentality” this transaction had at the time no separate mind, will
may be disregarded or existence of its own.

- Courts are concerned with reality and not form 2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of
- Mere ownership of all or substantially all of the shares a statutory or other positive legal duty or dishonest
of stock of a corporation is not, in itself, insufficient and unjust act in contravention of plaintiff’s legal
ground for disregarding the separate corporate rights; and,
personality. And for the separate personality of the
corporation to be disregarded, the wrong doing must 3. The aforesaid control and breach of duty must
be clearly and convincingly established proximately cause the injury or unjust loss complained
of.
- Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It - The absence of one of the elements prevents “piercing
cannot be justified by speculation and can never be the corporate veil.” In applying the “instrumentality”
presumed. And only if it sought to hold the or “alter ego” doctrine, the courts are concerned with
stockholders liable directly for corporate debt reality and not form, with how the corporation
operated and the individual defendant’s relationship to
• Palacio vs. Fely that operation.

- Piercing the veil of corporate fiction  There must facts and circumstances before warrant
piercing the veil of corporate fiction
- Fely trans and the other corporation is one and the
same
 The control necessary does not mean stock ownership
• Marvel bldg. vs. David
• MCConnel vs. CA
- There must be facts before the court will be justified in
piercing the veil of corporate fiction - were located in the same floor

- Corporation was a mere extension of the personality of


- “while the mere ownership of all or nearly all of the
the person
capital stock of a corporation does not necessary
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mean that it is a mere business conduit of the 1. In case any amendment to the articles of
stockholder, that conclusion is amply justified where it incorporation has the effect of changing or restricting
is shown, as in the case before us, that the operations the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
of the corporation were so merged with the
those of outstanding shares of any class, or of
stockholders as to be practically indistinguishable from extending or shortening the term of corporate
them. To hold the latter liable for the corporation’s existence;
obligations is not to ignore the corporation’s separate
entity, but merely to apple the established principle
2. In case of sale, lease, exchange, transfer, mortgage,
that such entity cannot be invoked or used for
pledge or other disposition of all or substantially all of
purposes that could not have been intended by the the corporate property and assets as provided in the
law that created that separate personality.” Code; and

• Tan boon bee vs. Jarencio


3. In case of merger or consolidation. (n)

- Why would a drug company need a printing machine


- Right granted only in specified instances

- The property must be in pursuance of a company Are non-voting shares included in amending the articles of
business incorporation

• Cease vs. CA 1 100/s XYZ-----ABC

- Alter-ego or the extension of the person of forest ware 2 100/s


does the court pierced the veil of corporate fiction
To
- As to not deprive the holders of their successional
rights 10 100/s

- Mere ownership of all or substantially all is not a =1M/S what would


justification of piercing the veil of corporate fiction be the 2/3?

 Fraud must be proven by clear and convincing Section 6 last paragraph


evidence cannot presume or speculate, there must be
facts and circumstances Voting shares are excluded except the foregoing instances

 Fraud must be clear and convincing evidence more 1 1


than preponderance
2 2
• Remo Jr. vs. IAC
3 3
- The resolution was not entered to defraud anyone
4 4

• Del Rosario vs. National Labor Commission


5 5
- The wrongdoing must be clearly established
6 6
- There must be facts to support
1 & 2=absent
- Payment of claims cannot thus be presumed 1&2=absent but gave their written assent

• Indophil Textile Mill vs. CALICA 3 & 4= objected


3&4=objected
- How do you distinguish this ruling to La Campana,
having the same issues: 5 & 6= approved the amendment
5&6=approved

- La campana, one payroll, employees were made Would there be a valid amendment
interchangeable. Acrylic had its own standards
 Special amendments 37 & 38 shortening that would
• PNB vs. Ritratto Group result to dissolution require prior approval by the SEC

- Control test
Section 37. Power to extend or shorten
corporate term. - A private corporation may extend or
- Not mere majority but rather complete shorten its term as stated in the articles of
incorporation when approved by a majority vote of the
- Twin ace was only a subsequent interested party board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds
- Assets and machineries (2/3) of the outstanding capital stock or by at least
two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action
 Amendment of the articles of incorporation and of the time and place of the meeting shall be
addressed to each stockholder or member at his place
- Express power granted to a corporation of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
 Section 16 in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the
- Appraisal right conditions provided in this code. (n)

- Section 81 to object on certain acts and transactions Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
Section 81. Instances of appraisal right. -
decrease its capital stock or incur, create or increase
Any stockholder of a corporation shall have the right to any bonded indebtedness unless approved by a
dissent and demand payment of the fair value of his
majority vote of the board of directors and, at a
shares in the following instances: stockholder's meeting duly called for the purpose, two-
thirds (2/3) of the outstanding capital stock shall favor
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the increase or diminution of the capital stock, or the Commission, which shall have the authority to
incurring, creating or increasing of any bonded determine the sufficiency of the terms thereof. (17a)
indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness  The vote must be cast at the meeting called for that
and of the time and place of the stockholder's meeting purpose
at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any  Written assent would not suffice
bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of
residence as shown on the books of the corporation  When do amendments become valid and effective?
and deposited to the addressee in the post office with
postage prepaid, or served personally. - Only upon the approval of the SEC TRUE OR FALSE?

A certificate in duplicate must be signed by


a majority of the directors of the corporation and
- FALSE because it can be valid upon the date of filing if
countersigned by the chairman and the secretary of not acted upon within 6 months without fault
the stockholders' meeting, setting forth: attributable to the corporation

 Why is it retroactive?
(1) That the requirements of this section have been
complied with;
 What provision may be amended, altered or repealed

(2) The amount of the increase or diminution of the


capital stock;  Can you change name, address for example she
married or changed address?

(3) If an increase of the capital stock, the amount of


- NO. you cannot change that
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount
of capital stock or number of no-par stock subscribed
 Fait accompli, are beyond the powers or authority of
by each, and the amount paid by each on his the corporation to change, alter or modify. These
subscription in cash or property, or the amount of would include the following:
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the - Names of the incorporators and
purpose of making effective stock dividend therefor
authorized;
- The incorporating directors or trustees,

(4) Any bonded indebtedness to be incurred, created - The name of the treasurer originally or first elected by
or increased;
the subscribers or members to act as such until his
successor has been duly elected and qualified,
(5) The actual indebtedness of the corporation on the
day of the meeting; - The number of shares and amount originally
subscribed and paid out of the original authorized
(6) The amount of stock represented at the meeting; capital stock of the corporation,
and
- The date and place of execution of the articles of
(7) The vote authorizing the increase or diminution of incorporation,
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness. - The signatories and acknowledgment thereof.

Any increase or decrease in the capital stock - All other provisions or matters stated or contained in
or the incurring, creating or increasing of any bonded the articles are subject to amendment.
indebtedness shall require prior approval of the
Securities and Exchange Commission.  Founder’s or signatories hindi pwede palitan

One of the duplicate certificates shall be  Names, nationalities- you cannot


kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange
 Capital- right granted by law to all corporation
Commission and attached to the original articles of
incorporation. From and after approval by the
Securities and Exchange Commission and the issuance  Paid up capital- NO
by the Commission of its certificate of filing, the capital
stock shall stand increased or decreased and the
 Restriction and transfer of shares in ordinary stock
incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing corporations
may declare: Provided, That the Securities and
Exchange Commission shall not accept for filing any - You can, but close corporation cannot
certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer - Section 96, otherwise it will not be a close corporation
of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital Section 96. Definition and applicability of
stock has been subscribed and that at least twenty- Title. - A close corporation, within the meaning of this
five (25%) percent of the amount subscribed has been Code, is one whose articles of incorporation provide
paid either in actual cash to the corporation or that that: (1) All the corporation's issued stock of all
there has been transferred to the corporation property classes, exclusive of treasury shares, shall be held of
the valuation of which is equal to twenty-five (25%) record by not more than a specified number of
percent of the subscription: Provided, further, That no persons, not exceeding twenty (20); (2) all the issued
decrease of the capital stock shall be approved by the stock of all classes shall be subject to one or more
Commission if its effect shall prejudice the rights of specified restrictions on transfer permitted by this
corporate creditors. Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its
stock of any class. Notwithstanding the foregoing, a
Non-stock corporations may incur or create
corporation shall not be deemed a close corporation
bonded indebtedness, or increase the same, with the
when at least two-thirds (2/3) of its voting stock or
approval by a majority vote of the board of trustees
voting rights is owned or controlled by another
and of at least two-thirds (2/3) of the members in a
corporation which is not a close corporation within the
meeting duly called for the purpose.
meaning of this Code.

Bonds issued by a corporation shall be


Any corporation may be incorporated as a
registered with the Securities and Exchange
close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public
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utilities, educational institutions and corporations - Will be bound by corporate officers if they acted within
declared to be vested with public interest in the 5 classification page 150
accordance with the provisions of this Code.
• Ramirez vs. Orientalist co.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply - What was the position of Fernandez in this case?
suppletorily except insofar as this Title otherwise TREASURER
provides.
- Why did the court rule that actions of Fernandez
 Transfer clause, executor clause, acknowledgment, bound the corporation when he is not even a board of
treasury affidavit-NO director?

• Philippine First Insurance case “if a man is found acting for a corporation
with the external indicia of authority, any person not
having notice of want of authority, may usually rely
- Mere change in the name of a corporation or by
upon those appearances; and if it be found that the
merely complying with the law is general amendment
directors had permitted the agent to exercise that
authority and thereby held him out as a person
- It does not change its personality. It is the same
competent to bind the corporation, or had acquiesced
person in a different name. the charter is the same
in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be
 Amendment of a corporate term bound, notwithstanding the actual authority may
never have been granted.”
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- Contracts must be made by the director and not the
- FALSE. It can be if there are justifiable reasons for stockholders
earlier extension as may be determined by the SEC
- Actions of the stockholders in such matters is only
 Can you extend the corporate term if it has already advisory and not in any way binding in the corporation
expired?
• Barreto vs. La previsora Filipina
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is - Everything emanates from the board of directors
dissolved automatically on the day it expires.
- Stockholders action is merely advisory except their
 Alhambra cigar and PNB case approval or vote is necessary to prove a valid
corporate act
 Instances when the SEC allowed extension whose term
has already expired  Qualifications:

- All of them involved are institutions of learning, it was - No citizenship requirement, at least majority must be
the case in order to avoid confusion that would arise residents
later on.
- Can have a governing board consisting solely of
BOARD OF DIRECTORS/TRUSTEES foreigners

 Section 23 - But we have to take into consideration partly


nationalized industries and other laws which prohibits
or limits foreign ownership
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
- Anti-dummy act
corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all
property of such corporations controlled and held by - Utilization development of natural resources 60% must
the board of directors or trustees to be elected from be owned by Filipino citizens, therefore they only own
among the holders of stocks, or where there is no 40%---10 members they can only have 4 seats, but not
stock, from among the members of the corporation, entirely correct because the law may provide
who shall hold office for one (1) year until their
otherwise; educational institutions restricted to
successors are elected and qualified. (28a)
Filipinos, but there are exceptions when created by
religious and charitable institutions.
Every director must own at least one (1)
share of the capital stock of the corporation of which - By-laws may provide additional qualifications and
he is a director, which share shall stand in his name on
disqualifications
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 - To qualify as a director he must own at least 1 share
thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of  Should the stockholder be the equitable or beneficial
the directors or trustees of all corporations organized
owner in order to qualify as a director?
under this Code must be residents of the Philippines.

- NO, it is not necessary, as long as you are listed in the


- Controlled by the board of directors books as owner of one share

- Authority are however restricted to the day to day • Lee vs. CA

- Stockholders may have all the profit but will turn over - As long as you are listed in the books as owner of one
the management to the governing board share

- But unless the law provides the power may be - Under the old law he must be the beneficial owner and
delegated legal owner thereof but in the new law it is not
required as long as it stands in his name he is qualifies
 General rule
1 A-100t/S B (own in the trust of X) is B qualified to be a
- Corporations must sit and act as a body director?

2
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3-10  Who wins? Or who gets elected?

2– transferring there voting rights in favor of VT - No vote requirement, the one who gets the most
number of votes gets elected, section24.
Other rights will accrue in favor of them, but not the voting rights
 What is cumulative voting?
voting rights must be recorder in the books of the corporation
that it is transferred - Process of multiplying the number of shares to the
number of director to be elected
PNB-IFL- wholly owned subsidiary of PNB
- Matter of right granted to stockholders in a stock
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will corporation
be able to be nominated
1 to 5 has 200k/s and members of the same family- majority
 Gen. Rule: 800k they have 4M votes they are guaranteed 4 seats

- Term of one year who will serve as such until there 6 to 10 are not related- 1 seat 1M votes
successors are elected and qualified
 Cumulative to allow the minority to have a rightful
 Exception: representation in the board

- Non-stock corporation can serve for a term of 3 years  Is it allowed in a non-stock corporation?

- Educational non-stock- term of the governing board - Not generally available


can be 5 years
- Section 89 unless the articles or by-laws allow
 May this term exceed one year? cumulative voting

- Yes, they may serve in a hold over capacity until their


Section 89. Right to vote. - The right of the
successors have been duly elected and qualified members of any class or classes to vote may be
limited, broadened or denied to the extent specified in
• Detective and protective bureau vs. Cloribel the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.
- In the by-laws, managing director must be elected
from among themselves
Unless otherwise provided in the articles of
- Must be duly elected and qualified incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code.
(n)
How are the directors elected?

1-100T/S Voting by mail or other similar means by


members of non-stock corporations may be authorized
by the by-laws of non-stock corporations with the
2-100T/S approval of, and under such conditions which may be
prescribed by, the Securities and Exchange
3-100T/S Commission.

to 10=1M/S

 Do you include the vote of 1 & 2 to have a quorum to  Other corporate officers other than the governing
have a valid meeting? board section 25

- NO, quorum requirements is 401,000


Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
Quorum requirement is 501k corporation must formally organize by the election of a
president, who shall be a director, a treasurer who
Holders of non-voting shares are only entitled to vote in last par. may or may not be a director, a secretary who shall be
Of section 6 a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held
1-200k
concurrently by the same person, except that no one
shall act as president and secretary or as president
2-200k and treasurer at the same time.

3-200k
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by
4-100k law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
5-100k 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
6-100k business, and every decision of at least a majority of
the directors or trustees present at a meeting at which
7-50k there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require
8-40k the vote of a majority of all the members of the board.

9-5k Directors or trustees cannot attend or vote


by proxy at board meetings. (33a)
10-5k
 Is the president required to be a stockholder. YES
=1MS
 The chairman may be another person
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all their  The president may also be another person
shares on themselves

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 Prohibited is president to be secretary or treasurer at - The contract here is so onerous that it would throw the
the same time corporation into insolvency

 Board of director must sit and act as a body to arrive • Francisco vs. GSIS
at a corporate act
- GSIS cannot evade the binding effect of the telegram
 What would constitute a quorum if 5 then 3 must be
present - Only 15 months later that the corporation said there
was a mistake
 May the vote of 2 members past a 5 man governing
board pass a valid corporate act? - The silence coupled with the unconditional acceptance
of the other subsequent remittances is binding to the
- YES. Voting requirement is majority of directors corporation
present at which there where a quorum
• Board of liquidators vs. Kalaw
1 1 and 2 present=valid voting
requirement “Settled jurisprudence has it that where
similar acts have been approved by the directors as a
2 1 and 2 voted yes matter of general practice, custom and policy, the
general manager may bind the company without
3 3 voted no formal authorization of the board of directors. In
varying language, existence of such authority is
4 established, by proof of the course of business, the
usages and practices of the company and by the
5 knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its
subordinates in and about the affairs of the
 Is it absolute?
corporation. So also, “xx authority to act for and bind a
corporation may be presumed from acts of recognition
- NO, except in the election because it requires the
in other instances where the power was in fact
majority of all the members of the board
exercised.” “xx Thus, when, in the usual course of
business of a corporation, an officer has been allowed
- If by-laws or articles provide a higher voting in his official capacity to manage its affairs, his
requirement authority to represent the corporation may be implied
from the manner in which he has been permitted by
 Artificial beings must act through its members and act the directors to manage its business.”
as a body to have a valid corporate act
In the case at bar, the practice of the
 Exception: corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading
- Delegation activities for and in NACOCO’s behalf without prior
board approval. If the by-laws were to be literally
- Expressly conferred followed, the board should give its stamp of prior
approval on all corporate contracts. But that Board
- Where the officer or agent is clothed with actual or itself, by its acts and through acquiescence, practically
apparent authority laid aside the by-law requirement of prior approval.

- Otherwise it will not bind the corporation - Kalaw signed alone and said contracts were submitted
to the board of directors after its consummation and
 Yao ka sin trading case “already asked in the bar” not before

- Only bind the corporation to the extent of authority • Buenaseda vs. Bowen
confined to him or virtue of customs, usage and policy
- Express ratification is made through a formal board
- Must pass first the controller and counsel action

 What if the notice requirement is not complied with? - Implied ratification is through: silence or acquiescence,
acceptance benefits and lastly recognition or adoption
• Lopez realty vs. Fotencha
 An unauthorized act may nevertheless be binding
either by express or implied by estoppels
- Notice requirement must be complied with hence it
should have been with force and effect, but according  By virtue of silence the board had impliedly accepted
to the SC, it may be ratified expressly if there is a the act
subsequent meeting called for that purpose
 By recognition or adoption
- Impliedly through acts

- Asuncion was aware of the corporations obligation  By virtue of payment of obligations arising therefore-
Lopez realty
- There was implied ratification or she was estopped
 May directors or trustees be disqualified to act as
• Pua casim vs. Neumark and Co. such?

- Considered 3 circumstanced - YES, crime, etc. disqualifications in book

- Check which was the proceed of the loan which was - Possess or dispossess any of the qualifications or
endorsed and deposit in the corporate account disqualifications , cease to hold at least one share

- Neumark as president and also stockholder  May directors be ousted from office?

• Yu chuck vs. Kong Li Po - At least 2/3 of members representing outstanding


capital stock. Again notice requirement must be
- General manager usually has the power to hire but the complied with
SC said the contract must be reasonable

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1-200 1-5 same compensation of directors, as such directors, exceed


family ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
2-200
- Generally not entitled to receive compensation
3-200 because they render it gratuitously

4-100 - Unless the by-laws allows

5-100 electing - Stockholders may also grant pursuant to a majority


vote
6-100 6 to 10 not
related - Must not exceed net income of 10% tax of the
preceding year
7-50
- Acting in special capacity
8-40
- In, sum directors may receive compensation when
9-5
1. there is a provision in the by-laws to that effect
10-5 outstanding
director 2. When the stockholders, by a majority vote of the
outstanding capital stock grant the same; and,
 Meetings called by the president or the secretary
ordered by the president 3. If the director renders extra-ordinary or unsual service

 It depends if the removal is without cause they cannot • Central cooperative exchange vs. Tibe
do so because removal without cause shall not deprive
the minority stockholders or members of the right of - By-laws may allow, stockholders may also allow such
representative
 What do you understand by the phrase “as such
 If with cause they can even if it will prejudice the directors”
rights of the minority, provided of course additional
requirements by-laws and articles of incorporation • Western institute vs. Salas

 Who will fill up the vacancy created due to the ouster - Compensation was granted without by-laws authority
of a member of the board of directors <section 29>

- Prohibition is not a sweeping rule


Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
- Members of the board may receive when they receive
board of directors or trustees other than by removal by
the stockholders or members or by expiration of term, in a special capacity
may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a - Mere act of the board will suffice
quorum; otherwise, said vacancies must be filled by
the stockholders in a regular or special meeting called
 Is the 10% ceiling applicable to other officers?
for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term
of his predecessor in office. - NO. the phrase “as such director” was used twice
<Section 30>

Any directorship or trusteeship to be filled


by reason of an increase in the number of directors or - The SC ruled that the 10% ceiling will not likewise
trustees shall be filled only by an election at a regular apply if they acted in a capacity other than “as such
or at a special meeting of stockholders or members directors”
duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so • Government vs. El Hogar
stated in the notice of the meeting. (n)

- Judicial intervention is not proper


 Other than by removal or expiration of term they do
not have the power - The appropriates remedy is to those who can make or
unmake the by-laws
 When will the vacancies be filled up?
 Liability of corporate officers
 Is notice required, to fill up vacancies due to removal?
- Obligations incurred by those acting for and in behalf
 What if the vacancy is due to an increase, can it be of the corporations are not there’s BUT there are
filled up in the same meeting where in the number is exceptions even if they are acting for and in behalf of
increased? the corporation

 Election due to removal-in the same meeting notice is • Tramat vs. CA


not required
- General rule was applied in the case
 Election due to increase in number- it must be so
stated in the meeting - Ong acted as officers and acted within the scope of his
authority
 Section 30
- Court laid down 4 instances when even if acting within
Section 30. Compensation of directors. - In the scope of his authority he is held solidarily liable
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any 1. He assents (a) to a patently unlawful act of the
compensation, as such directors, except for corporation, or (b) for bad faith, or gross negligence in
reasonable per diems: Provided, however, That any
directing its affairs, or (c) for conflict of interest,
such compensation other than per diems may be
granted to directors by the vote of the stockholders resulting in damages to the corporation, its
representing at least a majority of the outstanding stockholders or other persons;
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
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2. He consents to the issuance of watered stocks or who,  Distinction between section 31 and 34 relative to the
having knowledge thereof, does not forthwith file with ratification by the stockholders
the corporate secretary his written objection thereto;
- The second paragraph of section 31 which makes a
3. He agrees to hold himself personally and solidarily director liable to account for profits if he attempts to
liable with the corporation; acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
4. He is made, by a specific provision of law, to confidence as to which equity imposes a disability
personally answer for his corporate action. upon him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section 34
- Watered stocks- issued, fully paid up when in fact they if a director acquires for himself a business opportunity
have not been fully paid or promised as such which should belong to the corporation, he is bound to
account for such profits unless his act is ratified by the
• Llamado vs. CA stockholders owning ore representing at least 2/3 of
the outstanding capital stock.
- The corporate entity theory cannot be used as a
defense to escape liability in violation of B.P. 22 - If reposed in him in confidence, not subject to
ratification
- Where the check is drawn by a corporation the
persons who signed the check shall be liable. - If the acquisition is merely that of a business
opportunity which has not been reposed in him in
• Uichico vs. NLRC confidence, the same may be subject to ratification by
the stockholders.

- Labor case corporate directors and officers are Director x co.


solidarily liable with the corporation for the
termination of employment of corporate employee A-REALTY
done with malice and bad faith
B
 3 fold duty of directors
C Z owns property and is going abroad never to Return,
- obedient he wants to sell for 25M the fair
market value is 30M
- diligent
D
- loyal
E
 Business judgment rule
E goes to Z and offers to pay the property for 26 M and later he
sells it for 30M making 4M profit, one of the stockholders learned
- Questions of policy and management are left solely to
and complains that he should submit the profits. E said that he
the honest decision of the board of directors and the
will move for ratification of his actuation. Can it be ratified?
courts are without authority to substitute its judgment
as against the former. The directors are the business
- It can be ratified he merely acquired a business
managers of the corporation and as long as they act in
owning to the corporation
good faith, its actuations are not subject to judicial
review. Montelibano vs. Bacolod Murcia Milling
- It would be different if it was entrusted in his
confidence
- questions of policy and management are left solely to
the board of directors
Another scenario:
- BOD, business manager of the corporation and as long
Had A not attended the meeting he would not have known of
as they act in good faith, its actuations are not subject
the sale it is then a matter reposed in him in confidence
to judicial review

- They are not insurer of the property of the company,  A corporation cannot reaquire its share if it has no
they were guarantors that the enterprise undertaken restricted unretained earnings
by the corporation shall be successful
• Strong vs. Rapide
• Montelibano vs. Bacolod Murcia Milling Co.
- What duty did he violate?
- Directors are not liable due to imprudence or honest
error of judgment - He violated his duty of loyalty

- Duty of loyalty of corporate directors - The law would be impotent if the sale were not
invalidated
- 31,32,33,34
 Self-dealing director and interlocking director
- 31,32,33- specific instances when corporate officers
may violate loyalty
 What is a self-dealing director?

- 32,33 self-dealing and interlocking director


- Director of a corporation dealing or transacting
business with his corporation
 Corporate opportunity doctrine
 Are the contracts and dealing of a self0dealing director
- It places a director of a corporation in the position of a
valid?
fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and
 General rule: voidable
with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in
fairness should belong to the corporation.  May the contracts of a self-dealing director be valid
per se.
 Last paragraph of section 31 and the provision of
section 34 make reference to recovery of “forbidden - YES. If all the 4 conditions are present they will be
profits” valid per se

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1. That the presence of such director or trustee in the  May corporate directors purchase the corporate
board meeting in which the contract was approved property?
was not necessary to constitute a quorum for such
meeting; • Mead vs. Mccullogh

2. That the vote of such director or trustee was not - interlocking director- a director of one corporation who
necessary for the approval of the contract; deals and transacts business with another corporation
who is himself a director
3. That the contract is fair and reasonable under the
circumstances; and A- director of X company also a director of Y corporation

4. That in case of an officer, the contract has been B-


previously authorized by the board of directors.
C-
 When do they become voidable?
D-
- When any of the two requisites are absent it is
voidable, but subject to ratification by 2/3 of the E-
outstanding capital stock or 2/3 of the member
 Both companies enter into a contract and A sits, is the
 Requisites for ratification (subject to ratification by the contract valid?
stockholders holding or representing at least 2/3 of the
outstanding capital stock or 2/3 of the members.) - Yes on the ground of fraud or if it is unfair

- it must be at a meeting called for the purpose - May be subject to the provision of section 32

- full disclosure of the adverse interest of the director - Section 32 contract may become voidable, hence it
concerned must be made may also be ratified

- the contract is fair and reasonable under the X Co.


circumstances Y Co.

 Problem if self-dealing director involved owns all or A owe 20%


substantially all of the shares of stock of the A owe 20%
corporation thereby making it easily possible to have
the contract ratified Is it generally valid or voidable? VALID

- last sentence of section 32 should be made to apply 25%


by determining the reasonableness and fairness of the 25% VALID
contract
15%
Section 32. Dealings of directors, trustees 25% VOIDABLE SUBJECT TO section 32
or officers with the corporation. - A contract of the
corporation with one or more of its directors or More than 20 substantial
trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are
present:  BOD mismanages corporate officers. Who may file a
suit?

1. That the presence of such director or trustee in the


- General rule: BOD which can institute a case because
board meeting in which the contract was approved
was not necessary to constitute a quorum for such it has all the powers. To allow stockholders to file
meeting; would violate the doctrine of corporate entity and may
result to multiplicity of suits

2. That the vote of such director or trustee was not


necessary for the approval of the contract; - Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
3. That the contract is fair and reasonable under the
circumstances; and  Derivative suit

4. That in case of an officer, the contract has been - An action based on injury to the corporation-to enforce
previously authorized by the board of directors. a corporate right- wherein the corporation itself is
joined as a necessary party, and recovery is in favor of
and for the corporation.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such contract - Remedy granted by law to stockholders to institute a
may be ratified by the vote of the stockholders case to remedy a wrong done directly to the
representing at least two-thirds (2/3) of the corporation and indirectly to the stockholders, if the
outstanding capital stock or of at least two-thirds (2/3) board refuses to do so. Otherwise if not they would be
of the members in a meeting called for the purpose: left without any recourse
Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair  Available suits
and reasonable under the circumstances. (n)
• individual or personal
• Prime white cement vs. IAC
- Wrong done against his person as a stockholder
- a director of a corporation owes a position in trust
• Class suit
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the - Filed by a stockholder in representation of other
corporation to his own advantage stockholders

- as a director he should have acted in a manner as not - A wrong or redress done, a derivative suit in nature
to unduly prejudice the corporation
 Intra-corporate remedies
- he cannot be allowed to enrich himself
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- Demand to the BOD to institute such action being intra-corporate disputes, per Section 5 (b) of
P.D. 902-A
- Negated by the BOD
• San Miguel vs. Khan
- The one who instituted must be a stockholder at the
date when the act was done, must have been a - Was a demand made? NO
stockholder by that time
- It is not necessary because he objected in the board
 Demand will not be required if the majority of the BOD meeting, but still it was adopted therefore it was
are the one’s guilty of the wrong charged useless

• Chase vs. Buencamino


 The corporation must be made a party in the case
whatever side will not matter because under Philippine
- Argument that he should be in estoppels since he filed
law misjoinder is not a ground for dismissal
in the U.S.

 Non-joinder is a ground for dismissal - Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to
 Any benefit should inure to the corporation step in it must be a case by the corporation

 Stockholder bringing the action is entitled to • Reyes vs. tan


reimbursement such as attorney’s fee ONLY IF the
case is SUCCESSFUL to avoid harassment suit to their - Corporate director are guilty of breach of trust
management
- A stockholder may institute an action to remedy a
• Pascual vs. Orozco wrong done

- By virtue of the fact that he is a stockholder, may - Fraud in the conduct of corporate affairs
maintain a derivative suit
• Gamboa vs. Victoriano
- Depend on how, when and what reason
- Is derivative suit appropriate in this case
- Seeking for the years 1898 all the way 1907
- They are not vindicatory damage done to the
- Only became a stockholder in 1903 corporation, but rather they where vindicating damage
against him
- He can sue only in 1903 forward because he must be a
stockholder - Violation of their rights as individuals, hence derivative
suit is not the remedy
- The right of action is personal in nature. He became a
stockholder only in 1902 • Evangelista vs. Santos

 Derivative suit - Derivative suit is not proper

- By a stockholder to address a wrong done against the - Claim is not for the benefit of the corporation, but
corporation and the stockholder indirectly rather his individual benefit

- Essential requisite must have been a stockholder from  From the cases above cited, these are the
the time the act complained of took place requirements and the procedures that must be
followed in order that a derivative suit may prosper
- Cannot institute an action from the years he was still
not a stockholder 1. That the party bringing the suit should be a
stockholder as of the time the act or transaction
• Everett vs. Asia Banking complained of took place, or whose shares have
evolved upon him since by operation of law. This rule,
- Stockholders cannot ordinarily commence suit in however, does not apply if such act or transaction
equity and such is in the hands of its BOD however continues and is injurious to the stockholder or affect
there are exceptions when the BOD will not sue since him specifically in some other way.
they are themselves principals to the fraud.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or
• Republic vs. Cuaderno
vindication of his own right, or the redress of a wrong
done against him, individually, but in behalf and for
- The facts constitute sufficient cause of action
the benefit of the corporation.

- It is not the corporate interest to shield one from


2. He has tried to exhaust intra-corporate remedies, he
criminal prosecution which is personal interest
has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
- Perez is not suing in his behalf, but in behalf of the
heed his plea. Demand, however, is not required if the
corporation
company is under the complete control of the directors
who are the very ones to be sued (or where it
• Western institute vs. Salas becomes obvious that a demand upon them would
have been futile and useless) since the law does not
- Assuming it was filed in the proper forum would there require a litigant to perform useless acts;
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must 3. The stockholder bringing the suit must allege in his
be stated in the complaint that it is being instituted as complaint that he is suing on a derivative cause of
a derivative suit and for and in behalf of the action on behalf of the corporation and all other
corporation stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action
- Granting arguendo, that this is a derivative suit, the actually devolves on the corporation and not to a
same is still outrightly dismissible for having been particular stockholder.
wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case should 4. The corporation should be made a party, either as
have been filed with the SEC which exercises original party-plaintiff or defendant, in order to make the
and exclusive jurisdiction over derivative suits, they
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court’s judgment binding upon it, and thus, bar future  Corporate authority may be classified into three
litigation of the same issues. On what side the classes namely:
corporation appears loses importance when it is
considered that it lay within the power of the court to 1. Those expressly granted or authorized by law inclusive
direct the making of amendment of the pleading, by of the corporate charter or articles of incorporation;
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground 2. Those impliedly granted as are essential or reasonably
to dismiss action; and, necessary to the carrying out of the express powers;

5. Any benefit or damages recovered shall pertain to the 3. Those that are incidental to its existence.
corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the  Section 36 to 45- POWER GRANTED BY LAW
corporation and not for the protection or vindication of
a right or rights of a particular stockholder, otherwise,
the aggrieved stockholder should institute, instead, an Section 36. Corporate powers and capacity. - Every
individual or personal suit to vindicate his personal or corporation incorporated under this Code has the power and
capacity:
individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are
similarly situated, injured or violated, personally or 1. To sue and be sued in its corporate name;
individually.
2. Of succession by its corporate name for the period
 Executive committee of time stated in the articles of incorporation and the
certificate of incorporation;
- Not allowed under the OLD law
3. To adopt and use a corporate seal;
 How may executive committee created and
constituted?
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
- Section 35

5. To adopt by-laws, not contrary to law, morals, or


Section 35. Executive committee. - The by- public policy, and to amend or repeal the same in
laws of a corporation may create an executive accordance with this Code;
committee, composed of not less than three members
of the board, to be appointed by the board. Said
committee may act, by majority vote of all its 6. In case of stock corporations, to issue or sell stocks
members, on such specific matters within the to subscribers and to sell stocks to subscribers and to
competence of the board, as may be delegated to it in sell treasury stocks in accordance with the provisions
the by-laws or on a majority vote of the board, except of this Code; and to admit members to the corporation
with respect to: (1) approval of any action for which if it be a non-stock corporation;
shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal
7. To purchase, receive, take or grant, hold, convey,
of by-laws or the adoption of new by-laws; (4) the
sell, lease, pledge, mortgage and otherwise deal with
amendment or repeal of any resolution of the board
such real and personal property, including securities
which by its express terms is not so amendable or
and bonds of other corporations, as the transaction of
repealable; and (5) a distribution of cash dividends to
the lawful business of the corporation may reasonably
the shareholders.
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
- Said committee may act and bind the corporation by
the majority vote of all its members except with 8. To enter into merger or consolidation with other
respect to those matters provided for in sec. 35 these corporations as provided in this Code;
are:

9. To make reasonable donations, including those for


1. Approval of any action for which shareholders’ the public welfare or for hospital, charitable, cultural,
approval is also required scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations
2. The filing of vacancies in the board; in aid of any political party or candidate or for
purposes of partisan political activity;
3. Amendment or repeal of by-laws or the adoption of
new by-laws; 10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
4. Amendment or repeal of any resolution of the board employees; and
which by its express terms is not so amenable or
repealable; and, 11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
5. Distribution of cash dividends to the shareholders. stated in the articles of incorporation. (13a)

 May the board alone create an executive committee Section 37. Power to extend or shorten corporate
without any authority provided for the by-laws? term. - A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at
- NO board of directors must sit and act as a body to a meeting by the stockholders representing at least two-thirds
have a valid transaction (2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock corporations. Written
 May a non-member of the board of directors be a notice of the proposed action and of the time and place of the
member of the executive committee? meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage
- NO, all of them must be members of the board of prepaid, or served personally: Provided, That in case of
directors extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
- BOD cannot act by proxy it would be abdication of code. (n)
powers
Section 38. Power to increase or decrease capital
 Purpose clauses necessary because it confers and also stock; incur, create or increase bonded indebtedness. - No
limits the actual authority of the corporation corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's
CORPORATE POWERS AND AUTHORITY meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution
of the capital stock, or the incurring, creating or increasing of
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any bonded indebtedness. Written notice of the proposed exchange for property needed for corporate purposes or in
increase or diminution of the capital stock or of the incurring, payment of a previously contracted debt.
creating, or increasing of any bonded indebtedness and of the
time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the Section 40. Sale or other disposition of assets. -
incurring or increasing of any bonded indebtedness is to be Subject to the provisions of existing laws on illegal combinations
considered, must be addressed to each stockholder at his place and monopolies, a corporation may, by a majority vote of its
of residence as shown on the books of the corporation and board of directors or trustees, sell, lease, exchange, mortgage,
deposited to the addressee in the post office with postage pledge or otherwise dispose of all or substantially all of its
prepaid, or served personally. property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or
A certificate in duplicate must be signed by a majority of the other property or consideration, as its board of directors or
directors of the corporation and countersigned by the chairman trustees may deem expedient, when authorized by the vote of
and the secretary of the stockholders' meeting, setting forth: the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock corporation, by
the vote of at least to two-thirds (2/3) of the members, in a
(1) That the requirements of this section have been stockholder's or member's meeting duly called for the purpose.
complied with; Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
(2) The amount of the increase or diminution of the
corporation and deposited to the addressee in the post office
capital stock;
with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the
(3) If an increase of the capital stock, the amount of conditions provided in this Code.
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
A sale or other disposition shall be deemed to cover substantially
and residences of the persons subscribing, the amount
all the corporate property and assets if thereby the corporation
of capital stock or number of no-par stock subscribed
would be rendered incapable of continuing the business or
by each, and the amount paid by each on his
accomplishing the purpose for which it was incorporated.
subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the After such authorization or approval by the stockholders or
purpose of making effective stock dividend therefor members, the board of directors or trustees may, nevertheless,
authorized; in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto,
(4) Any bonded indebtedness to be incurred, created
without further action or approval by the stockholders or
or increased;
members.

(5) The actual indebtedness of the corporation on the


Nothing in this section is intended to restrict the power of any
day of the meeting;
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or
(6) The amount of stock represented at the meeting; otherwise dispose of any of its property and assets if the same is
and necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the conduct of its
(7) The vote authorizing the increase or diminution of remaining business.
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
In non-stock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in
Any increase or decrease in the capital stock or the incurring, office will be sufficient authorization for the corporation to enter
creating or increasing of any bonded indebtedness shall require into any transaction authorized by this section.
prior approval of the Securities and Exchange Commission.

Section 41. Power to acquire own shares. - A stock


One of the duplicate certificates shall be kept on file in the office corporation shall have the power to purchase or acquire its own
of the corporation and the other shall be filed with the Securities shares for a legitimate corporate purpose or purposes, including
and Exchange Commission and attached to the original articles but not limited to the following cases: Provided, That the
of incorporation. From and after approval by the Securities and corporation has unrestricted retained earnings in its books to
Exchange Commission and the issuance by the Commission of its cover the shares to be purchased or acquired:
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may 1. To eliminate fractional shares arising out of stock dividends;
declare: Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of capital
2. To collect or compromise an indebtedness to the corporation,
stock unless accompanied by the sworn statement of the
arising out of unpaid subscription, in a delinquency sale, and to
treasurer of the corporation lawfully holding office at the time of
purchase delinquent shares sold during said sale; and
the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been
subscribed and that at least twenty-five (25%) percent of the 3. To pay dissenting or withdrawing stockholders entitled to
amount subscribed has been paid either in actual cash to the payment for their shares under the provisions of this Code. (a)
corporation or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease Section 42. Power to invest corporate funds in
of the capital stock shall be approved by the Commission if its another corporation or business or for any other purpose. -
effect shall prejudice the rights of corporate creditors. Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was
Non-stock corporations may incur or create bonded organized when approved by a majority of the board of directors
indebtedness, or increase the same, with the approval by a or trustees and ratified by the stockholders representing at least
majority vote of the board of trustees and of at least two-thirds two-thirds (2/3) of the outstanding capital stock, or by at least
(2/3) of the members in a meeting duly called for the purpose. two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and
Bonds issued by a corporation shall be registered with the
the time and place of the meeting shall be addressed to each
Securities and Exchange Commission, which shall have the
stockholder or member at his place of residence as shown on the
authority to determine the sufficiency of the terms thereof. (17a)
books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided,
Section 39. Power to deny pre-emptive right. - All That any dissenting stockholder shall have appraisal right as
stockholders of a stock corporation shall enjoy pre-emptive right provided in this Code: Provided, however, That where the
to subscribe to all issues or disposition of shares of any class, in investment by the corporation is reasonably necessary to
proportion to their respective shareholdings, unless such right is accomplish its primary purpose as stated in the articles of
denied by the articles of incorporation or an amendment thereto: incorporation, the approval of the stockholders or members shall
Provided, That such pre-emptive right shall not extend to shares not be necessary. (17 1/2a)
to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be
Section 43. Power to declare dividends. - The board
issued in good faith with the approval of the stockholders
of directors of a stock corporation may declare dividends out of
representing two-thirds (2/3) of the outstanding capital stock, in
Notes on Corporation Law
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22

the unrestricted retained earnings which shall be payable in - strict compliance is necessary
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash - should be served to those named in the statute
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent - secretary of a dep’t are not those included in the
stockholder until his unpaid subscription is fully paid: Provided, statute
further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds • E.B. Villarosa vs. Benito
(2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
- decision En Banc repeals all other pronouncement

Stock corporations are prohibited from retaining surplus profits - section 13 Rule 14 was repealed
in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) - the old rules was ambiguous and broad and at all time
when the corporation is prohibited under any loan agreement illogical
with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such  the particular revision under Section 11 of Rule 14 was
consent has not yet been secured; or (3) when it can be clearly
explained by retired Supreme Court Justice Florenz
shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there Regalado, thus:
is need for special reserve for probable contingencies. (n)
“xxx the then section 13 of this Rule allowed
service upon a defendant corporation to “be
Section 44. Power to enter into management
contract. - No corporation shall conclude a management contract made on the president, manager, secretary,
with another corporation unless such contract shall have been cashier, agent or any of its directors.” The
approved by the board of directors and by stockholders owning aforesaid terms were obviously ambiguous
at least the majority of the outstanding capital stock, or by at and susceptible of broad and sometimes
least a majority of the members in the case of a non-stock illogical interpretations, especially the word
corporation, of both the managing and the managed corporation, “agent” of the corporation. The Filoil case,
at a meeting duly called for the purpose: Provided, That (1)
involving the litigation lawyer of the
where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations corporation who precisely appeared to
own or control more than one-third (1/3) of the total outstanding challenge the validity of service of summons
capital stock entitled to vote of the managing corporation; or (2) but whose very appearance for that purpose
where a majority of the members of the board of directors of the was seized upon to validate the defective
managing corporation also constitute a majority of the members service, is an illustration of the need for this
of the board of directors of the managed corporation, then the revised section with limited scope and
management contract must be approved by the stockholders of
specific terminology. Thus the absurd result
the managed corporation owning at least two-thirds (2/3) of the
total outstanding capital stock entitled to vote, or by at least in the Filoil case necessitated the
two-thirds (2/3) of the members in the case of a non-stock amendment permitting service only on the
corporation. No management contract shall be entered into for a in-house counsel of the corporation who is in
period longer than five years for any one term. effect an employee of the corporation, as
distinguished from an independent
The provisions of the next preceding paragraph shall apply to practitioner.”
any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another o notes: additional knowledge
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That
- special appearance enter for that particular
such service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of appearance you are not the counsel in the case
natural resources may be entered into for such periods as may
be provided by the pertinent laws or regulations. (n) - would apply only if it does not involve an intra-
corporate controversy (controversy between and
Section 45. Ultra vires acts of corporations. - No among the stockholders)
corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its - upon any of the statutory officers or officers fixed in
articles of incorporation and except such as are necessary or the by-laws any secretary, any of the directors; any
incidental to the exercise of the powers so conferred. (n) managers in the by-laws

Section 36  Seal

 Where should the corporation be sued? - merely ministerial or permissive

- principal office is important because it establishes the  Power to amend


residence of the corporation and determining service
of summons, venue of action - section 16

- it can be sued in the city or municipality where its - special 37,38,120


principal office is found
 Power to adopt by-laws
 Principal office is also important for venue of meetings
- section 46-48

 Non-stock corporation may provide in its by-laws that  Power to issue or sell stocks and to admit members
the venue of meeting be anywhere in the Philippines
- stock of stockholders and provision governing non-
 Upon whom service of summons be made? stock

- Section 11. Service upon domestic private juridical  Power to acquire or alienate real or personal property
entity- when the defendant is a corporation,
partnership or association organized under the laws of - is there any limitation? YES
the Philippines with a juridical personality, service may
be made upon the president, managing partner, - Two specific limitation
general manager, corporate secretary, treasurer, or in
house counsel. 1. Section 36, as lawful transactions of business of the
corporation may reasonably and necessarily require
• Delta motor vs. Mangosing
2. Constitution and law
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23

• Luneta vs. A.D. Santos - Examined the articles of incorporation to arrive at its
decision
- Importance of the purpose clause
• National Power vs. Vera
- Cannot have the power to acquire
- For purpose of prohibiting the NAPOCOR
- Cannot engage in land transportation
- The court must decide whether or not a logical and
- Doctrine of limited capacity necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC
• Gov’t vs. El Hogar charter

- As the lawful transaction of its business may  Importance of PLACE of registration


reasonably represent
- Residence
• Director of Lands vs. CA
- Venue
- Exception to the rule in the constitution
- Place of meetings
- Alienable public land
- Place or registration of chattel mortgage
- Converts the property to a private land automatically
once converted it can now be registered  Power to extend its terms

 Power to make donation - Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- Limitation section 36 par.9
- After dissolution, it has 3 years to windup
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a  What are the modes of increasing capital stock?
means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36 expressly 1. Increasing the par value of the existing number of
authorizes a corporation to make donations. The only shares without increasing the number of shares;
limitations imposed are the following:
2. Increasing the number of existing shares without
1. The donation must be “reasonable”; increasing the par value thereof; and,

2. It must be for public welfare, or for hospital, charitable, 3. Increasing the number of existing shares and at the
scientific, cultural or similar purpose; and, same time increasing the par value of the shares.

3. It shall not be in aid of political party or candidate, or  Why a corporation increases it capital stock?
for purposes of partisan political activity.
- Generate funds, business expansion, or payment of
 Power to establish pension liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
- Include any act to promote and improve the acquiring other business, expansion, other valid
convenience, welfare and benefit of the employees or reasons)
offices
 How do you decrease capital stock and why a
• Republic vs. Acoje corporation decreases?

- While as a rule an ultra-vires act is one committed - Reduce or wipeout existing deficit where no creditors
outside the object for which a corporation is created would thereby be effected
as defined by law, there are however certain
corporate acts that may be performed outside of the - When capital is more than necessary to procreate the
scope of the powers expressly conferred if they are business or reduction of capital surplus
necessary to promote the interest or welfare of the
corporation. Thus, it has been held that “although not - To write down the value of its fixed assets to reflect
expressly authorized to do so a corporation may those present and actual
become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its o NOTE: any increase or decrease of capital stock
business,” and here it is undisputed that the requires approval of government agency like SEC it
establishment local post office is a reasonable and can never take place unless SEC approves the same
proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital  Relevance of decrease of capital?
improvement in the living condition of its employees
and laborers who came to settle in its mining camp
1. To reduce or wipe out existing deficit where no
which is far removed from the postal facilities or
creditors would thereby be affected;
means of communication accorded to people living in
a city or municipality.
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus;
 Power to exercise such other powers essential or or,
necessary to carry out its purpose (implied power)
3. To write down the value of its fixed assets to reflect
1. Acts in the usual course of business; there present actual value in case where there is a
decline in the value of the fixed assets of the
2. Acts to protect debts owing to the corporation; corporation.

3. Embarking in a different business; - Examples: Php 10M capital for grocery business,
mayor didn’t want to issue license/permit because
4. Acts in part or wholly to protect or aid employees; and, mayor has 3 other grocery stores, only allowed sari-
sari store permit, reduce capital for sari-sari so that
5. Acts to increase business the money will not sleep in bank

• Teresa Electric and Power Co. vs. P.S.C.


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- Example: car rental agencies-Php 10M capital for 20  May it be denied? How?
taxi’s, after some time each taxi is only 250K,
nagmura ang taxi, to reduce capital is to show actual
assets
- Yes, if provided by articles of incorporation or by an
amendment
 Limitation imposed by law
- However, pre-emptive rights is unavailable to shares in
trading in stock exchange otherwise stockholders must
- Decrease shall not in any way affect the rights of the
waive first their right before they may sell such.
creditors

 Exceptions
 Philippine Trust Company vs. Rivera

1. When the shares to be issued is in compliance


- Without the appraisal of SEC, a decrease in capital
with laws requiring stock offerings or minimum
stocks has no effect
stock ownership by the public

 TRUST FUND DOCTRINE:


2. Shares to be issued in good faith with the
approval of the stockholders representing 2/3 of
- Subscription to capital stock of a corporation the outstanding capital stock either
constitute a fund to which the creditors have a right to
look upon for satisfaction of their claims and that the
a. In exchange for property needed for
assignee in insolvency can maintain an action upon
corporate purpose or,
any unpaid stock subscription in order to realize assets
for the payment of its debts.
b. In payment of a previously contracted debt

• Madrigal vs. Zamora


- The exceptions, however will not apply to stockholders
of a close corporation by virtue of a subsequent and
- Decrease in capital has a subterfuge to evade specific provision of the Code which provides that the
payment “pre-emptive right of a stockholder in a close
corporation shall extend to all stock to be issued,
- Thus not valid and effective including reissuance of treasury shares, whether for
money, property or personal services or in payment of
- Must not prejudice creditors which includes the a corporate debt, unless the articles of incorporation
employees provide otherwise, if not entirely absolute, in that it
extends to all issuance and disposition of shares
 Bond
- Such right of pre-emption may be lost by waiver of the
- Commonly understood as an obligation of a state, its stockholder, expressly or impliedly by his inability or
subdivision or a private corporation, represented by a failure to exercise it after having been notified of the
certificate or an instrument for the principal and by proposed issuance or disposition of shares
detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges  When is it unavailable?
himself to pay a certain sum of money to another at a
day named.
- In shares traded openly in stock exchange/market
- There are different kinds of bond but before they may
be issued or floated by the corporation, the same must  Is it applicable to close corporations?
be registered and approved by the SEC subject to the
rules and regulations that may be adopted by that - See section 96, close corporations must provide it first
agency. The procedure and requirements set forth in on its articles of incorporation, that its articles does
section 38 is the same as in increasing or decreasing not really deny such pre-emptive rights.
the capital stock except that the certificate does not
have to state the matters required in sub-section 2 & 3  Section 102, will not apply to close corporations
thereof.

 Pre-emptive rights
 The right of pre-emptive rights is absolute in close
corporations
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or “All issues or depositing shares of any class” form part of ACS
disposition of shares of any class, in proportion to their
respective stockholdings, subject only to the  Certain instances when a stockholder may
limitations imposed under section 39 of the Code. nevertheless be unable to exercise this right:

- Internationally granted - Issued for public ownership

 Pre-emptive rights, why it is granted? - Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in exchange for
property needed or b) for payment of a previously
- In order that the existing stockholders may maintain
contracted debt
their proportionate right as not to dilute their right

 Pre- emptive rights of stockholders in ordinary stock


 Power to deny pre-emptive rights
corporations may be denied

Section 39. Power to deny pre-emptive - if the shares are to be issued in compliance with laws
right. - All stockholders of a stock corporation shall requiring stock offering or minimum stock ownership
enjoy pre-emptive right to subscribe to all issues or
by the pubic
disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied
by the articles of incorporation or an amendment - In exchange for property needed for corporate
thereto: Provided, That such pre-emptive right shall purposes
not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock - In payment of previously contracted debts
ownership by the public; or to shares to be issued in
good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital  This rule, however, does not apply in a close
stock, in exchange for property needed for corporate corporation as the pre-emptive rights of the
purposes or in payment of a previously contracted stockholders thereof is broadened to include all issues
debt.

Notes on Corporation Law


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25

without exceptions unless, of course, denied or limited  May 1-5 subscribe to the unsubscribed capital stock to
by the articles of incorporations. Section 102 provides: the exclusion of 6-10?

Section 102. Pre-emptive right in close - If a corporation makes 2M unrestricted retained


corporations. - The pre-emptive right of stockholders in earnings, it is the shares and not the number of
close corporations shall extend to all stock to be persons that matters
issued, including reissuance of treasury shares,
whether for money, property or personal services, or  May 6-10 complain for a dilution of their interest?
in payment of corporate debts, unless the articles of
incorporation provide otherwise.
- YES, it’s an internationally recognized right because it
includes “all issues and disposition of shares of any
 Denial will not apply to a close corporation, ABSOLUTE class” and all kinds of shares new or old

- section 96 - If the remaining unsubscribed shares are issued, it’s


an issuance of any class
 May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?  May a corporation sell/dispose all or substantially all of
its corporate assets and liabilities?
- Yes, section 102
- YES
 What type or shares are covered by pre-emptive
rights? - 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION
4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
 Does it include those originally unsubscribed? PROVISIONS OF EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT
- NO. Benito vs. SEC

 If a corporation sells substantially all of it assets and


 Will the stockholders be able to exercise their pre- properties, will the buyer assume liability?
emptive right with respect to the old unissued shares?
- NO, EXCEPT
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it is
1) Express or implied agreement to the purchase
presumed that the original subscribers is deemed to
have taken his shares knowing that they form a
2) Where the transaction amounts to consolidation or
definite proportionate part of the whole number of
merger of the corporations
authorized shares

3) When purchasing corporation is merely a continuation


- When the shares, left unsubscribed are re-offered, he
of the selling corporation
cannot therefore claim. DILUTION OF INTEREST

4) Where the transaction is entered into fraudulently in


 Will the acquiring purchaser be liable for debts of the order to escape liability for such debt
former corporation?

 Legitimate purpose: for a corporation to reacquire its


- Generally no, corporate entity theory because there
own shares
may be instances when purchasing corporation may
be held liable
- Limitation: it must have surplus/unrestricted retained
earnings
 May a corporation acquire its own shares?
- Exception: may redeem irrespective of unrestricted
- Yes retained earnings

 Is there any restriction provided for by law in 1) Exercise of stockholders’ right to compel “close
reacquiring its own shares? corporation” to purchase his shares

- Yes, it must have been unrestricted retained earnings 2) Where corporation has sufficient assets in its books to
appearing in the books of corporation cover its debts and liabilities exclusive of capital stock

 A corporation can never acquire its own shares if it has ACS 1M


no unrestricted retained earnings
SUBSRIBED 1M
- False, exception close corporation and redeemable
shares PAID-UP 1M

EXAMPLE: ASSETS 500K

ACS 2M 1M PROFITS

SUBSCRIBED 1M - 500K LIABILITIES

PAID UP 1M ____________________

1 100K 500K RESERVES IN A CLOSE


CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS
2 100K
X – REALTY CORPORATION
TO
• THE ONLY PROPERTY OF
10 100K THE CORPORATION

 If 1-5 became 200K each, may 6-10 demand the • BOARD OF DIRECTORS
exercise their pre-emptive right? DECIDED TO SELL IT

- YES Will it need the approval of the stockholders?

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- NO, if the same is necessary in the usual and regular • Steinberg vs. Velasco
course of business of said corporation or if the
proceeds of the sale or other disposition of such - For as long as there are debts and liabilities, a
property and assets be appropriated for the conduct of corporation may not reacquire its shares (subject to
its remaining business exceptions)

 If X is a manufacturing company, then it can sell its - Creditors of a corporation have the right to assume
only property upon approval of the stockholders that so long as there are outstanding debts and
because it will render itself capable of continuing its liabilities, the board of directors will not use the assets
business, BUT if the proceeds will be used to purchase of the corporation to purchase its own stock, and that
a better one for the continuance of its business, then it it will not declare dividends to stockholders when the
does not need the approval of the stockholders corporation is insolvent.

 Conditions for the valid exercise of this power are the  Power to invest funds <sec.42>
following

Section 42. Power to invest corporate


1. Resolution by the majority vote of the board of
funds in another corporation or business or for any
directors/trustees other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other
2. Authorization from the stockholders representing at corporation or business or for any purpose other than
least 2/3 of the outstanding capital stock or 2/3 of the the primary purpose for which it was organized when
members; approved by a majority of the board of directors or
trustees and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital
3. The ratification of the stockholders or members must stock, or by at least two thirds (2/3) of the members in
be made at a meeting duly called for that purpose the case of non-stock corporations, at a stockholder's
or member's meeting duly called for the purpose.
4. Prior written notice of the proposed action and of the Written notice of the proposed investment and the
time and place of meeting must be made addressed to time and place of the meeting shall be addressed to
each stockholder or member at his place of residence
all stockholders of record, either by mail or personal
as shown on the books of the corporation and
service; deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
5. The sale of the assets shall be subject to the any dissenting stockholder shall have appraisal right
provisions of existing laws on illegal combinations and as provided in this Code: Provided, however, That
monopolies where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the
6. Any dissenting stockholder shall have the option to stockholders or members shall not be necessary. (17
exercise his appraisal right 1/2a)

• IDP vs. CA - For any other purpose other than the primary purpose,
stockholder’s consent or approval is necessary
- Consent of the members was not secured
- Thus, if it’s for the secondary purpose, it is necessary
• Edward Nell Co. vs. Pacific Farms
- If it’s in connection with the primary purpose, only
- Generally where one corporation sells or otherwise board resolution is necessary
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the  Requirements and steps to be followed for a valid
transferor, except: investment of corporate funds are:

1. Where the purchaser expressly or impliedly 1. Resolution by the majority of the board of directors or
agrees to assume such debts; trustees;

2. Where the transaction amounts to a consolidation 2. Ratification by the stockholders representing at least
or merger of the corporations; 2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation; 3. The ratification must be made at a meeting duly called
for that purpose;
4. Where the transaction is entered into fraudulently
in order to escape liability for such debts. 4. Prior written notice of the proposed investment and
the time and place of the meeting shall be made,
 Power to acquire own shares addressed to each stockholder or member by mail or
by personal service, and;
Section 41. Power to acquire own shares. -
A stock corporation shall have the power to purchase 5. Any dissenting stockholder shall have the option to
or acquire its own shares for a legitimate corporate exercise his appraisal right
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has • Dela rama vs. Ma-ao Sugar
unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
- There is a substantial and not remote connection
between the sugar bags and the sugar manufacture,
1. To eliminate fractional shares arising out of stock thus stockholder’s approval is not necessary for
dividends;
validity

2. To collect or compromise an indebtedness to the - A private corporation, in order to accomplish its


corporation, arising out of unpaid subscription, in a purpose as stated in its articles of incorporation, and
delinquency sale, and to purchase delinquent shares
imposed by the Corporation Law, has the power to
sold during said sale; and
acquire, hold, mortgage, pledge, or dispose of shares
bonds, securities and other evidences of indebtedness
3. To pay dissenting or withdrawing stockholders of any domestic or foreign corporation. Such an act, if
entitled to payment for their shares under the done in pursuance of the corporate purpose, does not
provisions of this Code. (a)
need the approval of the stockholders; but when the
purchase of shares of another corporation is done
 The corporation must at all times have “unrestricted solely for investment and not to accomplish the
retained earnings” to exercise this corporate power

Notes on Corporation Law


“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
27

purpose of its incorporation, the vote of approval of  What are property dividends?
the stockholders is necessary.
- Those paid in property surplus
• Gokongwei vs. SEC
 Like tables and chairs? Can tables and chairs make
- Investments made by SMC is necessarily connected surplus profits?
with its primary purpose and this was ratified in a
meeting - No, they do not make surplus, bonds, etc.

- Submission of previous action is a sound corporate  Where should dividends come from?
practice
- Stock dividends are declared as stocks coming from
 Redeemable shares corporation

 Closed corporation (see section 105)  Who declares dividends to be declared? Do


stockholders have any say?
- For any reason, compel the value of shares
“withdrawal shares” provided corporation has - Board of Directors, if stock approval of 2/3 outstanding
sufficient funds to cover its debts and liabilities capital stock

Section 105. Withdrawal of stockholder or ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus


dissolution of corporation. - In addition and without profits of the corporation)
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close 1-100k
corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value,
2-100k
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital To
stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities 10-100k
and Exchange Commission, compel the dissolution of
such corporation whenever any of acts of the
directors, officers or those in control of the corporation 1M
is illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any  Board decides to declare 1M, how much will each
stockholder, or whenever corporate assets are being receive? May the board declare stock dividend
misapplied or wasted.
- NO. that would be over issuance of shares, violation of
 If shares are reacquired, what happens? securities regulation code

- It becomes treasury shares - It must have a free portion

 Stockholder’s consent/ approval is not necessary and - The corporation may increase its capital
mere board action is sufficient if in accordance with
primary purpose  Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
 The logical relation of act done and primary purpose of
corporation and between the board of directors to
- No, because in property 2/3 is not required
undertake submission of acts is a sound corporate
practice
 What is the effect of declaration of dividends with
regards to the assets of a company?
 Dividends

- As compared to stock dividends, the declaration of


Section 43. Power to declare dividends. - cash or property dividends have the effect of reducing
The board of directors of a stock corporation may corporate assets to the extent of dividends declared.
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or
in stock to all stockholders on the basis of outstanding - Neither would stock dividends increase the
stock held by them: Provided, That any cash dividends proportionate interest of the stockholders of the
due on delinquent stock shall first be applied to the corporation although it will have the effect of
unpaid balance on the subscription plus costs and increasing the subscribed and paid-up capital of the
expenses, while stock dividends shall be withheld from corporation. It gives the stockholders nothing in the
the delinquent stockholder until his unpaid way of distribution of assets but merely divides his
subscription is fully paid: Provided, further, That no
existing shares into smaller units.
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or  Earnings belong to the corporation until declared or
special meeting duly called for the purpose. (16a) given

Stock corporations are prohibited from  Revocation


retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: - No revocation of dividend may be has unless it has not
(1) when justified by definite corporate expansion been officially communicated to the stockholders or is
projects or programs approved by the board of
in the form of stock dividends which is revocable at
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial any time prior to distribution.
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can  Stock dividends- no reduction, you capitalize your
be clearly shown that such retention is necessary restricted retained earnings, what is issued is a piece
under special circumstances obtaining in the of paper. The restricted earnings remain in the
corporation, such as when there is need for special corporation
reserve for probable contingencies. (n)
 Cash and property- reduces corporate assets
 What are dividends?
 Stock dividends increase corporate assets? No, it will
- Corporate profits set aside, declared and ordered by only have the effect of increasing the subscribed and
the Board of Directors to be paid to the stockholders. paid-up capital of the corporation

Notes on Corporation Law


“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
28

 Will there be a corresponding increase in their  How did the court decide dividends in the case of
proportionate interest? Neilsen

- REMAINS THE SAME - Stock dividends cannot be issued to a person who is


not a stockholder in payment of services rendered.
- Exception: when stock dividends will result in a
- Whether cash, property or stock, only stockholders
fractional share
may receive dividends. Dividends are fruits of
investments. They come from the U.R.E. or surplus
ACS-2M 1-100K 200 (10%) *VOTING AND
profits of the corporation.
DIVIDEND RIGHTS STILL THE SAME

ACS 2M 1M U.R.E.
SUB-1M TO
10%
SUB 1M JULY 24 DECLARATION
JULY 31
PU-1M 10-100K

PU 1M
ACS 2M

1 100K 100T JULY 26-Y(NEW ONE WAS DECLARED


SUB 1M
TO Y) JULY 30- 100K

PU 1M
2

1M RE
TO TO HAVE THE TRANSFER
RECORDED
1 100K
10 100K
2 100K
1M
TO

 Insofar as 1 and Y who has a better right? Already


10 100K
declared, but not yet paid?

1M
- Right to receive vest upon declaration. Who ever owns
at the time of declaration owns the dividends
 May they be compelled?
- Unless there is a stipulation to the contrary
- NO. You cannot declare if it does not come from
unrestricted retained earnings.  TRUST FUND DOCTRINE

1. 1M-U.R.E. (is it true there is no way to compel?) - The power to declare it if paid-up capital is not
maintained or is impaired
2. 2M-U.R.E.
- Trust fund must be kept intact for the protection of
 May they be compelled to declare dividends creditors who have the right to rely on such
subscription and the paid-up capital for the satisfaction
- Mandatory if earned, the board may be compelled to of their claims
declare dividends
 Cannot accumulate surplus unreasonably

- if exceeds 100% of the paid-up capital the boards may


 Basis is the paid-up capital
be compelled

 Entitled to dividends
ACS 2M 1M U.R.E.

 Irrespective of whether the subscription is full


SUB 1M

PU 800K  Illegally declared

1-100K 50K PU - Declare dividend with the belief that it formed part of
the U.R.E., but yun pala sa capital
2-100K 50K
 Directors are not liable, unless sec31 acted in bad faith
TO or gross negligence in the conduct of corporate affairs

10-100K  Directors even if acting in behalf of the corporation,


may still be held solidarily liable
1M
 Power to enter into management contract
 Will 1 and 2 receive full amount of dividends?
- New provision
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be applied Section 44. Power to enter into
to his delinquency plus expenses. management contract. - No corporation shall conclude
a management contract with another corporation
 Delinquency occurs, you are called to pay, but you unless such contract shall have been approved by the
board of directors and by stockholders owning at least
failed to pay. In case of stock dividend, the delinquent
the majority of the outstanding capital stock, or by at
stock holder will not be entitled thereto until he has least a majority of the members in the case of a non-
paid his subscription in full. stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the
 Are non-stockholders entitled to receive dividends? purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both
the managing and the managed corporations own or
- No, tock dividends are civil fruits of the original control more than one-third (1/3) of the total
investment, and to the owners of the shares belong outstanding capital stock entitled to vote of the
the civil fruits. managing corporation; or (2) where a majority of the
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
29

members of the board of directors of the managing - Ultra-vires acts which are not illegal per se may
corporation also constitute a majority of the members become binding and enforceable either by satisfaction,
of the board of directors of the managed corporation, estoppels or equitable grounds
then the management contract must be approved by
the stockholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding capital  Consequences of ultra-vires acts?
stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. 1. On the corporation itself
No management contract shall be entered into for a
period longer than five years for any one term.
- The proper forum, in accordance with the provisions of
PD 902-A, as amended and R.A. No. 8799 may
The provisions of the next preceding suspend or revoke, after proper notice and hearing,
paragraph shall apply to any contract whereby a the franchise or certificate of registration of the
corporation undertakes to manage or operate all or corporation for serious misrepresentation as to what
substantially all of the business of another corporation,
the corporation can do or is doing to the great damage
whether such contracts are called service contracts,
operating agreements or otherwise: Provided, or prejudice of the general public
however, That such service contracts or operating
agreements which relate to the exploration, 2. On the rights of the stockholders
development, exploitation or utilization of natural
resources may be entered into for such periods as may - A stockholder may bring either an individual or
be provided by the pertinent laws or regulations. (n)
derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been
 The requirement for a valid management contract are performed, a derivative suit for damages against the
as follows: directors may be filed, but their liability will depend on
whether they acted in good faith and with reasonable
1. Resolution of the board of directors diligence in entering into the contract.
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of 3. On the immediate parties
the members in case of non-stock corporation of both
the managing and the managed corporation
- The courts have not agreed as to the legal effect of a
3. The approval of the stockholders or members must be
made at the meeting called for that purpose corporate contract outside of its authorized business
4. The contract shall not be for a period longer than 5 but Ballatine gives the following summary of the
years for any one term, except those which relate to doctrines evolved:
exploration, development or utilization of natural
resources which may be entered into for such periods a. If the contract is fully executed on both sides, the
as may be provided by pertinent laws and regulations
contract is effective and the courts will no
 Every corporate act emanates from the BOARD
interfere to deprive either party of what has been
acquired under it
 Is the voting requirements of a majority stockholder
ABSOLUTE?
b. If the contract is executory on both sides, as a
rule, neither party can maintain an action for its
- Not only a majority but 2/3 of the outstanding capital non-performance
stock or 2/3 of the members in a non-stock corporation
would be required for the approval of a management c. Where the contract is executor on one side only,
contract in the following instances: and has been fully performed on the other, the
courts differ as to whether an action will lie on
1. Where the stockholders representing the same the contract against the party who has received
interest of both the managing and managed benefits of performance under it. Majority of the
corporation own or control more than 1/3 of the total courts, however, hold that the party who has
outstanding capital stock of the managing corporation; received benefits from the performance is
and estopped to set up that the contract is ultra-vires
to defeat an action on the contract. This is more
2. Where a majority of the members of the board of in conformity with the doctrine that no person
directors of the managing corporation also constitute a shall be allowed to enrich himself at the expense
majority of the directors of the managed corporation of another

3. Where the contract would constitute the management • Privano vs. Dela Rama
or operation of all or substantially all of the business of
another corporation, whether such contracts are called - Court looked into the purpose clause
service contracts. If it will not constitute the
management of all or substantially all of the business - The purpose clause empowers and limits
of another corporation the first paragraph of section
44 will apply and not that of the second, that is, only - Articles likewise provide that it may deal with any of
the vote of the stockholders holding or representing at its money
least a majority of the outstanding capital stock or
majority of the members in the case of non-stock - “deal” broad enough to cover the donation it is not
corporation will be required. then ultra-vires

 How long? - Not illegal per se hence (law of agency) excess powers
are subject to ratification
- Not longer than 5 years for any one term
- Ratified by passing the resolution in question
- Exception: exploration, development or utilization of
natural resources • Carlos vs. Mindoro sugar Co.

 What is an ultra-vires act or contract? - PTC- trust company as such, it also has implied powers
as to make them more attractable
- Doctrine of limited capacity. Corporation can do such
acts and things as it is allowed to do - Not ultra-vires in pursuance of its legitimate business

- Acts beyond it will be ultra vires, allowing a collateral • Japanese war notes vs. SEC
attack
- Non-stock corporations cannot make profits and
- If not illegal per se merely voidable. Can be ratified distribute profits to its shareholders
expressly or impliedly or even stopped as equitable
grounds

Notes on Corporation Law


“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
30

- Ultra-vires because Japanese war notes is a non-stock


- Subject the corporation to a fine, as may be issued by
corporation
the SEC

• Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN


 When do by-laws become effective?
SUNDIANG)

- Until and unless the SEC gives it stamped of approval


- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
- Suspension of any government agency. The
holder for value, although such holder at the time of
permission must first be secured- section 46
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. This is  Elements of a valid by-law
because the issue or indorsement of negotiable paper
by a corporation without consideration and for the 1. It must not be contrary to law, public policy or morals;
accommodation of another is ultra-vires
2. It must not be inconsistent with the articles of
- Corporate officers may guarantee or endorse an incorporation;
accommodation only if specifically authorized
3. It must be general and uniform in its effect or
Section 36 paragraph 11 applicable to all alike or those similarly situated;

Section 10 4. It must not impair obligations and contracts or vested


rights; and’
Section 14 and 15
5. It must be reasonable.
 Corporate powers depend on the agreement of the
stockholders rather than any director - Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to the  By-laws
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS CASE - None filing would not affect the status of the
corporation, Loyola grand villas case
- Purpose clause may be stretched to cover PLDT
internet. It may be within its business. - The word “must” is not always imperative

- May it sell computers? NO! other line of business. Its


- Stockholders are conlusively presumed to know the
trading! provisions of the by-laws

BY-LAWS
 How about 3rd persons?
 By-Laws
- NO. unless there is actual knowledge of the same they
- Rule adopted by the corporation for its internal are not presumed to know of the provisions of the by-
governance laws

 Is the adoption of by-laws mandatory? • Fleischer vs. Botika Nolasco

 When should the by-laws be adopted or filed? Can it - Shares of stock are personal properties
not be adopted earlier?
- Shares of stock may transfer to whom ever he wishes
- After incorporation- within 1 month (emanates from
the BOARD) - The by-laws is contrary to law

- Prior-more convenient (signed by the incorporators)  Articles of incorporation

 Who will sign the adoption clause? - May provide reasonable restriction

- Majority of the stockholders or members attested to by - By-laws merely internal laws


the corporate secretary
- Articles is the contract between and among the parties
 What happens if the corporation fails to adopt the by- and corporation
laws from the tie provided by the law? Would there be
an automatic revocation or suspension? • Gov’t vs. El Hogar

- Proper notice and hearing, must first be complied with - Did the court categorically ruled here that the
provision in the 5th cause of action is valid?
• Loyola grand villas vs. CA
- Rules governing equity, considering the fact that there
- Not the SEC, but the HIGC was always lack of quorum

- Must – not always imperative - Section 29 BOD if still constituting a quorum may fill
up a vacancy other than by removal, etc.
- Filing of by-laws mandatory
• Gokongwei vs. SEC
- Empowered by SEC
- Section 48 allows a corporation to amend it by-laws
- Merely a ground, there must be proper notice and
hearing - Section 47 of the code, the by-laws may provide for
the qualification and disqualification
- Not affect the status of the corporation as a juridical
person - It cannot be said Gokongwei has a vested rights

Notes on Corporation Law


“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
31

- Prevent directors from taking advantage of position to - Upon issuance of the SEC that they are not
promote his individual interest to the damage of inconsistent
others
 What if the SEC failed to act within 10 months without
- The validity or reasonableness of a by-laws is a fault attributable to the corporation?
question of law
 T or F any amendment of the by-laws will never
- Subject to the limitations that reasonableness of a by- become valid until it gives its stamp of approval even
law is a mere matter of judgment after 1 year

- Rule of the majority and not the tyranny of the - TRUE. Articles of incorporation and by-laws are
minority different

 May the by-laws be amended altered or appealed? MEETINGS

- YES. HOW? Two modes  Meetings

1. By a majority vote of the directors or trustees and the - Meetings of stockholders 1. Date fixed
majority vote of the outstanding capital stock or in the by-laws or by-law
members in a non-stock corporation, at a regular or
special meeting called for that purpose; - Meetings of director or trustees

2. By the board of directors alone when delegated by 2/3  Meetings are regular and special
of the outstanding capital stock or 2/3 of the members
in a non-stock corporation.
 Meetings of stockholders

- This delegated power, however, is considered revoked


 What is regular and what is special?
whenever a majority of the outstanding capital stock
or members shall so vote at a regular or special
meeting.  When are regular meetings of the stockholders held?

- Fixed date provided by the by-laws


 If it is to be amended what is the proceeding?

 What if there is no date?


- Section 48 2nd paragraph provides:
- April
Section 48. Amendments to by-laws. - The
board of directors or trustees, by a majority vote  Why april?
thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the - Point in time the audited financial statement have
members of a non-stock corporation, at a regular or
been prepared
special meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the outstanding  What if in the date specified in the by-laws or by the
capital stock or two-thirds (2/3) of the members in a law itself the meeting was not convened, for instance
non-stock corporation may delegate to the board of lack of quorum or force majeure?
directors or trustees the power to amend or repeal any
by-laws or adopt new by-laws: Provided, That any
power delegated to the board of directors or trustees - It may be postponed on a reasonable date
to amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders  Notice requirement?
owning or representing a majority of the outstanding
capital stock or a majority of the members in non-
- Regular- 2 weeks prior notice
stock corporations, shall so vote at a regular or special
meeting.
- Special- 1 week

Whenever any amendment or new by-laws


are adopted, such amendment or new by-laws shall be  May the notice requirement be lessened?
attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under - By-laws may provide a longer or a shorter duration
oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities
 What if the notice requirement is not complied with?
and Exchange Commission the same to be attached to
the original articles of incorporation and original by-
laws.  What happened to any act passed in a meeting when
notice requirement was not required with?
The amended or new by-laws shall only be
effective upon the issuance by the Securities and - Voidable, subject to ratification
Exchange Commission of a certification that the same
are not inconsistent with this Code. (22a and 23a) • Board of directors vs. Tan

• Baretto vs. La Previsora - Notice requirement is the by-laws is a mandatory


requirement
- Any corporate act emanates from the board
- Improperly served, any action will be invalidated at the
- Directors themselves cannot amend the by-laws if they objection of any stockholder or member
were not granted the same
 Must be held in the proper place
 Section 48
 Where should it be held?
 The power granted is not subject to revocation T or F?
- Apparent from the foregoing provision is that meetings
- FALSE of stockholders must, at all times, be held in the city or
municipality where the principal office of the
corporation is located and, as far as practicable, in the
 If the by-laws are amended when will they become
principal office of the corporation.
valid?

 May the by-laws of a corporation provide that


meetings be held anywhere in the Philippines?
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
32

- While there is no provision authorizing a stock  Mandamus would be appropriate remedy if there is a
corporation to hold stockholders’ meetings outside of person authorized but refuses
the City of Municipality where the principal office is
located, the law allows a non-stock corporation to  Quorum and voting requirement
provide in its by-laws any place of members’ meeting
provided that proper notice is sent to all members - Majority stockholders or members constitute a quorum
indicating the date, time and place of the meeting
which shall be within the Philippines.
 Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a
 T or F the by-laws of a stock corporation may validly quorum?
provide that meetings shall be held anywhere in the
Philippines? - NO. when the code requires a higher quorum it must
also be equivalent to the vote required
- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is
 Do you include non-voting shares in arriving at the
given
voting requirement to have a valid corporate act?

 Corporation can do only such things as the law allows - It depends.


it to do, DOCTRINE OF LIMITED CAPACITY
- Section 6 last par. If it falls within the penultimate par.
 San Miguel office located in Ortigas Center. May Of section 6
stockholders meeting be held in PICC center?
 Five requisites of a valid meeting
- YES. Metro Manila, one single city
1. It must be held on the date fixed in the by-laws or in
 Must be called by the proper party accordance with law

 Who calls? 2. Prior notice must be given

- President until and unless there is a provision , 3. It must be held at he proper place
secretary on order of the president
4. It must be called by the proper party
 What if there is nobody who can call?
5. Quorum and voting requirements must be met
- The petitioner, stockholder may petition the court
 Date not complied with, notice, place, not complied
 What if there is a person who can call, but he fails or with and the person who called not authorized, what
neglects to call the meeting? May a stockholder happens to any resolution called?
petition to authorize a meeting?

- Ponce case only applies when there is NO person


- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
authorized to call the meeting. If there is a person, but
provided it is within the power of the corporation. 3RD
neglects his duty. Ponce will not apply.
paragraph of 324

 Writ of injunction may never be issued ex parte


- If the voting requirement is met, any resolution passed
in the meeting, even if improperly held or called will be
 Is there any exception?
valid if all the stockholders or members are present or
duly represented thereat. The last paragraph of
- Section 28 only instance section 51 is clear on the matter when it provides:

Section 28. Removal of directors or “all proceedings had and any business
trustees. - Any director or trustee of a corporation may transacted at any meeting of the
be removed from office by a vote of the stockholders stockholders or members, if within the
holding or representing at least two-thirds (2/3) of the powers or authority of the corporation, shall
outstanding capital stock, or if the corporation be a
be valid even if the meeting be improperly
non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That held or called, provided all the stockholders
such removal shall take place either at a regular or members of the corporation are present
meeting of the corporation or at a special meeting or duly represented at the meeting.”
called for the purpose, and in either case, after
previous notice to stockholders or members of the  Directors/trustees meeting
corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders
or members of a corporation for the purpose of  Regular (monthly) and special (anytime)
removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or  May that be restricted (within or outside the Phil)
on the written demand of the stockholders
representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock - YES. unless the by-laws provide otherwise.
corporation, on the written demand of a majority of
the members entitled to vote. Should the secretary fail  Is there any notice requirement?
or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there
- YES. 1 day unless otherwise provided by the by-laws
is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing  What happens if notice is not complied with?
the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such - If the notice requirement is not complied with the
removal, must be given by publication or by written
meeting is illegal and will not bind the corporation
notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without except when subsequently ratified or in the case of a
cause may not be used to deprive minority close corporation where the act of any one director
stockholders or members of the right of representation may bind the corporation even without a meeting
to which they may be entitled under Section 24 of this under the special provision of Section 101 of the Code.
Code. (n)
 Can notice be waived? <sec.53>
 Cases of removal or ouster of a director
Section 53. Regular and special meetings
of directors or trustees. - Regular meetings of the
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board of directors or trustees of every corporation - However this right is not always inherent, because it
shall be held monthly, unless the by-laws provide may be denied:
otherwise.
1. Redeemable and preferred shares, however if
Special meetings of the board of directors or founders shares are issued others may be denied
trustees may be held at any time upon the call of the the right to vote.
president or as provided in the by-laws.
2. May be denied by the articles of incorporation or
Meetings of directors or trustees of contracts
corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise. - When not denied they may do so in person or by proxy
Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every
director or trustee at least one (1) day prior to the  May the right to vote by proxy be denied?
scheduled meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this  May the articles of incorporation deny?
requirement, either expressly or impliedly. (n)
 May the by-laws validly provide that proxy voting is
- YES. Expressly and impliedly not allowed?

- SEC ruling - NO

A special meeting is valid without notice  Only non-stock may be denied proxy voting (may be
where the directors are all present or where broaden, limited or denied)
they consent to the meeting. Presence at
the meeting waives the want of notice.  Proxy voting is a matter of right granted by law
Moreover, it has been ruled that the meeting
of the directors without a formal call first
 Requirements of a valid proxy?
being had, and notice thereof given to the
members, did not operate to invalidate it or
- Section 58
to render the proceedings which were taken
at it void, for every member of the board
Section 58. Proxies. - Stockholders and
were present, and their joint action had
members may vote in person or by proxy in all
completely bound the corporation as if the
meetings of stockholders or members. Proxies shall in
meeting has been called with due formality,
writing, signed by the stockholder or member and filed
and everyone of the directors had received
before the scheduled meeting with the corporate
proper notice.
secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
 What is the quorum and voting requirement in the
intended. No proxy shall be valid and effective for a
directors meeting?
period longer than five (5) years at any one time. (n)

- Majority of the members of the board of directors


 How long may a proxy exist?
(entire membership)

- Maximum of 5 years
 Vote required to pass a valid corporate act?

- Valid for the meeting in which it is intended


- Majority of those present at which there is a quorum (3
present, vote of 2 sufficient)
 Is proxy revocable?
- Exception, majority of all the members of the board in
case of election of corporate officers, unless the - Generally revocable, unless coupled with interest
articles provide for a greater quorum or voting
requirement  Revocation

 Should the director or trustees be physically present? - A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
- General rule, must sit and act as a body to have a made by formal notice in writing. Revocation may be
expressed to the proxy holder, to the election
valid corporate act
committee, by a subsequent proxy to another or by
sale of the shares. Thus it may be revoke orally by
 Five man member board, a meeting was called today,
conduct such that appearing and asserting the right to
should the physical presence or warm bodies requires
vote at a meeting by the registered owner of the
to constitute a quorum?
shares revokes a proxy previously given.

- NO. it is not required. Teleconference or video


 Must be submitted to a validation committee
conference is allowed, E- commerce law

 By-laws of non-stock corporations may deny proxy


 Membership subject to laws
voting

 Stockholder not yet


 What is voting trust agreement?

 May director vote by proxy?


- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a group
- NO
of identical agreements between individual
stockholders and a common trustee, whereby it is
 If A is a director and a meeting is called for the provided that for a term o years or for a period
purpose of electing a new set of BOD can A vote by contingent upon a certain event, or until the
proxy? agreement is terminated, control over the stock owned
by such stockholders, shall be lodged in the trustee,
- YES. Because it is a stockholders meeting either with or without reservation to the owners or
persons designated by them the power to direct how
such control shall be issued.
 If directors meeting, cannot vote by proxy

- It is a devise of binding stockholders to vote as a unit


 Stockholder’s right to vote
and thus assuring a desirable stability and continuity
in management in situations where it is needed.
- Inherent in stock ownership
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 What is the effect of a voting trust agreement relative  Being still the beneficial owner they may transfer
to the rights? these rights

- Lee vs. CA must pass these criteria  Is the right granted to a voting trust agreement
absolute? (to inspect)

1. That the voting rights of the stock are separated from


- NO.
the other attributes of ownership;

- The voting trust agreement filed with the corporation


2. That the voting rights granted are intended to be
shall be subject to examination by any stockholder of
irrevocable for a definite period of time; and,
the corporation in the same manner as any other
corporate book or record. Provided, that both the
3. That the principal purpose of the grant of voting rights
transfer and the trustee or trustees may exercise the
is to acquire voting control of the corporation.
right of inspection of all corporate books and records
in accordance with the provisions of this Code.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Legal title is transferred to the voting trustee

 Requisites
 May the voting trustee vote by proxy?

- Section 59
- Yes, legal owner may vote by proxy

Section 59. Voting trusts. - One or more  May the proxy holder vote by proxy?
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
- NO, (AGENT) an agent can have no other agent unless
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding five specifically allowed by the principal
(5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a  Stockholder executing as a proxy, is he qualified to be
loan agreement, said voting trust may be for a period voted as a director?
exceeding five (5) years but shall automatically expire
upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall  Why is he qualified to act as a director if the
specify the terms and conditions thereof. A certified stockholder executes as a director?
copy of such agreement shall be filed with the
corporation and with the Securities and Exchange - The beneficial owner of the shares in a voting trust is
Commission; otherwise, said agreement is ineffective disqualified to be a director in a voting trust whereas
and unenforceable. The certificate or certificates of
in a proxy, the owner of the shares may be elected as
stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of such since legal title thereof remains with him
the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
- YES he remains to be the owner
name of the trustee or trustees is made pursuant to
said voting trust agreement.  Is the stockholder executing in a voting trust
agreement, is he qualified to act as a director?
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates, - NO. ceases to be stockholder of record, no longer the
which shall be transferable in the same manner and legal owner of shares
with the same effect as certificates of stock.
 May the corporation enforce the voting trust
The voting trust agreement filed with the agreements executed by its stockholders?
corporation shall be subject to examination by any
stockholder of the corporation in the same manner as - NO. NIDC vs. AQUINO
any other corporate book or record: Provided, That
both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books - Not a privy to the contract
and records in accordance with the provisions of this
Code. - Rights liabilities of a stockholder are there in their
individual capacity- corporate entity theory
Any other stockholder may transfer his
shares to the same trustee or trustees upon the terms  Voting trust agreements
and conditions stated in the voting trust agreement,
and thereupon shall be bound by all the provisions of - Normally executed in favor of banking and financial
said agreement.
institutions

No voting trust agreement shall be entered - So that they can vote a certain set of directors
into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of
- They will be more secured
trade or used for purposes of fraud.

 Voting pull agreement


Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically expire
at the end of the agreed period, and the voting trust - Enters into an agreement
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be - Pull all their shares to cast one vote
deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
- Covered by rules governing contracts

The voting trustee or trustees may vote by - By pulling their votes they can decline the resolution
proxy unless the agreement provides otherwise. (36a) passed by the board

 Does it need to be notarized?  END OF MIDTERMS


- Yes, otherwise it is ineffective and unenforceable

 Only legal ownership is transferred STOCKS AND STOCKHOLDERS

 3 modes
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1. By a contract of subscription with the corporation;


- 2nd example galling sa treasury shares hindi sa
unissued share
2. By purchase of treasury shares from the corporation;
and,
 NO such thing as purchase of unissued stocks
3. By purchase or acquisition of shares from existing
stockholders.
 A subscription contract can be conditional provided
there is nothing in the charter or statute prohibiting it
 Section 60 subscription
and not against public order, law, etc.
- Any contract
 Must it be in writing?
- Whether existing or still to be formed
- NO, it may be oral
Section 60. Subscription contract. - Any contract for
the acquisition of unissued stock in an existing corporation  5M should it be in writing to be valid and binding as a
or a corporation still to be formed shall be deemed a subscription?
subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n) - NO, statutes of frauds only applies to SALES

• Trillana vs. Quezon College


 Under the old law the 4th mode is PURCHASE

- Counter proposal, therefore there was a need for an


 Purchase acceptance

- Reciprocal in nature - Facultative because it is in his own free will, it is void

- Purchaser can neither require the issuance  What may be used as a consideration and how much
should be the consideration?
Xco. Inc.
- Section 62 provides:

P Section 62. Consideration for stocks. -


Stocks shall not be issued for a consideration less than
the par or issued price thereof. Consideration for the
Authorized capital 1M issuance of stock may be any or a combination of any
two or more of the following:
500 SUBSCRIBED
1. Actual cash paid to the corporation;
500 UNISSUED STOCKS (AS LONG AS GALING DITO)

2. Property, tangible or intangible, actually received by


Z wants to acquire 100K
the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to the
Entered in June 50% shall be down payment remainder par or issued value of the stock issued;
December 08

3. Labor performed for or services actually rendered to


o he will not be considered a stockholder unless he has the corporation;
paid in full

4. Previously incurred indebtedness of the corporation;


August 08 property is ravaged by fire all are turned into shares

 Is Z liable to pay the balance of his acquisitions? 5. Amounts transferred from unrestricted retained
earnings to stated capital; and
- YES, no matter how the party refer to it, it is
considered subscription 6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
- Once you subscribe, you become a stockholder which
is entitled to all the liabilities of a stockholder Where the consideration is other than actual
cash, or consists of intangible property such as patents
Z- subscribed to 100T/S of XCo. of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to approval by the Securities and
Amount he paid 50k Exchange Commission.

Z did not pay on the date called and was declared a delinquent
Shares of stock shall not be issued in
share
exchange for promissory notes or future service.

 Corporation paid 100T/S therefore the corporation


reacquired the shares again, what are they called? The same considerations provided for in this
section, insofar as they may be applicable, may be
used for the issuance of bonds by the corporation.
- Treasury shares

Y- 80T/S DECEMBER 08 The issued price of no-par value shares may


be fixed in the articles of incorporation or by the board
of directors pursuant to authority conferred upon it by
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO the articles of incorporation or the by-laws, or in the
PAY THE UNPAID PORTION? absence thereof, by the stockholders representing at
least a majority of the outstanding capital stock at a
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL meeting duly called for the purpose. (5 and 16)
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?  “Amounts transferred from unrestricted retained
earnings to stated capital” what does it mean?
- NO, because that was a purchase
- Stock dividends will in effect capitalize the unrestricted
- First example galing sa unissued stock retained earnings

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 After 5 years the founders shares may be converted


into common shares or other kinds of shares
B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
 May shares of stocks be issued without consideration?
Why?

- NO, two reasons by the SC, discriminatory against


other stockholders and second unlawful, it prejudices
the right of the creditors “Trust Fund Doctrine”

 If issued without a consideration

- Section 65, they will be considered as watered stocks


Endorsement from
When issued by owner
Section 65. Liability of directors for Endorsed by owner- strict compliance
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a ANSWER: a certificate of stock is not regarded as negotiable in
consideration in any form other than cash, valued in the same sense that a bill or note is negotiable, even if it is
excess of its fair value, or who, having knowledge
endorsed in blank. Thus, while it may be transferred by
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, endorsement coupled with delivery thereof, and therefore
shall be solidarily, liable with the stockholder merely quasi-negotiable, it is nonetheless non-negotiable in that
concerned to the corporation and its creditors for the the transferees takes it without prejudice to all the rights and
difference between the fair value received at the time defenses which the true and lawful owner may have except in so
of issuance of the stock and the par or issued value of far as the principles governing estoppels may apply.
the same. (n)
He acquired it by virtue of a forged instrument; no matter how
- Subscribers may be compelled to pay the value innocent the purchaser is because it is subject to all the rights
and defenses
 Issuance of a certificate of stock is another thing
 What if A endorsed it?
 What are the requisites for the issuance of a valid
certificate of stock? - He is estopped, unless there are other available
defenses
1. It must be signed by the president or vice-president
and countersigned by the secretary or assistant
secretary;
 Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be
valid between the parties. Non-registration will not
2. It must be sealed with the corporate seal; and the
however, affect the validity thereof at least in so far as
entire value thereof (together with interest or
the contracting parties are concerned.
expenses, if any) should have been paid.

While it appears, that a subscriber to shares of stock Section 63. Certificate of stock and
cannot be entitled to the issuance of a certificate of transfer of shares. - The capital stock of stock
stock until the full amount of his subscription together corporations shall be divided into shares for which
certificates signed by the president or vice president,
with interest and expenses (in case of delinquent
countersigned by the secretary or assistant secretary,
shares) if any is due, has been paid, a subscriber to and sealed with the seal of the corporation shall be
shares of stock, even if not yet fully paid, is entitled to issued in accordance with the by-laws. Shares of stock
exercise all the rights of a stockholder and the so issued are personal property and may be
corresponding liability that attach thereunder. Thus, transferred by delivery of the certificate or certificates
the Code provides: indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between
Section 72. Rights of unpaid shares. - the parties, until the transfer is recorded in the books
Holders of subscribed shares not fully paid which are of the corporation showing the names of the parties to
not delinquent shall have all the rights of a the transaction, the date of the transfer, the number of
stockholder. (n) the certificate or certificates and the number of shares
transferred.
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder? No shares of stock against which the
corporation holds any unpaid claim shall be
- NO, shall be considered a stockholder even without a transferable in the books of the corporation. (35)
certificate of stock
 “Until registration is accomplished, the transfer,
 Instances when he may not be able to exercise his though valid between the parties, cannot be effective
rights as such stockholder as against the corporation. Thus the, unrecorded
transfer cannot enjoy the status of a stockholder; he
- Declared delinquent cannot vote nor be voted for, and he will not be
entitled to dividends. The corporation will be protected
- When he exercises his appraisal right when it pays dividend to the registered owner despite
a previous transfer of which it had no knowledge. The
 Are certificate of stocks transferrable? purpose of registration therefore is twofold: to enable
the transferee to exercise all the rights of a
- YES stockholder and to inform the corporation of any
change in shares ownership so that it can ascertain
the persons entitled to the rights and subject to the
 Are certificate of stocks considered negotiable?
liabilities of a stockholder.”

- Quasi-negotiable
Thus, it was also ruled by the High Court in
Nautica Canning Corp. vs. Yumul that “A
 Why are they considered quasi-negotiable when it may transfer of shares not recorded in the stock
be transferred through endorsement and delivery? and transfer book of the corporation is non-
existent in so far as the corporation is
100t/s 001 concerned.” This is so because “the
corporation looks only through its books for
10/s
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the purpose of determining who its - Register of deeds where the corporation resides and if
stockholders are.” different in the register of deeds of owner’s domicile

 Registration is necessary for the following:  Unson vs. Dinamito

1. To enable the corporation to know who its - All transferred not register will not have a valid force
stockholders are; and effect

2. To enable the transferee to exercise his rights a s


stockholders;
 Right to transfer may be regulated

3. To afford the corporation an opportunity to object or  May not be unreasonably restricted


refuse registration of the transfer in case allowed by
law;  Violation of nationalization law- Central Bank

4. To avoid fictitious and fraudulent transfers; and, • Lambert vs. Fox

5. To protect creditors who have the right to look upon - Valid , may be reasonably regulated, restricted by
stockholders, in case of no-payment or watered agreement of parties
shares, for the satisfaction of their claims.
- Reasonable agreement by the parties
 Duty of the secretary is ministerial, hence mandamus
will lie if the secretary refuses to record the transfer, - Reasonable as to length of time
but he cannot be compelled when the transferee’s title
to the said shares has no prima facie validity or • Padgett vs. Babcock
uncertain
- Any attempt to restrain transfer
 Transfer- absolute and unconditional transfer to
warrant registration in the books of the corporation in - SC, in the absence of a valid lien upon its shares
order to bind the latter and other third persons.
- Valid restrictions shares are applicable
 Other restrictions on the right to transfer shares would
include: - Any restriction on a stockholder’s right to dispose of
his shares must be construed strictly; and any attempt
1. It is not valid, except as between the parties, until to restrain a transfer of shares is regarded as being in
recorded in the books of the corporation; restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid
2. Shares of stock against which the corporation holds restrictive regulations and agreements exist and are
any unpaid claim shall not be transferable in the books applicable. Subject only to such restrictions, a
of the corporation; unpaid claims, refer to claims stockholder cannot be controlled in or restrained from
arising from unpaid subscription and not to any exercising his right to transfer by the corporation or its
indebtedness which a stockholder may owe the officers or by other stockholders, even though the sale
corporation such as monthly dues; is to a competitor of the company, or to an insolvent
person, or even though a controlling interest is sold to
3. Restrictions required to be indicated in the articles of one purchaser.
incorporation, by-laws and stock certificates of a close
corporation;  Certificate of stocks are transferrable

4. Restrictions imposed by special law, such as the Public - By endorsement and delivery of the stock certificate to
Service Act requiring the approval of the government the transferee
agency concerned if it will vest unto the transferee
40% of the capital of the public service company;  In order to be valid, must be registered in the books. If
not, will only be binding among parties
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;  How may shares of stock be transferred?

6. Those covered by reasonable agreement of the - Endorsement of stock certificate by owner or attorney-
parties. in-fact with delivery

• Monserat vs. Ceron • Embassy farms vs. CA

- Does it include mortgage? - Must be endorsed by owner or attorney-in-fact coupled


with delivery
- NO, it is not an absolute transfer
- Endorsed not delivered
- Will not affect the transfer through mortgage
- Proper mode and manner must be complied with
- Absolute and unconditional transfer
• Razon vs. IAC
- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
- Delivered not endorsed
noted upon the books of the corporation in order that
such transfer may be valid, therefore, inasmuch as a
- Reverse of Embassy Farms
chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion and
- Endorsement alone is not sufficient nor delivery
ownership thereof, its entry and notation upon the
without endorsement is not allowed
books of the corporation is not necessary requisite to
its validity
- Endorsement plus delivery is mandatory

 Chua guan vs. Magsasaka


 Is there any other mode of transferring stock?
- Was the mortgage valid and effective as against
- Notarized deed
subsequent third parties

- Deed of assignment

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• Rural bank of Salinas vs. CA - Valid between contracting parties even if not recorded
in corporation books
- If denied or refused without good cause, mandamus
will lie - Right accrues only if refused

• Tay vs. CA - Statute of limitations does not apply in registration of


shares of stock
- Mandamus may issue if petition has a clear legal right
- Must determined from the time of refusal
- Never issued in doubtful cases
 Why are they non-negotiable when they may be
- Petitioner failed to establish a clear legal right and transferred?
alleged ownership is without merit
- Transferees pays it without prejudice to all the rights
- Did not acquire ownership by virtue of the contract of and defenses as the true and lawful owner may have
pledge under the law except insofar as such rights and
defenses are subject to the limitations imposed by the
- In a contract of pledge there must be foreclosure principles governing estoppels

- In the case there was no attempt to foreclose • De los Santos vs. Republic

- Petitioner must have a prima facie right - Why is he, not considered as the owner of shares?
When it has been said that when endorsed by the
• Nava vs. Peers Marketing owner it is considered as strict certificate? Because
certificate of stocks are non-negotiable
- A stock subscription is a subsisting liability from the
time the subscription is made - Although a stock-certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it
- The subscriber is as much bound to pay his
is well settled that the instrument is non-negotiable,
subscription as he would be to pay any other debt
because the holder thereof takes it without prejudice
to such rights or defenses as the registered owner or
- No stock certificate was issued. Without stock
creditor may have under the law, except insofar as
certificate, which is the evidence of ownership of
such rights or defenses are subject to the limitations
corporate stock, the assignment of corporate shares is
imposes by the principles governing estoppels.
effective only between the parties to the transaction

 Unauthorized issuance of stock certificates


 Exception to the general rule

• Rural Bank of Lipa vs. CA


100/s
- By notarized deed 100

- Certificate of stocks already issued must be coupled XYZCo


with delivery, exception (TAN vs. SEC) 100 pesos per share
Stolen by B and forged the signature of A
 Stock certificate has already been issued it must be B sells to C will C acquire title? NO
coupled with the delivery

 After certificate of stock is issued, may it be effectively


transferred even without endorsement or delivery of
the stock certificate?

- Person sought to be a stockholder is an officer and has


custody
ENDORSEMENT FORM

 Endorsement and delivery is not necessary (TAN vs.  C armed with the endorsement form certificate, sold to
SEC) D (innocent purchaser for value), will D acquire title?

• Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED) - NO, subject to such rights and defenses as the true and
lawful owner may have
- Persons sought to be stockholder is officer and has
custody of the book (estopped)  What if C now goes to the corporation and presents the
form?
 General Rule for valid transfer
- Then the corporation shall cancel the old certificate and
- Certificate of stock must be endorsed by owner or issues a new one, now in the name of C, now
attorney-in-fact coupled with delivery registered in the name of C, will C acquire title?

 Exceptions  A found out what happened and goes to the


corporation who has a better title C or A?
- Section 63 uses the word “may”
- A, A cannot be deprived of his right by virtue of an
- Showing that there may be other modes of unauthorized transfer
transferring shares
 Corporation can compel C to deliver the new stock
 Is there a time frame or fixed period as when transfer certificate because he made a representation that the
can be made? certificate where good.

Armed with the new certificate issued to C, C delivers


- NO, (WON vs. WACK WACK)

to D a purchaser in good faith and for value will D
acquire title?
• Won vs. Wack Wack

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- D will acquire title took the shares not by virtue of a - Section 64 provides:
forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C
Section 64. Issuance of stock certificates. -
No certificate of stock shall be issued to a subscriber
 Stock certificate now in possession of D. A knew of until the full amount of his subscription together with
what happened and went to the corporation and interest and expenses (in case of delinquent shares), if
complains. Who will have a better title? any is due, has been paid. (37)

- the corporation may be compelled to recognize both, A  A certificate of stock cannot be issued unless he fully
as stockholder (non-negotiable) D, reliance that the paid the amount subscribed
stock certificate is valid and existing and owned by C
 Subscription to the capital stocks of the corporation
 Forged transfers are indivisible

- If the corporation should issue a new certificate in


pursuance of a forged transfer, the corporation incurs
 Clear mandate of section 148 of the code is that the
no liability to the person in whose favor it is issued and ruling of the court in Baltazar vs. Lingayen Gulf, no
it may demand its return for cancellation. The longer holds true
corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty of Section 148. Applicability to existing
the purchaser to determine that the indorsement of corporations. - All corporations lawfully existing and
the owner is genuine. However, if the new certificate doing business in the Philippines on the date of the
issued to the purchaser comes into the hands of a effectivity of this Code and heretofore authorized,
bona fide purchaser for value, the corporation will be licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been
stopped from denying validity thereof, since by issuing
authorized, licensed or registered under the provisions
such new certificate it represents that the person of this Code, subject to the terms and conditions of its
named therein is a stockholder of the corporation. The license, and shall be governed by the provisions
corporation is thus forced to recognize both the hereof: Provided, That if any such corporation is
original certificate and new certificate-the original, affected by the new requirements of this Code, said
because the true owner could not be deprived of his corporation shall, unless otherwise herein provided, be
given a period of not more than two (2) years from the
title by a forged transfer, and the new, because of its
effectivity of this Code within which to comply with the
representation that the person named therein is the same. (n)
owner of shares in the corporation. But if the
recognition of both stockholders would result in an
over issue of shares, then only the original and true  Subscription to shares of stocks are indivisible
owner can be recognized as a stockholder. The bona
fide purchaser of the new certificate will however have  Also apparent is that once a subscriber has paid his
a right of damages against the corporation. The subscription in full, he becomes entitled to be issued a
corporation, in turn, would have a right of action stock certificate and in the event that the corporation
against the person who made false representations refuses to do so, the stockholder my institute a case
and in whose favor it issued a new certificate. The true for mandamus with damages. Thus, it has been said
owner of the shares which were wrongfully transferred that the duty of the corporate officers to issue stock
would of course have a right to compel the corporation certificates to those entitled thereto is a ministerial
to issue him a certificate in lieu of the original one duty enforceable by mandamus.
which was wrongfully cancelled.
• Fua Cun vs. Summers and China Banking Corp.
 Authorized capital stock 1M shares
- The court erred in holding the plaintiff as the owner of
 All are subscribed who will the corporation recognize as 250 shares of stock; “the plaintiff’s rights consist in
rightful owner A or D? if both will be recognized there equity in 500 shares and upon payment of the unpaid
will be over issuance portion of the subscription price he becomes entitled
to the issuance of certificate for said 500 shares in his
favor.”
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an
- No certificate of stock until the full amount has been
over issue of shares, then only the original and true
paid.
owner can be recognized as a stockholder)

 Watered stock
- by virtue of the doctrine of non-negotiability of
certificate of stocks
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value
 The true and lawful owner will never be deprived of his
thereof has not been paid.
rights
- Basis is par value and not the fair market value
 What happens to D?
 Section 62 states that stocks shall not be issued for a
- D will have a cause of action against the corporation for
consideration less than par or issued price thereof,
the value of his acquisition cost inclusive of damages,
while section 13 states that in no case shall be paid-up
attorney’s fees and cost of suit
capital be less than five thousand [P5000] pesos.

 D sues the corporation for the value of his acquisition


 If issued below par, issued value considered as water
cost, inclusive of damages, attorney’s fees and cost of
suit. What may the corporation do?
 How may watered stocks be issued?

- NO defense, no valid defense, because it was


1. For a monetary consideration less than its par or
represented to other parties that the certificate of
issued value;
stocks is valid, subsisting, etc.

2. For a consideration in property, tangible or intangible,


 2nd situation, what cause of action may the corporation valued in excess of its fair market value;
have? Remedy?
3. Gratuitously or under an agreement that nothing shall
be paid at all; or
- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
4. In the guise of stock dividends when there are no
surplus profits of the corporation.
 When may certificate of stocks be issued?
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 Why is stock watering illegal? - Those having knowledge thereof, but did not interpose
their objection shall be liable
1. The corporation is deprived of its capital thereby
hurting its business prospects, financial capability and - Section 65 provides:
responsibility;
Section 65. Liability of directors for
2. Stockholders who paid their subscriptions in full, or watered stocks. - Any director or officer of a
promised to pay the same, are injured and prejudiced corporation consenting to the issuance of stocks for a
by the reduction of their proportionate interest in the consideration less than its par or issued value or for a
corporation; and, consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in
3. Present and future creditors are deprived of the writing and file the same with the corporate secretary,
corporate assets for the protection of their interest. shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
- Corporation is prejudiced difference between the fair value received at the time
of issuance of the stock and the par or issued value of
the same. (n)
- Stockholders, dilution of interest

- Creditors are prejudiced, virtue of right to look upon  ACS-100M 100M/S PAR VALUE-
corporations properties for the satisfaction of their 1.00
claims
SUBSCRIBED-50M FAIR MARKET VALUE-
 What is the effect of issuance of watered stocks 12.00/S

1. As to the corporation - when a corporation is guilty of UNSUBSCRIBED-50M


ultra-vires or illegal acts which constitute an injury to
or fraud upon the public, or which will tend to injure or A
defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the B
misuse or abuse of its franchise.
C
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the D
subscriber is liable to pay the full par or issued value
thereof, to render it valid and effective. E

3. As to the consenting stockholders - They are stopped There is a denial of pre-emptive rights and directors
from raising any objection thereto; A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
4. As to dissenting stockholders - In view of the dilution
of their proportionate interest in the corporation, they  Is there stock watering if the fair market value is
may compel the payment of the “water” in the stock 12.00?
solidarily against the responsible and consenting
directors and officers inclusive of the holder of the - No stock watering
watered stocks;
- The basis is the par value
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock, - The shares where in fact paid more than the par value
solidarily against the responsible directors/officers and indicated in the articles of incorporation
the stockholders concerned; and’
3 days later they sold their 10M share for P11.00 each,
6. As against transferees of the watered stock – His right therefore making a profit.
is the same as that of his transferor. If, however, a
certificate of stock has been issued and duly indorsed  Can you question there actuations? What would be the
to a bona fide purchaser, without knowledge, actual or cause of action?
constructive, the latter cannot be held liable, at least
as against the corporation, since he took the shares on - It may be questioned.
reliance of the misrepresentation made by the
corporation that the stock certificate is valid and - Duty of loyalty or fiduciary duty as such directors
subsisting. This is because a corporation is prohibited
from issuing certificates of stock until the full value of - They cannot advance their own motives to the
the subscriptions have been paid and could not, damage prejudice of the corporation which they
therefore, deny the validity of the stock certificate it represents and stockholders as a whole instead of it
issued as against a purchaser in good faith. Thus, being sold outside
Ballentine states that whether there is any liability on
the part of the transferee of watered stock is made to - 500M would have gone to the coffers of the
depend upon whether he acquired the same without corporation, 500M should be there for the protection of
notice, either as purchaser or donee. If he had creditors
knowledge thereof, he is subject to the same liability
as his transferor. - They are placed in a fiduciary relationship

 What is the nature of the liability of the corporate - Sila lang ba ang kikita, pano naman yung corporation,
directors consenting to the issuance of watered stocks opportunity na yun para kumita
and the extent of their liabilities?
 When are unpaid subscriptions due and payable?
- Solidarily liable with the holder of the watered stocks
to the extent of the water from said shares of stocks
- Section 67. Payment of balance of subscription. -
 Will all the directors be liable? What if you objected Subject to the provisions of the contract of
will you also be liable? subscription, the board of directors of any stock
corporation may at any time declare due and payable
to the corporation unpaid subscriptions to the capital
- If you do not issue a written objection, you are still
stock and may collect the same or such percentage
liable
thereof, in either case with accrued interest, if any, as
it may deem necessary.
- Even passive directors may be liable

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Payment of any unpaid subscription or any percentage of this Code, bid for the same, and the total amount
thereof, together with the interest accrued, if any, due shall be credited as paid in full in the books of the
shall be made on the date specified in the contract of corporation. Title to all the shares of stock covered by
subscription or on the date stated in the call made by the subscription shall be vested in the corporation as
the board. Failure to pay on such date shall render the treasury shares and may be disposed of by said
entire balance due and payable and shall make the corporation in accordance with the provisions of this
stockholder liable for interest at the legal rate on such Code. (39a-46a)
balance, unless a different rate of interest is provided
in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date  Who is the winning bidder in a delinquency sale?
no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and
- Bidder who shall “offer to pay the full amount of the
shall be subject to sale as hereinafter provided, unless
balance on the subscription together with accrued
the board of directors orders otherwise. (38)
interest, cost of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
 Remedies of the corporation to enforce payment of share.”
unpaid subscription
X Co. has 1M authorized capital stock
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code 500 thousand is already subscribed
2. By a collection case in court as provided for in section
70
A subscribed to 100 thousand shares, 50 thousand is
already paid leaving 50 thousand unpaid
 Are subscribers of shares of stocks not fully paid, liable
to pay interest?
The corporation is at a loss of 250 thousand, the board
decides to make a call for the payment of the unpaid
- General rule is they are not liable to pay interest subscriptions, however A could not paid, hence
because the code says unless requires in the by-laws declared delinquent and decides to sell his share at a
- Aside from the mandate of the law that subscribers to public auction
shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in the 55 thousand is to be paid, remaining balance plus cost
contract or in the corporate by-laws at such rate as and expenses
may be indicated thereat or the legal rate if not so
fixed. Unless so required or provided, however,
subscribers to shares of stock, not fully paid, are not BIDDERS:
liable to pay interest on their unpaid subscriptions. The
code thus provides:
X-55K FOR 99,900 shares

Section 66. Interest on unpaid


Y-55K FOR 99,500 shares
subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from
the date of subscription, if so required by, and at the Z-55K FOR 99,000 shares (winning bidder)
rate of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)  Assume there is no bidder, may the corporation bid?

 Until a call is made, they are not due and payable, but - NO. It cannot bid because the law says, subject to the
still subject to the provisions of the contracts provisions of this CODE. Section 68 and 41 should be
 Procedures in case of sale of delinquent stocks reconciled. Section 68 states that:

- Section 68. Delinquency sale. - The board of directors Should there be no bidder at the public
auction who offers to pay the full amount of the
may, by resolution, order the sale of delinquent stock
balance on the subscription together with accrued
and shall specifically state the amount due on each
interest, costs of advertisement and expenses of sale,
subscription plus all accrued interest, and the date,
for the smallest number of shares or fraction of a
time and place of the sale which shall not be less than
share, the corporation may, subject to the
thirty (30) days nor more than sixty (60) days from the
provisions of this Code, bid for the same, and the
date the stocks become delinquent.
total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock
Notice of said sale, with a copy of the covered by the subscription shall be vested in the
resolution, shall be sent to every delinquent corporation as treasury shares and may be disposed of
stockholder either personally or by registered mail. by said corporation in accordance with the provisions
The same shall furthermore be published once a week of this Code. (39a-46a)
for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the
principal office of the corporation is located.

- There was no unrestricted retained earnings in the


Unless the delinquent stockholder pays to
example given therefore the corporation cannot bid ,
the corporation, on or before the date specified for the
section 41, it states that:
sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the Section 41. Power to acquire own shares. -
board of directors otherwise orders, said delinquent A stock corporation shall have the power to purchase
stock shall be sold at public auction to such bidder or acquire its own shares for a legitimate corporate
who shall offer to pay the full amount of the balance purpose or purposes, including but not limited to the
on the subscription together with accrued interest, following cases: Provided, That the corporation has
costs of advertisement and expenses of sale, for the unrestricted retained earnings in its books to
smallest number of shares or fraction of a share. The cover the shares to be purchased or acquired:
stock so purchased shall be transferred to such
purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor. 1. To eliminate fractional shares arising out of stock
The remaining shares, if any, shall be credited in favor dividends;
of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares. 2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
Should there be no bidder at the public sold during said sale; and
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, 3. To pay dissenting or withdrawing stockholders
for the smallest number of shares or fraction of a entitled to payment for their shares under the
share, the corporation may, subject to the provisions provisions of this Code. (a)

Notes on Corporation Law


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 What if the shares of A were sold without compliance stock subscription in order to realize assets for the
of the requirements? May A question the sale? payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
- The law prescribes two conditions before an action to paying for his shares, without a valuable consideration
recover delinquent stocks irregularly sold may be for such release; and as against creditors a reduction
allowed. These are: of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or
the charter or the articles of incorporation.
1. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for
which the same was sold, with interest from the date • Edward Keller and Co. vs. COB
of the sale at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the sale. - May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- The reason for such is the stability of transactions of - As to the liability of the stockholders, it is settled that
the shares of stock a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscriptions
 Suppose in the example, since there are no
unrestricted retained earnings, hence the corporation
cannot bid, is the corporation left without any  Is there a prescriptive period wherein a demand for
recourse? unpaid subscription should be made?

- Section 70. Court action to recover unpaid - NO. Garcia vs. Suarez case
subscription. - Nothing in this Code shall prevent the
corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid • Garcia vs. Suarez
subscription, with accrued interest, costs and
expenses. (49a)
- Never became due and payable until there is a call
made
• Velasco vs. Poizat - Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
- The subscriber is as much bound to pay the amount of demand has been made and not from the time of
the share subscribed by him as he would be to pay any subscription
other debt, and the right of the company to demand
payment is no less incontestable.
- Two available remedies: the first and most special  If declared delinquent, what would be the effect as to
remedy given by the statute consist in permitting the the owner of said shares?
corporation to put up the unpaid stock and dispose of
it for the account of the delinquent subscriber. The
other remedy is by action in court. - Section 71. Effect of delinquency. - No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor shall
• De Silva vs. Aboitiz and Co. the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code, until and
- Discretionary on the part of the board of directors to
unless he pays the amount due on his subscription
do whatever is provided in the said article relative to
with accrued interest, and the costs and expenses of
the application of the part of the 70 percent of the
advertisement, if any. (50a)
profit distributable in equal parts on the payment of
- However if the shares are not delinquent, subscribers
the shares subscribed to and fully paid
to the capital of a corporation, though not fully paid,
are entitled to all the rights of a stockholder, according
• Lingayen Gulf vs. Baltazar to section 72

- Exception: pursuant to a bona fide compromise or to Section 72. Rights of unpaid shares. -
set off a debt due from the corporation, a release Holders of subscribed shares not fully paid which are
supported by consideration, will be effectual as against not delinquent shall have all the rights of a
dissenting stockholders and subsequent and existing stockholder. (n)
creditors. A release which might originally have been
held invalid may be sustained after a considerable
 May the rules governing delinquency sale apply to a
lapse of time
non-stock corporation? Are there unpaid shares in a
non-stock corporation?
• Apocada vs. NLRC
- Rules governing stock corporations, when applicable,
- Set-off is without any legal basis also applies to a non-stock corporation
- It was premature - There are delinquent shareholders also in a non-stock
- Unpaid subscriptions will become due and payable corporation. Example is membership dues
only upon certain instance
- Call or if there is a stipulation in contract
 A corporation paid 50% of subscription and was later
- If no call and no stipulation in contract then it will not
on declared delinquent when he could not pay upon
be demandable or payable at all
call; A is also a director of the corporation. Will A, upon
declaration of delinquency , still be able to exercise his
• Lumanlan vs. Cura right as a director?

- Trust Fund Doctrine- subscription to the capital of a - Yes, he loses all his right as a stockholder except his
corporation constitute a fund to which the creditors right to receive dividends
have a right to look for satisfaction of their claims and - He remains to be a director, only qualification to be a
that the assignee in insolvency can maintain an action director is he must own at least 1 share and since it
upon any unpaid stock subscription in order to realize still stands in his name pending the sale, he remains to
assets for the payment of its debts. be and act as a director
- Even if there is sale, he may still be director because
the winning bidder may not bid or pay for all the
• PNB vs. Bitulak shares or there might be remaining shares, which
would be credited in favor of the delinquent
stockholder
- Where it not for the promise, the defendants would - Section 43 provides:
have not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute Section 43. Power to declare dividends. -
a fund to which creditors have a right to look for The board of directors of a stock corporation may
satisfaction of their claims and that the assignee in declare dividends out of the unrestricted retained
insolvency can maintain an action upon any unpaid earnings which shall be payable in cash, in property, or
Notes on Corporation Law
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©GTan; ASoguilon; VVillanueva
43

in stock to all stockholders on the basis of outstanding - The code provides that:
stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and after the expiration of one (1) year from
expenses, while stock dividends shall be withheld from the date of the last publication, if no contest has
the delinquent stockholder until his unpaid been presented to said corporation regarding said
subscription is fully paid: Provided, further, That no certificate of stock, the right to make such contest
stock dividend shall be issued without the approval of shall be barred and said corporation shall cancel in its
stockholders representing not less than two-thirds books the certificate of stock which has been lost,
(2/3) of the outstanding capital stock at a regular or stolen or destroyed and issue in lieu thereof new
special meeting duly called for the purpose. (16a) certificate of stock,

Stock corporations are prohibited from  Could it be issued earlier than 1 year?
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
- Yes it can be, the code states that:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited unless the registered owner files a bond or
under any loan agreement with any financial other security in lieu thereof as may be required,
institution or creditor, whether local or foreign, from effective for a period of one (1) year, for such amount
declaring dividends without its/his consent, and such and in such form and with such sureties as may be
consent has not yet been secured; or (3) when it can satisfactory to the board of directors, in which case a
be clearly shown that such retention is necessary new certificate may be issued even before the
under special circumstances obtaining in the expiration of the one (1) year period provided
corporation, such as when there is need for special herein: Provided, That if a contest has been
reserve for probable contingencies. (n) presented to said corporation or if an action is pending
in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the
 When a certificate of stock is loss or destroyed, what issuance of the new certificate of stock in lieu thereof
must be done by the owner thereof?
shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed.
- Section 73. Lost or destroyed certificates. - The
following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of  May corporate officers be held liable for the
those which have been lost, stolen or destroyed: unauthorized issuance?

1. The registered owner of a certificate of - YES, the code provides that:


stock in a corporation or his legal representative shall
file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the Except in case of fraud, bad faith, or
certificate was lost, stolen or destroyed, the number of negligence on the part of the corporation and its
shares represented by such certificate, the serial officers, no action may be brought against any
number of the certificate and the name of the corporation which shall have issued certificate of stock
corporation which issued the same. He shall also in lieu of those lost, stolen or destroyed pursuant to
submit such other information and evidence which he the procedure above-described. (R.A. 201a)
may deem necessary;

 Assuming the last paragraph is not there; would it be


2. After verifying the affidavit and other not the same, that they should be held liable due to
information and evidence with the books of the fraud, bad faith or negligence?
corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the
place where the corporation has its principal office, - YES. Section 31 provides that:
once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of
Section 31. Liability of directors, trustees
stock which has been lost, stolen or destroyed. The
or officers. - Directors or trustees who willfully and
notice shall state the name of said corporation, the
knowingly vote for or assent to patently unlawful acts
name of the registered owner and the serial number of
of the corporation or who are guilty of gross
said certificate, and the number of shares represented
negligence or bad faith in directing the affairs of the
by such certificate, and that after the expiration of one
corporation or acquire any personal or pecuniary
(1) year from the date of the last publication, if no
interest in conflict with their duty as such directors or
contest has been presented to said corporation
trustees shall be liable jointly and severally for all
regarding said certificate of stock, the right to make
damages resulting there from suffered by the
such contest shall be barred and said corporation shall
corporation, its stockholders or members and other
cancel in its books the certificate of stock which has
persons.
been lost, stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the registered owner
files a bond or other security in lieu thereof as may be When a director, trustee or officer attempts
required, effective for a period of one (1) year, for such to acquire or acquires, in violation of his duty, any
amount and in such form and with such sureties as interest adverse to the corporation in respect of any
may be satisfactory to the board of directors, in which matter which has been reposed in him in confidence,
case a new certificate may be issued even before the as to which equity imposes a disability upon him to
expiration of the one (1) year period provided herein: deal in his own behalf, he shall be liable as a trustee
Provided, That if a contest has been presented to said for the corporation and must account for the profits
corporation or if an action is pending in court which otherwise would have accrued to the
regarding the ownership of said certificate of stock corporation. (n)
which has been lost, stolen or destroyed, the issuance
of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court  Certificate of stock was lost, the owner transfers his
regarding the ownership of said certificate of stock shares by way of a notarized deed will it be valid?
which has been lost, stolen or destroyed.

- He cannot do so, if a certificate of stock is issued by a


Except in case of fraud, bad faith, or corporation, a mere notarized deed will not suffice
negligence on the part of the corporation and its - Deed of assignment was not sufficient since there was
officers, no action may be brought against any no endorsement (Rural Bank of Lipa vs. CA)
corporation which shall have issued certificate of stock
in lieu of those lost, stolen or destroyed pursuant to
the procedure above-described. (R.A. 201a)  Rights and liabilities of stockholders

- The rationale of the above-quoted law is to avoid - RIGHTS


duplication of certificates of stock and the avoidance
of fictitious and fraudulent transfers.
1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted
 When will the replacement certificate be issued? upon either personally or by proxy as provided for
under sections 50 and 58 of the code;

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2. To enter into a voting trust agreement subject to the


procedure, requirements and limitations imposed
under section 50;
3. To receive dividends and to compel their declaration if
warranted under section 43;
4. To transfer shares of stock subject only to reasonable
restrictions such as options and preferences as may be
allowed by law inclusive of the right of the transferee
to compel the registration of the transfer in the books
of the corporation as provided for in section 63;
5. To be issued a certificate of stock for fully paid-up
shares in accordance with 64;
6. To exercise pre-emptive rights as provided for in
section 39;
7. To exercise their appraisal right in accordance with the
provision of section 81 and in those instance allowed
by law such as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under section 69;
10. To inspect the books of the corporation subject only to
the limitations imposed by section 73;
11. To be furnished by the most recent financial statement
of the corporation as by section 75;
12. To be issued a new stock certificate in lieu of the lost
or destroyed one subject to the procedure laid down in
section 73;
13. To have the corporation dissolved under section 118 to
121, and section 105 in a close corporation;
14. To participate in the distribution of the assets of the
corporation upon dissolution under section 122;
15. In the case of a close corporation, to petition the SEC
to arbitrate in the event of a deadlock as allowed
under section 104; and,
16. Also in the case of a close corporation, to withdraw
therefrom, for my reason, and compel the corporation
to purchase his shares as provided for under section
105.

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45

- LIABILITIES No stock transfer agent or one engaged


principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed
1. To pay to the corporation the balance of his unpaid to operate in the Philippines unless he secures a
subscriptions subject to the provision of section 67 to license from the Securities and Exchange Commission
70; and pays a fee as may be fixed by the Commission,
2. To pay interest on his unpaid subscription if required which shall be renewable annually: Provided, That a
by the by-laws or by the contract of subscription in stock corporation is not precluded from performing or
accordance with section 66; making transfer of its own stocks, in which case all the
3. To answer to the creditors for the unpaid portion of his rules and regulations imposed on stock transfer
subscription under the TRUST FUND DOCTRINE; agents, except the payment of a license fee herein
4. To answer the “water” in his stocks as provided for in provided, shall be applicable. (51a and 32a; P.B. No.
section 65; 268.)
5. To be liable, as general partners, for all debts,
liabilities and damages of a determinable corporation
as envisioned under section 21 (corporation by  To summarize:
estoppel); and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates 1. Records of all business transactions which include,
in the management of the corporate affairs. among others, journals, ledger, contracts, vouchers
and receipts, financial statements and other books of
accounts, income tax returns, and voting trust
CORPORATE BOOKS AND RECORDS agreements which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders or members
 What are these books and records that are required to and of the directors or trustees setting forth in detail
be kept? the date, time, and place of meeting, how authorized,
the notice given whether the same be regular or
special, and if special, the purpose thereof shall be
- Section 74. Books to be kept; stock transfer agent. - specified, those present and absent, and every act
Every corporation shall keep and carefully done or ordered done there at which ,must likewise be
preserve at its principal office a record of all kept at the principal office of the corporation; and,
business transactions and minutes of all 3. Stock and transfer book showing the names of the
meetings of stockholders or members, or of the stockholders, the amount paid or unpaid on all stocks
board of directors or trustees, in which shall be for which subscription has been made, a statement of
set forth in detail the time and place of holding every alienation, sale or transfer of stock made, if any
the meeting, how authorized, the notice given, the date thereof, and by whom and to whom made
whether the meeting was regular or special, if which must also be kept at the principal office of the
special its object, those present and absent, and corporation or in the office of its stock transfer agent.
every act done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when any These corporate books and records, inclusive of all
director, trustee, stockholder or member business transactions and minutes of meetings, are
entered or left the meeting must be noted in the subject to inspection by any of the directors, trustees,
minutes; and on a similar demand, the yeas and stockholders or members of the corporation at
nays must be taken on any motion or reasonable hours on business days and a copy of
proposition, and a record thereof carefully excerpts of said records may be demanded. In fact, in
made. The protest of any director, trustee, so far as financial statement is concerned, the Code
stockholder or member on any action or clearly provides:
proposed action must be recorded in full on his
demand.
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
The records of all business transactions of of any stockholder or member, the corporation shall
the corporation and the minutes of any meetings shall furnish to him its most recent financial statement,
be open to inspection by any director, trustee, which shall include a balance sheet as of the end of
stockholder or member of the corporation at the last taxable year and a profit or loss statement for
reasonable hours on business days and he may said taxable year, showing in reasonable detail its
demand, in writing, for a copy of excerpts from said assets and liabilities and the result of its operations.
records or minutes, at his expense.

At the regular meeting of stockholders or members,


Any officer or agent of the corporation who the board of directors or trustees shall present to such
shall refuse to allow any director, trustees, stockholder stockholders or members a financial report of the
or member of the corporation to examine and copy operations of the corporation for the preceding year,
excerpts from its records or minutes, in accordance which shall include financial statements, duly signed
with the provisions of this Code, shall be liable to such and certified by an independent certified public
director, trustee, stockholder or member for damages, accountant.
and in addition, shall be guilty of an offense which
shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a However, if the paid-up capital of the corporation is
resolution or order of the board of directors or less than P50,000.00, the financial statements may be
trustees, the liability under this section for such action certified under oath by the treasurer or any
shall be imposed upon the directors or trustees who responsible officer of the corporation. (n)
voted for such refusal: and Provided, further, That it
shall be a defense to any action under this section that
 May books and records be examined? Who may
the person demanding to examine and copy excerpts
examine? Can they copy them? In whose expense?
from the corporation's records and minutes has
improperly used any information secured through any
prior examination of the records or minutes of such - Yes, according to the code:
corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in
making his demand. “The records of all business
transactions of the corporation and the minutes
of any meetings shall be open to inspection by
Stock corporations must also keep a book to any director, trustee, stockholder or member of
be known as the "stock and transfer book", in which the corporation at reasonable hours on business
must be kept a record of all stocks in the names of the days and he may demand, in writing, for a copy
stockholders alphabetically arranged; the installments of excerpts from said records or minutes, at his
paid and unpaid on all stock for which subscription has expense. “
been made, and the date of payment of any
installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to  Is there any defense available that could be raised? By
whom made; and such other entries as the by-laws the corporate officers to justify the refusal?
may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the
office of its stock transfer agent and shall be open for - Yes, the code provides that:
inspection by any director or stockholder of the
corporation at reasonable hours on business days.
“and Provided, further, That it shall be a
defense to any action under this section that the
person demanding to examine and copy
Notes on Corporation Law
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46

excerpts from the corporation's records and ownership of shares and the necessity of
minutes has improperly used any information self-protection. Managers of some
secured through any prior examination of the corporations deliberately keep the
records or minutes of such corporation or of any shareholders in ignorance or under
other corporation, or was not acting in good misapprehension as to the true condition of
faith or for a legitimate purpose in making his its affairs. Business prudence demands that
demand.” the investor keep a watchful eye on the
management and the condition of the
business. Those in charge of the company
 What is the stock and transfer? Where should stock may be guilty of gross incompetence or
and transfer be kept? Can it be kept elsewhere? dishonesty for years and escape liability if
the shareholders cannot inspect the records
and obtain information.”
“Stock corporations must also keep a book
to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the  Is there any distinction of the right of inspection of a
names of the stockholders alphabetically stockholder and that of a director?
arranged; the installments paid and unpaid on
all stock for which subscription has been made,
and the date of payment of any installment; a - Yes, as compared to a stockholder or member, the
statement of every alienation, sale or transfer of right of a director or trustee to inspect and examine
stock made, the date thereof, and by and to corporate books and records is considered absolute
whom made; and such other entries as the by- and unqualified and without regard to motive. This is
laws may prescribe. The stock and transfer book because a director supervises, directs and manages
shall be kept in the principal office of the corporate business and it is necessary that he be
corporation or in the office of its stock transfer equipped with all the information and data with regard
agent and shall be open for inspection by any director to the affairs of the company in order that he may
or stockholder of the corporation at reasonable manage and direct its operations intelligently and
hours on business days. “ according to his best judgment in the interest of all the
stockholders he represents. Thus, while stockholders
and members are entitled to inspect and examine the
 Stock and transfer agent
books and records as provided in sections 74 and 75
they may not gain access to highly sensitive and
- Records every movement confidential information. In the case of directors. “it is
- Person who monitors movement by the minutes or by not denied” that they have such access. This would
the hours include, among others,
- Non-stock corporation- stock and transfer books
- Club share- membership
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
 Are stockholders entitled to financial statements? c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms
- Yes, they are entitled to a copy, the code provides
that:
 May this right be exercised, other than by the
stockholders themselves?
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall - Yes, while the right is founded on stock ownership thus
furnish to him its most recent financial statement, personal in nature it may be made by the
which shall include a balance sheet as of the end of stockholder’s agent or representative since it may be
the last taxable year and a profit or loss statement for unavailing in many instances
said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.
 What if the right of the stockholder to inspect is
denied? What is his remedy?
At the regular meeting of stockholders or
members, the board of directors or trustees shall
1. Mandamus
present to such stockholders or members a financial
2. Damages either against the corporation or responsible
report of the operations of the corporation for the
officer who refused the inspection
preceding year, which shall include financial
3. Criminal complaint for violation of his right to inspect
statements, duly signed and certified by an
and copy excerpts of all business transactions and
independent certified public accountant.
minutes of meeting. Section 74 provides that Any
officer or agent of the corporation who shall refuse to
However, if the paid-up capital of the allow any director, trustees, stockholder or member of
corporation is less than P50,000.00, the financial the corporation to examine and copy excerpts from its
statements may be certified under oath by the records or minutes, in accordance with the provisions
treasurer or any responsible officer of the corporation. of this Code, shall be liable to such director, trustee,
(n) stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable
under Section 144 of this Code. The latter provision
- Audited financial statement filed in the SEC, 120 days imposes a penalty of a fine of not less than P1,000 but
from the end of the final year, or must be filed on or not more than P10,000 or an imprisonment for not less
before April of each year than 30 days but not more than 5 years, or both, at
- Must be stamp received by the BIR the discretion of the court. If the refusal is pursuant to
a resolution or order of the board, the liability shall be
imposed upon the directors or trustees who voted for
 Those in the stock exchange such refusal.

- Disclosure of any matter that have to do with  Defense of the responsible corporate officer
increasing and decreasing
- If not “kulong” violation of securities and regulation
act 1. That the person demanding has improperly used any
information secured through any prior examination of
the records or minutes of such corporation or of any
 Why is this right of inspection granted to a other corporation;
stockholder? 2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
3. The right is limited or restricted by special law or the
- The basis of the right of the stockholder to inspect the law of it creation.
books and records of the corporation for a proper
purpose is to protect his interest as a stockholder.
Thus, it has been said that: • W.G. Philpotts vs. Philippine Manufacturing Co.

“The right of the shareholders to ascertain - The right of inspection given to a stockholder can be
how the affairs of his company are being exercised either by himself or by any proper
conducted by its directors and officers is representative or attorney-in-fact, and either with or
founded by his beneficial interest through without the attendance of the stockholder

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- The right may be regarded as personal, in the sense - However, whole seemingly enlarging the right of
that only a stockholder may enjoy it; but the inspection, the new code has prescribed limitations to
inspection and examination may be made by another. the same. It is now expressly required as a condition
Otherwise it would be unavailing in many instances. for such examination that the one requesting it must
not have been guilty of using improperly any
information secured through a prior examination and
o Note: Usually hires an auditor or accountant to
that the person asking for such examination must be
safeguard his interest
acting in good faith and for a legitimate purpose in
making his demand
• Pardo vs. Hercules Lumber Co. - Admittedly, he sought to be a stockholder in order to
pry into transactions entered into by the respondent
bank even before he became a stockholder. His
- The law is clear, it may be exercised during reasonable obvious purpose was to arm himself with materials he
hours on any business days, the by-laws cannot deny can use against the respondent bank for acts done by
this right all together the latter when the petitioner was a total stranger to
- The general right given by the statute may not be the same.
lawfully abridged to the extent attempted in this - Bank was created by a special law, it has its own
resolution. It may be admitted that the officials in charter and primarily governed by the law creating
charge of a corporation may deny inspection when them
sought at unusual hours or under other improper - The bank is only subject to the inspection of the
conditions; but neither the executive officers nor the Central Bank and any information pertaining to the
board of directors have the power to deprive a bank is confidential and shall not be revealed to any
stockholder of the right altogether. person other than the President of the Philippines, the
- The corporation, or its responsible directors and Secretary of Finance and the Board of Directors, nor
officers cannot unduly restrict this right of inspection shall any information relative to the funds in its
and may not arbitrarily set a few days of the year custody, its current accounts or deposits belonging to
within which the stockholder may make the inspection. private individuals, corporations or other entities
- A by-law unduly restricting the right of inspection is except by order of a Court of Competent Jurisdiction,
undoubtedly invalid hence inspection sought to by the petitioner is
violative of the provisions of its charter and is even
subject to penal sanctions
• Vegaruth vs. Isabela Sugar Co.
 Assuming you are a stockholder of PNB, and then it
- Directors of a corporation have the unqualified right to was privatized, may you already have the right to
inspect the books and records of the corporation at all inspect?
reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure certified - No, unless its charter has been altered or repealed it is
copies of the minutes of the corporation until these still subject to the same law
minutes have been written up and approved by the
directors.
 3 stages in the life of a corporation

 May a stockholder of a holding company inspect the - Formation or birth


books and records of a subsidiary? - We now discuss the union of the corporation
- The last would be its death or dissolution
- It depends
- The right of the stockholders to examine corporate MERGER AND CONSOLIDATION
books extends to wholly-owned subsidiary which is
completely under the control and management of the
parent company where he is such a stockholder. But if  Merger and consolidation
the two entities (subsidiary and parent) are legally
being operated as separate and distinct entities, there
is no such right of inspection on the part of the - In corporate parlance it is called spin-off
stockholder of the parent company. - Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
AYALA- HOLDING COMPANY/PARENT COMPANY company; it can later on absorb the company
- Corporations are granted by the code to merge or
consolidate
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly- - most common type of corporate recognition
owned subsidiary) - not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial
o HOLD ATLEAST 50 +1 shares in order to be a
capability
PARENT COMPANY
- also a method of recapitalization

 A, is a stockholder of Ayala, does he have a right to o purchase and sale of corporate assets is another
inspect the records of its subsidiaries? form of corporate reorganization

- If wholly owned pwede, but its subsidiaries are not


 How do you value the assets of the merging
wholly owned kaya hindi pwede
corporation, do you consider goodwill?
 First secure favorably recommendation of government
• Gokongwei vs. SEC agency

- San Miguel corporation owns all of the shares of stock - Section 79. Effectivity of merger or
of San Miguel International consolidation. - The articles of merger or of
- It is wholly-owned consolidation, signed and certified as herein above
- It would be in accord with equity, good faith and fair required, shall be submitted to the Securities and
dealing to construe the statutory right of petitioner as Exchange Commission in quadruplicate for its
stockholder to inspect the books and records of such approval: Provided, That in the case of merger or
wholly-owned subsidiary which are in respondent consolidation of banks or banking institutions,
corporation’s possession and control building and loan associations, trust companies,
insurance companies, public utilities,
educational institutions and other special
 If being operated as separate and distinct corporations governed by special laws, the
corporations, there is no such right favorable recommendation of the appropriate
 Telecommunications- special franchise, it is a government agency shall first be obtained. If the
legislative grant Commission is satisfied that the merger or
consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and
• Gonzales vs. PNB existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or
consolidation shall be effective.
- Provisions of the old law was unqualified, when it
granted stockholders the right to inspect
Notes on Corporation Law
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48

If, upon investigation, the Securities and  Although merger and consolidation is an express
Exchange Commission has reason to believe that the power granted to corporation, it is subject to
proposed merger or consolidation is contrary to or limitations, as maybe proscribed by law
inconsistent with the provisions of this Code or existing  What would be the effect of merger or consolidation?
laws, it shall set a hearing to give the corporations <sec. 80>
concerned the opportunity to be heard. Written notice
of the date, time and place of hearing shall be given to
each constituent corporation at least two (2) weeks 1. There will only be a single corporation. In case of
before said hearing. The Commission shall thereafter merger, the surviving corporation or the consolidated
proceed as provided in this Code. (n) corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the surviving
 Merger corporation or the consolidated corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
- A union effected by absorbing one or more existing immunities and powers and shall be subject to all the
corporations by another which survives and continues duties and liabilities of a corporation organized under
the combined business the Code;
- It is the uniting of two or more corporations by the 4. The surviving or consolidated corporation shall possess
transfer of property to one of them which continue in all the rights, privileges, immunities and franchises of
existence, the other or the others being dissolved and the constituent corporations, and all property and all
merged therein. receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or
A B belonging to or due to the constituent corporations
shall be deemed transferred to and vested in such
surviving or consolidated corporation without further
A transfers all assets, properties, rights, obligations, act and deed; and,
liabilities to B 5. The rights of creditors or any lien on the property of
the constituent corporations shall not be impaired by
the merger or consolidation.
B issues shares of stocks in exchange of the transfer

 Is there a liquidation process in case of merger or


A is then dissolved and B SURVIVES consolidation?

o Parties to a merger are called constituent - None, there is nothing to distribute


corporation

• Associated Bank vs. CA


 Consolidation

- By virtue of a specific provision in the merger


- The uniting or amalgamation of two or more existing agreement
corporations to form a new corporation - Although the subject promissory note names CBTC as
- In merger there is a surviving corporation, the others the payee, the reference to CBTC in the note shall be
are dissolved, while in consolidation, all constituent construed, under the very provision of the merger
are dissolved and a new one organized agreement, as a reference to petitioner bank, “as if
such reference (was a) direct reference to the latter
for all intents and purposes
A B
- Section 80 par. 4 states:

The surviving or the consolidated


corporation shall thereupon and thereafter possess all
C the rights, privileges, immunities and franchises of
each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever
 Like all other corporate acts, it emanates from the account, including subscriptions to shares and other
board choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such
1. The board of directors or trustees of each constituent surviving or consolidated corporation without further
corporations shall approve a plan of merger or act or deed; and
consolidation setting forth the matters required in
section 76;
2. Approval of the plan by the stockholders - Without further acts, meaning it is automatic
representing 2/3 of the outstanding capital
stock or 2/3 of the member in non-stock
 When do merger and consolidation become effective?
corporations of each of such corporations at separate
What if the SEC fails to act on it without fault
corporate meetings called for the purpose;
attributable to the corporation involved?
3. Prior notice of such meeting, with a copy or
summary of the plan of merger or consolidation
shall be given to all stockholders or members at least - It will never become valid until and unless the SEC
two (2) weeks prior to the scheduled meeting, either gives its stamp of approval
personally or registered mail stating the purpose - It will be up to the constituent corporation to follow it
thereof; up
4. Execution of the articles of merger or consolidation by - It will never take effect until the SEC gives its approval
each constituent corporations to be signed by the and issues the articles of merger
president or vice-president and certified by the
corporate secretary or assistant secretary
o Granted 3 years to wing up unless there is a
setting forth the matters required in section 78;
trustee to wing up its affairs
5. Submission of the articles of merger or
consolidation in quadruplicate to the SEC subject
to the requirement of section 79 that if it involve  Could there be liquidators and winding up with respect
corporations under the direct supervision of any other to the corporation in consolidation and merger?
government agency or governed by special laws the
favorable recommendation of the government agency
concerned shall first be secured and; - No, there is none
- No assets properties or rights to collect, they are
6. Issuance of the certificate of merger or
transferred
consolidation by the SEC at which time the merger
- No debts and liabilities to pay because they become
or consolidation shall be effective. If the plan,
the liabilities of the surviving corporations
however, is believed to be contrary to law, the SEC
- No properties transferred because they will be the
shall set a hearing to give the corporations concerned
properties of the surviving corporations
an opportunity to be heard upon proper notice and
thereafter, the Commission shall proceed as provided
in the Code. o Hardest part is the financial act, regarding how
many shares would be issued, probability of
collection and the like

Notes on Corporation Law


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49

o In merger and consolidation, there is due majority of the appraisers shall be final, and their
diligence and an economist is usually hired award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder
APPRAISAL RIGHT unless the corporation has unrestricted retained
earnings in its books to cover such payment: and
Provided, further, That upon payment by the
 Define appraisal corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the
- Right to withdraw from the corporation and demand corporation. (n)
payment of the fair value of his shares after dissenting
from certain corporate acts involving fundamental X Co.
changes in corporate structure <sec. 81>

Principal Office- QC, it was changed to Manila


 What property? When may this right be exercises?

A objects and makes a written demand for payment of


- Section 81 provides: fair value of shares. Can he make a demand of
payment of shares?
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the right to  True or False, no stockholder in a stock corporation
dissent and demand payment of the fair value of his can ever demand if the principal office is amended,
shares in the following instances: changing it from QC to Manila

1. In case any amendment to the articles of - False, a stockholder in a close corporation may for any
incorporation has the effect of changing or restricting reason compel the close corporation that he be paid
the rights of any stockholder or class of shares, or of the fair value of his shares
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate Can he exercise his appraisal rights in the first place?
existence; He hasn’t even paid his subscription in full.

2. In case of sale, lease, exchange, transfer, mortgage,  May a stockholder who hasn’t paid his subscription in
pledge or other disposition of all or substantially all of full exercise his appraisal rights?
the corporate property and assets as provided in the
Code; and
- Yes, he can exercise his appraisal rights, by reconciling
the provisions of section 72, section 82 and section 86
3. In case of merger or consolidation. (n)

Section 72. Rights of unpaid shares. -


 May it be exercised by a stockholder who dissents to Holders of subscribed shares not fully paid which are
the act of a business other than a primary purpose? not delinquent shall have all the rights of a
stockholder. (n)
X Co. inc
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
Principal office is in Quezon city, it was changed to who shall have voted against the proposed corporate
Paranaque action, by making a written demand on the
corporation within thirty (30) days after the date on
A objects and makes a written demand. May he which the vote was taken for payment of the fair value
exercise his right of appraisal? of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action
- It is not available in all amendments of the corporation is implemented or affected, the corporation shall
- It must be changing or restricting the rights of any pay to such stockholder, upon surrender of the
stockholder certificate or certificates of stock representing
his shares, the fair value thereof as of the day prior
to the date on which the vote was taken, excluding
 What if the principal office is changed from QC to any appreciation or depreciation in anticipation of such
TAWI-TAWI, will it change or affect the rights of A? corporate action.

- To some it may change or restrict the rights to others If within a period of sixty (60) days from the
it may not date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
 How is the right exercised? shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be named
- According to section 82 of the code: by the stockholder, another by the corporation, and
the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their
Section 82. How right is exercised. - The award shall be paid by the corporation within thirty
appraisal right may be exercised by any stockholder (30) days after such award is made: Provided, That no
who shall have voted against the proposed corporate payment shall be made to any dissenting stockholder
action, by making a written demand on the unless the corporation has unrestricted retained
corporation within thirty (30) days after the date on earnings in its books to cover such payment: and
which the vote was taken for payment of the fair value Provided, further, That upon payment by the
of his shares: Provided, That failure to make the corporation of the agreed or awarded price, the
demand within such period shall be deemed a waiver stockholder shall forthwith transfer his shares to the
of the appraisal right. If the proposed corporate action corporation. (n)
is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate
or certificates of stock representing his shares, the fair Section 86. Notation on certificates; rights
value thereof as of the day prior to the date on which of transferee. - Within ten (10) days after demanding
the vote was taken, excluding any appreciation or payment for his shares, a dissenting stockholder shall
depreciation in anticipation of such corporate action. submit the certificates of stock representing his shares
to the corporation for notation thereon that such
shares are dissenting shares. His failure to do so shall,
If within a period of sixty (60) days from the at the option of the corporation, terminate his
date the corporate action was approved by the rights under this Title. If shares represented by the
stockholders, the withdrawing stockholder and the certificates bearing such notation are transferred, and
corporation cannot agree on the fair value of the the certificates consequently cancelled, the rights of
shares, it shall be determined and appraised by three the transferor as a dissenting stockholder under this
(3) disinterested persons, one of whom shall be named Title shall cease and the transferee shall have all the
by the stockholder, another by the corporation, and rights of a regular stockholder; and all dividend
the third by the two thus chosen. The findings of the
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distributions which would have accrued on such shares  When may the right to be paid the value of his shares
shall be paid to the transferee. (n) cease? Can he withdraw his right of appraisal?

- Notation is not mandatory, it is even discretionary - Yes, he may withdraw, but there must be consent by
because the code provides “at the option of the the corporation as provided for by section 83 of the
corporation” because it never issued one for that code:
matter since the subscriptions are not yet fully paid

Section 84. When right to payment ceases.


 May the corporation be compelled to pay the interest - No demand for payment under this Title may be
of A withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed
300 T, 150T, 150T and 0 unrestricted retained corporate action is abandoned or rescinded by the
earnings corporation or disapproved by the Securities and
Exchange Commission where such approval is
necessary, or if the Securities and Exchange
 No stockholder may be able to compel the corporation
Commission determines that such stockholder is not
to pay the value of his shares if the corporation has no
entitled to the appraisal right, then the right of said
unrestricted retained earnings
stockholder to be paid the fair value of his shares shall
cease, his status as a stockholder shall thereupon be
- False, a stockholder of a close corporation may for any restored, and all dividend distributions which would
reason, provided only that the corporation has have accrued on his shares shall be paid to him. (n)
sufficient assets to cover its debts and liabilities
 Instances when the right of a dissenting stockholder to
o General rule: there should be unrestricted be paid the fair value of his shares ceases.
retained earnings
o Exception: section 105 “close corporation”
1. When he withdraws his demand for payment and the
corporation consents thereto;
 The procedure and requirements for the valid exercise 2. When the proposed action is abandoned or rescinded
of this rights are: by the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
1. The stockholder must have voted against the proposed 4. When the SEC determines that he is not entitled to
corporate action in any of the instances allowed by law exercise his appraisal right;
for the exercise of the right of appraisal; 5. When he fails to submit the stock certificate within ten
2. The written demand for payment must be made by the (10) days from demand to the corporation for notation
dissenting stockholder within thirty (30) days after the that such shares are dissenting shares; and,
date on which the vote was taken thereon. Failure to 6. If the shares are transferred and the certificate
make the demand within the said period shall be subsequently cancelled.
deemed a waiver on the part of the stockholder
concerned to exercise his appraisal right;
3. Surrender of the certificate of stock by the dissenting  Who bears the cost of appraisal?
stockholder for notation in the corporate books and
the payment by the corporation of the fair market
- It depends
value of the said shares as of the day prior to the date
- The corporation bears the cost if
on which the vote was taken. If the stockholder and
the corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance a. The price offered by the corporation is lower than
with the provision of paragraph 2 of section 82; the fair value of the shares of the dissenting
4. The fair value of the shares of the dissenting stockholder as determined by the appraisers;
stockholder must be paid by the corporation only if it b. Where an action is filed by the dissenting
has “unrestricted retained earnings” in its books to stockholder to recover such fair value and the
cover such payment. If the corporation has no refusal of the stockholder to receive payment is
unrestricted retained earnings, the dissenting found by the court to be justified.
stockholder may not, therefore, be able to effectively
exercise his appraisal rights;
5. Upon payment of the shares by the corporation, the - Dissenting stockholder will be liable for the cost and
dissenting stockholder shall transfer his shares to the expenses of appraisal when
corporation.
a. When the price offered by the corporation is
 What would be the effect if the stockholder exercises approximately the same as the fair value
his appraisal rights? What happens to his voting and ascertained by the appraisers;
dividend rights if he exercises his appraisal rights? b. Where the action filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified.
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
 The dissenting stockholder may also sell, transfer or
assign his shares
Section 83. Effect of demand and
termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares Section 86. Notation on certificates; rights
until either the abandonment of the corporate action of transferee. - Within ten (10) days after demanding
involved or the purchase of the said shares by the payment for his shares, a dissenting stockholder shall
corporation, all rights accruing to such shares, submit the certificates of stock representing his shares
including voting and dividend rights, shall be to the corporation for notation thereon that such
suspended in accordance with the provisions of shares are dissenting shares. His failure to do so shall,
this Code, except the right of such stockholder at the option of the corporation, terminate his rights
to receive payment of the fair value thereof: under this Title. If shares represented by the
Provided, That if the dissenting stockholder is certificates bearing such notation are
not paid the value of his shares within 30 days transferred, and the certificates consequently
after the award, his voting and dividend rights cancelled, the rights of the transferor as a
shall immediately be restored. (n) dissenting stockholder under this Title shall
cease and the transferee shall have all the
rights of a regular stockholder; and all dividend
 How do you compare the rights of a stockholder, distributions which would have accrued on such
declared delinquent compared to a dissenting shares shall be paid to the transferee. (n)
stockholder exercising his appraisal rights
 What if a stockholder exercising his appraisal rights is
also a director, will he also lose his rights as a NON-STOCK CORPORATIONS
stockholder?
 What is a non-stock corporation?
- The shares remain to stand in his name until he is
paid, unless there is a stipulation in the by-laws
- A non-stock corporation is one where no part of its
income is distributable as dividends to its members,

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trustees, or officers, subject to the provisions of this office of one-third (1/3) of their number shall expire
code on dissolution every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
 What provision of the code will govern non-stock have a term of three (3) years. Trustees thereafter
corporations? Would the provision governing stock elected to fill vacancies occurring before the expiration
corporations also apply to non-stock corporations? of a particular term shall hold office only for the
unexpired period.

- Yes, 2nd par. Of section 87 provides:


No person shall be elected as trustee unless
he is a member of the corporation.
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific Unless otherwise provided in the articles of
provisions of this Title. (n) incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n)
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote  Qualifications?
cumulatively?
1. He is a member of the association;
- General rule is NO 2. Majority thereof must be residents of the Philippines;
and,
3. Other qualifications as may be provided for in the by-
 May it be granted or allowed by the by-laws? laws.

- Yes  Governing board in a non-stock

 May the right to cumulative voting be denied in a - Board of Trustees, however section 138 provides that:
stock corporation?

Section 138. Designation of governing


- No, Doctrine of Limited Capacity boards. - The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or
special corporations may, through their articles
 May members in a non-stock corporation vote by of incorporation or their by-laws, designate their
proxy? governing boards by any name other than as
board of trustees. (n)
- Yes, section 89 provides that:
 Disqualifications
“Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by - Section 27 also applies to a non-stock corporation,
proxy in accordance with the provisions of this Code. same holds true to the manner of removal <sec. 29 ad
(n) “ 30>

 May the right to vote by proxy be validly denied in a Section 27. Disqualification of directors,
stock corporation? trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
- No, it is a matter of right in a stock corporation
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a
 May member of a non-stock corporation cast their vote director, trustee or officer of any corporation. (n)
by text?
Section 29. Vacancies in the office of
- Yes, subject to the approval and terms and conditions director or trustee. - Any vacancy occurring in the
of the SEC <sec. 89> board of directors or trustees other than by removal by
the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the
“Voting by mail or other similar means by remaining directors or trustees, if still constituting a
members of non-stock corporations may be authorized quorum; otherwise, said vacancies must be filled by
by the by-laws of non-stock corporations with the the stockholders in a regular or special meeting called
approval of, and under such conditions which may be for that purpose. A director or trustee so elected to fill
prescribed by, the Securities and Exchange a vacancy shall be elected only or the unexpired term
Commission. “ of his predecessor in office.

 How about in stock? Any directorship or trusteeship to be filled


by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
- Voting by mail or other similar means may also be or at a special meeting of stockholders or members
authorized and allowed by the by-laws of non-stock duly called for the purpose, or in the same meeting
corporations. Generally, in stock corporations, the vote authorizing the increase of directors or trustees if so
must be cast at a duly constituted meeting. The only stated in the notice of the meeting. (n)
exception, in case of the latter, is in the matter of
general amendment of the articles of incorporation
where the written assent of the stockholder may be Section 30. Compensation of directors. - In
sufficient. the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
 How is the governing board constituted in a non-stock reasonable per diems: Provided, however, That any
corporation? How many members? such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
- It may exceed 15 in a non-stock corporation unless the capital stock at a regular or special stockholders'
AOI or by-laws provide otherwise, as provided for by meeting. In no case shall the total yearly
section 92 of the code: compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax
Section 92. Election and term of trustees. - of the corporation during the preceding year. (n)
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of
 Who elects the other officers?
non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as - Directly by the general members unless the by-laws or
organized, so classify themselves that the term of articles provide otherwise. <sec.92>
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“Unless otherwise provided in the articles of Section 91. Termination of membership. -


incorporation or the by-laws, officers of a non-stock Membership shall be terminated in the manner and for
corporation may be directly elected by the members. the causes provided in the articles of incorporation or
(n) “ the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise
 In stock corporations who elect officers? provided in the articles of incorporation or the by-laws.
(n)
- Directors
 Power is inherent and may be exercised in certain
situations:
 The provision that stock corporations cannot validly
provide that members cannot be voted by
stockholders is only a general rule because there is an 1. When an offense is committed which, although it
exception section 97 of the code states that: has no immediate relation to a member’s duty as
such, it is so infamous as to render him unfit for
society of honest men, which is indictable at
The articles of incorporation of a close
common law;
corporation may provide that the business of the
2. When the offense is a violation of his duty as
corporation shall be managed by the stockholders
member of the corporation; and,
of the corporation rather than by a board of
3. When the offense is of a mixed nature, being
directors. So long as this provision continues in
both against his duty as a member of the
effect:
corporation, and also indictable at common law.

1. No meeting of stockholders need be called to elect


If the conduct of the member comes within any of this
directors;
cases, it is a ground for valid expulsion although it
may not be expressly made so by the by-laws
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
• Chinese YMCA vs. Ching
directors for the purpose of applying the provisions of
this Code; and
- Right of the corporation to choose who the members
are, cannot be inquired or intervened by the court
3. The stockholders of the corporation shall be subject
- The appealed decision thus contravened the establish
to all liabilities of directors.
principle that the courts cannot strip a member of a
non-stock corporation of his membership therein
The articles of incorporation may without cause.
likewise provide that all officers or employees or
that specified officers or employees shall be
elected or appointed by the stockholders, instead • Lions Club International vs. CA
of by the board of directors.
- Courts will not generally interfere on matters involving
the internal affairs of an unincorporated association
 Nature of membership is non-transferrable and
such as election contest unless the acts complained of
personal in nature unless the articles of incorporation
are arbitrary, oppressive, fraudulent, violative of civil
or by-laws provide otherwise
rights and the like
- General rule is that the courts will not interfere with
Section 90. Non-transferability of the internal affairs of an unincorporated association so
membership. - Membership in a non-stock corporation as to settle disputes between the members, or
and all rights arising there from are personal and non- questions of policy, discipline, or internal government,
transferable, unless the articles of incorporation or the so long as the government of the society is fairly and
by-laws otherwise provide. (n) honestly administered in conformity with its by-laws
and the law of the land, and no property or civil rights
are involved.
 How is a membership requirement in a non-stock - Exceptions are the following:
corporation

a. Where law and justice so require, and the


A holds a membership certificate proceedings of the association are subject to
judicial review where there is fraud, oppression,
or bad faith, or where the action complained of is
B goes to the corporation and compels the corporation capricious, arbitrary, or unjustly discriminatory
to record the transfer in his name b. To grant relief in case property or civil rights are
invaded, although it has also been held that the
- Membership in non-stock corporations may be involvement of property rights does not
acquired by complying with the provisions of its rules necessarily authorize judicial intervention, in the
prescribed in the by-laws. This is in consonance with absence of arbitrariness, fraud or collusion.
the express power granted by law under section 36, c. Are violative of the laws of the society, or the law
paragraph 6 of the code, authorizing them to admit of the land, as by depriving the person of due
members thereof and that authority carries with it the process of law
power to prescribe rules on membership. It has thus d. There is lack of jurisdiction on the part of the
been stated that in the absence of charter or statutory tribunal conducting the proceedings, where the
restrictions, non-stock corporations may determine organization exceeds its powers, or where the
who shall be admitted to membership and how they proceedings are otherwise illegal
shall be admitted.
 Corporations, stock and non-stock, may be dissolved in
Section 36. Corporate powers and accordance and pursuant to the provisions of Sections
capacity. - Every corporation incorporated under this 118 to 121 of the Corporation Code and the pertinent
Code has the power and capacity: provisions of P.D. 902-A, as amended. If such be the
case, the assets of the corporation are to be
distributed in accordance with law and established
6. In case of stock corporations, to issue or sell stocks jurisprudence.
to subscribers and to sell stocks to subscribers and to  If a non-stock corporation is dissolved how will its
sell treasury stocks in accordance with the provisions properties be distributed?
of this Code; and to admit members to the corporation
if it be a non-stock corporation;
Section 94. Rules of distribution. - In case
dissolution of a non-stock corporation in
- They can provide the manner in which to admit accordance with the provisions of this Code, its
depending on their own rules assets shall be applied and distributed as follows:

 The power or authority to terminate members in non- 1. All liabilities and obligations of the corporation
stock corporations is said to be inherent but strict shall be paid, satisfied and discharged, or
compliance with the manner and procedure laid down adequate provision shall be made therefore;
in the by-laws must be observed, otherwise it may
render the expulsion ineffective and invalid.

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2. Assets held by the corporation upon a be deemed a close corporation when at least two-
condition requiring return, transfer or thirds (2/3) of its voting stock or voting rights is owned
conveyance, and which condition occurs by or controlled by another corporation which is not a
reason of the dissolution, shall be returned, close corporation within the meaning of this Code.
transferred or conveyed in accordance with such
requirements;
- Between and among themselves, they feel and act
alike
3. Assets received and held by the corporation - Not more than 20 stockholders
subject to limitations permitting their use only for - Specified persons, if you are not specified, you cannot
charitable, religious, benevolent, educational or be a stockholder
similar purposes, but not held upon a condition - All the issued stocks of all classes is subject to
requiring return, transfer or conveyance by restrictions
reason of the dissolution, shall be transferred or - Shall not be listed in the stock exchange not publicly
conveyed to one or more corporations, societies offered
or organizations engaged in activities in the - 3 qualifying conditions must be contained in the
Philippines substantially similar to those of the articles of incorporation, to be considered as a close
dissolving corporation according to a plan of corporation, if not, it will not be considered as such
distribution adopted pursuant to this Chapter; and will be governed by the general provisions of the
code
- Even if 100 % is owned by one person it will not be
4. Assets other than those mentioned in the considered a close corporation without the 3 qualifying
preceding paragraphs, if any, shall be distributed provisions
in accordance with the provisions of the articles - Identity of stockholders, specified persons
of incorporation or the by-laws, to the extent that - Active management either as directors or partners in
the articles of incorporation or the by-laws, management
determine the distributive rights of members, or - Combination of the corporation and partnership type
any class or classes of members, or provide for of business
distribution; and

 May any type of corporation, be organized as such


5. In any other case, assets may be distributed to close corporation?
such persons, societies, organizations or
corporations, whether or not organized for profit,
as may be specified in a plan of distribution - No, the 3 qualifying conditions must be present
adopted pursuant to this Chapter. (n)

 What if 2/3 of the outstanding capital stock is owned


 Non-stock corporations with 4Billion funds, may it be by another corporation which is also a close
distributed for and among its members? corporation, will it be a close corporation?

- Section 94 number 3 provides: - No, it will only be a closed corporation if 2/3 of the
voting stocks of a close corporation is also owned by a
3. Assets received and held by the close corporation. It must be “voting” stocks
corporation subject to limitations permitting their use - Even if another corporation owns or controls 2/3 of the
only for charitable, religious, benevolent, educational voting stocks of a close corporation, the latter may still
or similar purposes, but not held upon a condition be considered as such close corporation if the
requiring return, transfer or conveyance by reason of corporation owning or controlling the shares is also a
the dissolution, shall be transferred or conveyed to close corporation.
one or more corporations, societies or organizations
engaged in activities in the Philippines substantially “Notwithstanding the foregoing, a
similar to those of the dissolving corporation according corporation shall not be deemed a close corporation
to a plan of distribution adopted pursuant to this when at least two-thirds (2/3) of its voting stock or
Chapter; voting rights is owned or controlled by another
corporation which is not a close corporation within the
- If there is no distributive agreement then they may do meaning of this Code.”
so through a plan of distribution under section 95
 What kind of corporations cannot be a close
Section 95. Plan of distribution of assets. - corporation?
A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be
1. Mining or oil companies,
adopted by a non-stock corporation in the process of
2. Stock exchange
dissolution in the following manner:
3. Banks and insurance companies,
4. Public utilities
The board of trustees shall, by majority vote, 5. Educational institutions
adopt a resolution recommending a plan of distribution 6. Corporations vested with public interest
and directing the submission thereof to a vote at a
regular or special meeting of members having voting
 Classification of directors
rights. Written notice setting forth the proposed plan
of distribution or a summary thereof and the date,
time and place of such meeting shall be given to each - Ordinary stock- no such right
member entitled to vote, within the time and in the - Close corporation-yes there is such a right
manner provided in this Code for the giving of notice
of meetings to members. Such plan of distribution
shall be adopted upon approval of at least two-thirds  Section 97 is a permissive provision
(2/3) of the members having voting rights present or
represented by proxy at such meeting. (n)
Section 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:

CLOSE CORPORATIONS 1. For a classification of shares or rights and the


qualifications for owning or holding the same and
restrictions on their transfers as may be stated
 Section 96. Definition and applicability of Title. - A therein, subject to the provisions of the following
close corporation, within the meaning of this Code, is section;
one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of 2. For a classification of directors into one or more
record by not more than a specified number of classes, each of whom may be voted for and elected
persons, not exceeding twenty (20); (2) all the solely by a particular class of stock; and
issued stock of all classes shall be subject to one
or more specified restrictions on transfer 3. For a greater quorum or voting requirements in
permitted by this Title; and (3) The corporation meetings of stockholders or directors than those
shall not list in any stock exchange or make any provided in this Code.
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not
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 After classification what then? - Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
- After classification, qualification and then restriction as becomes in excess of 20
provided for under the 3 qualifying conditions in
section 96
o Unless all the stockholders consent they
“may”
 Cumulative voting is restricted in close corporations if
will be elected solely by a particular class
 In a close corporation, the articles of incorporation  What if the other stockholders object to register? What
may provide for a greater quorum and voting will be the remedy of the transferee?
requirement in meetings of both stockholders or
directors to increase the veto power of minority - His remedy is rescission. The effect of rescission is
stockholders, unlike in a stock corporation wherein mutual restitution
only directors meetings may provide for greater
quorum requirement and in stockholders meeting
which may not be altered or increased, as provide for  How about the stockholder, what is his recourse?
in section 25, following the doctrine of limited capacity
 The articles of a close corporation may likewise
provide that the business of the corporation shall be - He may compel the close corporation to purchase his
managed by the stockholders rather than by the board shares at their fair value for any reason, provided the
of directors. However the same must contain the corporation has sufficient assets in its books to cover
continuing provisions required in paragraph 2 of the debts and liabilities exclusive of capital
section 97, that is: - In a close corporation, there is a withdrawing
stockholder, unlike in an ordinary stockholder where
there is none, they may only do so in the exercise of
1. No meeting of stockholders need be called to appraisal rights
elect directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed Section 105. Withdrawal of stockholder or
to be directors; and; dissolution of corporation. - In addition and without
3. The stockholders of the corporation shall be prejudice to other rights and remedies available to a
subject to all liabilities of directors. stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel
the said corporation to purchase his shares at
 Liability of stockholders acting as directors in a close their fair value, which shall not be less than
corporation are more extensive since they are their par or issued value, when the corporation
personally liable for corporate torts unless the has sufficient assets in its books to cover its
corporation has obtained a reasonable adequate debts and liabilities exclusive of capital stock:
liability insurance, unlike a ordinary stock corporation, Provided, That any stockholder of a close corporation
wherein directors thereof are only liable for corporate may, by written petition to the Securities and
torts only if they have been negligent or acted Exchange Commission, compel the dissolution of such
fraudulently in the performance of their functions. corporation whenever any of acts of the directors,
 Restrictions officers or those in control of the corporation is illegal,
or fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation or any stockholder, or
- In ordinary stock corporations, the restrictions must whenever corporate assets are being misapplied or
appear in the articles of incorporation as well as the wasted.
certificate of stocks
- In a close corporation, the restrictions must appear in
the articles of incorporation, the by-laws and the  Agreements may also be entered in a close
certificate of stocks. Otherwise, the same shall not be corporation <sec.100>
binding on any purchaser thereof in good faith
- They can even agree to be partners in management
 What if the stockholders do not want to exercise their - Pre-incorporation
right or option to purchase may it be sold to any - Manner in which the business of the corporation shall
person? be managed

- Yes, any third person, section 98 provides:  Board resolution

Section 98. Validity of restrictions on - Ordinary stock corporations- sit and act as a body at a
transfer of shares. - Restrictions on the right to duly constituted meeting, they may do so by virtue of
transfer shares must appear in the articles of the E-Commerce Act through teleconference or video
incorporation and in the by-laws as well as in the conference
certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than granting  Exception to the rule: other officers may be directly
the existing stockholders or the corporation the option appointed and hired by the stockholders
to purchase the shares of the transferring stockholder  Close corporations may validly act even without a
with such reasonable terms, conditions or period meeting provided the conditions are obtained
stated therein. If upon the expiration of said
period, the existing stockholders or the
Section 101. When board meeting is
corporation fails to exercise the option to
unnecessary or improperly held. - Unless the by-laws
purchase, the transferring stockholder may sell
provide otherwise, any action by the directors of a
his shares to any third person.
close corporation without a meeting shall nevertheless
be deemed valid if:
o ordinary stock corporations are liable only if
acted in Bad faith, fraud or negligence in
1. Before or after such action is taken, written consent
performance of duty
thereto is signed by all the directors; or

 What if there are already 20 stockholders and they 2. All the stockholders have actual or implied
want to add 2 more, may it compel? knowledge of the action and make no prompt
objection thereto in writing; or
- In ordinary stock corporations, they may compel by
mandamus 3. The directors are accustomed to take informal
- In close corporations, may not be compelled to admit action with the express or implied acquiescence of all
because it breaches the qualifying conditions the stockholders; or

 Since they cannot be compelled, may they admit? 4. All the directors have express or implied knowledge
of the action in question and none of them makes
- Yes, provided all the stockholders consented or prompt objection thereto in writing.
instead of consenting they decide to amend their
articles of incorporation  Pre-emptive rights in a close corporation is absolute
Notes on Corporation Law
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55

Section 102. Pre-emptive right in close A provisional director shall be an impartial


corporations. - The pre-emptive right of stockholders in person who is neither a stockholder nor a creditor of
close corporations shall extend to all stock to be the corporation or of any subsidiary or affiliate of the
issued, including reissuance of treasury shares, corporation, and whose further qualifications, if any,
whether for money, property or personal services, or may be determined by the Commission. A provisional
in payment of corporate debts, unless the articles of director is not a receiver of the corporation and does
incorporation provide otherwise. not have the title and powers of a custodian or
receiver. A provisional director shall have all the rights
and powers of a duly elected director of the
 Why is it said to be absolute? corporation, including the right to notice of and to vote
at meetings of directors, until such time as he shall be
removed by order of the Commission or by all the
- Because there is no public offering in a close
stockholders. His compensation shall be determined
corporation, otherwise it will not be considered as
by agreement between him and the corporation
close
subject to approval of the Commission, which may fix
his compensation in the absence of agreement or in
 In a close corporation the pre-emptive rights is the event of disagreement between the provisional
broadened to include all issues without exception director and the corporation.
unless denied or limited by the articles of
incorporation - Powers of the SEC in intra-corporate concerns has
 Section 39 is the governing provision concerning rights been transferred to the proper commercial courts
of the stockholder in an ordinary stock corporation and - Prohibit, even if acting in good faith
it may be denied. If it is not denied a stockholder can - Provisional director appointed by the court
exercise his pre-emptive rights for all issues of shares - Requiring the purchase, irrespective of unrestricted
whether money, property or previously incurred retained earnings
indebtedness. - The provision of the law above-quoted gives the SEC a
very wide discretion in respect to management of a
Section 39. Power to deny pre-emptive close corporation in the event of a deadlock. It may:
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or 1. Cancel or alter any provision in the articles of
disposition of shares of any class, in proportion to their incorporation, by-laws or any stockholders
respective shareholdings, unless such right is denied agreement
by the articles of incorporation or an amendment 2. Cancel, alter or enjoin any resolution or other act
thereto: Provided, That such pre-emptive right shall of the corporation or its board of directors,
not extend to shares to be issued in compliance with stockholders or officers
laws requiring stock offerings or minimum stock 3. Prohibit any act of the corporation or its board of
ownership by the public; or to shares to be issued in directors, stockholders or officers or other
good faith with the approval of the stockholders persons party to the action;
representing two-thirds (2/3) of the outstanding capital 4. Requiring the purchase of the par value of the
stock, in exchange for property needed for corporate shares of any stockholders, either by the
purposes or in payment of a previously contracted corporation regardless of availability of
debt. unrestricted earnings, or by the other
shareholders,
5. Appointment of a provisional director
 Are treasury shares covered in the exercise of pre-
6. Dissolving the corporation; or
emptive rights in ordinary stock corporations?
7. Other relief as the circumstances may warrant.
 As regards amendments

 Section 105
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any - Dishonesty is a ground for dissolution of a close
provision required by this Title to be contained in the corporation
articles of incorporation or to reduce a quorum or - Even one stockholder may petition for dissolution
voting requirement stated in said articles of
incorporation shall not be valid or effective unless
approved by the affirmative vote of at least two-thirds o when there is a relief available, dissolution
(2/3) of the outstanding capital stock, whether with or would not be available in an ordinary
without voting rights, or of such greater proportion of corporation
shares as may be specifically provided in the articles
of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly CLOSE CORPORATION ORDINARY STOCK
called for the purpose. CORPORATION
1. The number of stockholders No limitation as to number of
cannot exceed 20 shareholder
 What happens if there is a deadlock? 2. To the extent that all Maximum number of directors
stockholders can be is 15
deemed directors, the
- Section 104 provides for a remedy number of directors can
effectively be more than 15
Section 104. Deadlocks. - Notwithstanding 3. Shares of stock are subject Generally no restriction on
any contrary provision in the articles of incorporation to specified restrictions transfer of shares
or by-laws or agreement of stockholders of a close 4. Shares of stock are No prohibition
corporation, if the directors or stockholders are so prohibited from being listed
divided respecting the management of the in the stock exchange or
corporation's business and affairs that the votes offered for sale to the public
required for any corporate action cannot be obtained, 5. Stockholders may take an Management is lodged in the
with the consequence that the business and affairs of active part in corporate Board of Directors
the corporation can no longer be conducted to the management by vesting
advantage of the stockholders generally, the Securities management to them rather
and Exchange Commission, upon written petition by than a Board of Director
any stockholder, shall have the power to arbitrate the 6. Those active in Directors are liable for torts
dispute. In the exercise of such power, the management are personally only if they have acted
Commission shall have authority to make such order liable for corporate torts negligently or fraudulently
as it deems appropriate, including an order: (1) unless the corporation has
cancelling or altering any provision contained in the obtained an adequate
articles of incorporation, by-laws, or any stockholder's liability insurance
agreement; (2) cancelling, altering or enjoining any 7. Directors can validly act Directors must, as a rule, act
resolution or act of the corporation or its board of even without a meeting as a body at a duly constituted
directors, stockholders, or officers; (3) directing or meeting
prohibiting any act of the corporation or its board of 8. Agreements between Not valid and binding since
directors, stockholders, officers, or other persons party stockholders regarding the stockholders’ agreement
to the action; (4) requiring the purchase at their fair operations of the business cannot limit the discretion of
value of shares of any stockholder, either by the can validly be made the Board to manage
corporation regardless of the availability of corporate affairs
unrestricted retained earnings in its books, or by the 9. To the extent that directors Ordinarily, no such
other stockholders; (5) appointing a provisional may be classified into one classification and no
director; (6) dissolving the corporation; or (7) granting or more classes and to be restrictions on cumulative
such other relief as the circumstances may warrant. voted solely by a particular voting
Notes on Corporation Law
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56

class of stock, cumulative  What provision governs educational corporations?


voting may, in effect, be
restricted
10. The articles of Officers are elected by the Section 106. Incorporation. - Educational
incorporation may provide Board of Directors corporations shall be governed by special laws and by
that all officers shall be the general provisions of this Code. (n)
elected or appointed by the
stockholders - Special laws like they Education Act of the Philippines
11. It may provide for greater Although the articles of
quorum and voting incorporation or by-laws may
- These institutions of learning, once recognized by the
requirements in meetings of provide for greater quorum government as such are mandated by law to be
stockholders and directors and voting requirements in incorporated within ninety (90) days under the
directors’ meeting under provisions of the Corporation Code and must, perforce,
section 25, those for comply with the requirements and procedure laid
stockholders’ meeting cannot down there under. Their failure to so will not immune
generally be altered the educational institution from suit as a corporation.
(Chiang Kai Siek Case)
12. Restriction on transfer of Valid and binding if indicated
- Favorable recommendation of government agency
shares should be indicated in the articles of incorporation
involved
in the articles of and stock certificates
incorporation, by-laws and
stock certificates  Two types of educational corporations
13. Pre-emptive rights of Pre-emptive rights may be
stockholders is broader as it denied as provided for in
include all issues without section 39 - Certificate of completion in the academic field
exception - Vocational and technical one’s
14. A stockholder may Unless he sells his shares, a
withdraw and compel the stockholder cannot get back
corporation to purchase his his investment nor compel the o Recommendation of DECS if certificate of
shares for any reason with corporation to buy his shares completion in the academic field
the limitation only that the except in the exercise of his
corporation has sufficient appraisal right
 How is the governing board of an educational
assets to cover its liabilities
institution instituted?
exclusive of capital stock
15. The proper forum may Courts cannot interfere I the
interfere in the business judgment of the - Non-stock- multiples of 5 only (example: 5,10,15)
management of a close directors/stockholders - Stock- can be anywhere between 5 to 15
corporation in case of “BUSINESS JUDGMENT RULE”
deadlocks under Section
104, even of the  Can they consist of 7 or 9 members?
directors/stockholders are
acting in good faith
16. Any stockholder may Dissolution may be had only - Yes, if stock
petition the SEC for on the grounds provided by
corporate dissolution on the provisions of the Code on
 Can they be incorporated also as non-stock?
grounds among others, dissolution and P.D. 902-A, as
provides for in section 105 amended
• Manuel Dulay Enterprises vs. CA - Yes
- B.P. 232 allows the organization of an educational
institution that is stock corporation, only if they do not
- What was the position of Manuel Dulay here? issue a certificate of completion in the academic field
President, General Manager and Treasurer
- Cannot act both as president and treasurer at the
same time  Qualifications and disqualifications of the membership
- Since it is a close corporation owned by the family of in the board of an educational corporation
Manuel Dulay, save and except the secretary, it should
be governed by Title XII
- Petitioner is classified as a close corporation and - Educational corporations are governed by special laws
consequently a board resolution authorizing the sale or and general provisions, hence if there is no provision
mortgage of the subject property is not necessary to in the special law, you go back to section 25 and 27 of
bind the corporation for the action of its president. At the general provisions
any rate, a corporate action taken at a board meeting - Stock- must be a stockholder
without proper call or notice in a close corporation is - Non-stock- must be a member
deemed ratified by the absent director unless the - By-laws may provide for additional qualifications and
latter promptly files his written objection with the disqualifications
secretary of the corporation after having knowledge of
the meeting which, in this case, petitioner Virgilio
Section 25. Corporate officers, quorum. -
Dulay failed to do.
Immediately after their election, the directors of a
- Virgilio Dulay is a signatory witness, he knows very
corporation must formally organize by the election of a
well about the deed of absolute sale, he is estopped
president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall be
• Naguiat vs. NLRC a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held
- Section 100 par. 5. To the extent that the concurrently by the same person, except that no one
stockholders are actively engaged in the management shall act as president and secretary or as president
or operation of the business and affairs of a close and treasurer at the same time.
corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for The directors or trustees and officers to be
corporate torts unless the corporation has obtained elected shall perform the duties enjoined on them by
reasonably adequate liability insurance. law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors
 Family corporations is not automatically a close or trustees as fixed in the articles of incorporation shall
corporation the 3 qualifying conditions must be constitute a quorum for the transaction of corporate
present. 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,
SPECIAL CORPORATIONS except for the election of officers which shall require
the vote of a majority of all the members of the board.
 2 types of special corporations
Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole Section 27. Disqualification of directors, trustees or
2.2 Religious Societies officers. - No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years,
or a violation of this Code committed within five (5) years prior to
Notes on Corporation Law
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57

the date of his election or appointment, shall qualify as a - Section 111 and section 112 provides for the contents
director, trustee or officer of any corporation. (n) and procedures

 Article 14 section 4 par. 2 of the Constitutions Section 111. Articles of incorporation. - In


order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or presiding
Educational institutions, other than those elder of any religious denomination, sect or church
established by religious groups and mission boards, must file with the Securities and Exchange
shall be owned solely by citizens of the Philippines or Commission articles of incorporation setting forth the
corporations or associations at least sixty per centum following:
of the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino
equity participation in all educational institutions. The 1. That he is the chief archbishop, bishop, priest,
control and administration of educational institutions minister, rabbi or presiding elder of his religious
shall be vested in citizens of the Philippines. denomination, sect or church and that he desires to
become a corporation sole;
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in any 2. That the rules, regulations and discipline of his
school. The provisions of this sub section shall not religious denomination, sect or church are not
apply to schools established for foreign diplomatic inconsistent with his becoming a corporation sole and
personnel and their dependents and, unless otherwise do not forbid it;
provided by law, for other foreign temporary residents.
3. That as such chief archbishop, bishop, priest,
- Management is left solely to citizens of the Philippines minister, rabbi or presiding elder, he is charged with
- Board of Directors manages the corporate affairs, the administration of the temporalities and the
foreigners cannot therefore be elected in the board management of the affairs, estate and properties of
- Exceptions are, mission boards and religious orders, his religious denomination, sect or church within his
which may have a governing board consisting of territorial jurisdiction, describing such territorial
foreigners jurisdiction;

4. The manner in which any vacancy occurring in the


 Term of office of governing board in an educational
office of chief archbishop, bishop, priest, minister,
institutions
rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the
- Can serve a term of 5 years. If that be the case, 1/5 of religious denomination, sect or church to which he
their number shall expire every year belongs; and

 Non-stock or stock, can they serve for a 1 year term 5. The place where the principal office of the
only? corporation sole is to be established and located,
which place must be within the Philippines.

- Yes, the articles of incorporation may provide that it be


1 year only The articles of incorporation may include
any other provision not contrary to law for the
regulation of the affairs of the corporation. (n)
 What are these religious corporations spoken off?
Section 112. Submission of the articles of
- Corporation sole and religious societies incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or
 What is a corporation sole? presiding elder, as the case may be, and accompanied
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop, bishop,
- Consists of one person only and his successor in some priest, minister, rabbi or presiding elder, duly certified
particular station, who are incorporated by law in order to be correct by any notary public.
to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural
persons they could not have had From and after the filing with the Securities
and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and
 May a corporation be organized by less than 5 natural accompanied by the documents mentioned in the
persons? preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and
- General rule, 5 to 15 natural persons(except properties of the religious denomination, sect or
cooperatives and corporations primarily organized to church theretofore administered or managed by him
hold equities in rural banks and may rightfully become as such chief archbishop, bishop, priest, minister, rabbi
incorporators thereof) or presiding elder shall be held in trust by him as a
- Exception, corporation sole, consist of only one person corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums,
 May any person form or organize a corporation sole? parsonages and cemeteries thereof. (n)

- No, not any person can form a corporation sole,  Is it required to indicate its terms of execution? Why
section 110 provides: not?

Section 110. Corporation sole. - For the - Not required because they are supposed to exist in
purpose of administering and managing, as trustee, perpetuity
the affairs, property and temporalities of any religious - However, it does not mean that it shall continue to
denomination, sect or church, a corporation sole may exist forever, it merely means that it has the capacity
be formed by the chief archbishop, bishop, priest, of continuous existence during a particular period until
minister, rabbi or other presiding elder of such dissolved in accordance with law
religious denomination, sect or church. (154a)

 When will it acquire judicial personality? How do you


 Is it required to file the articles of incorporation in the compare this to other types of corporation?
SEC?

- After the filing the verified articles of incorporation


- Yes along with the documents required in Section 112 with
the SEC, immediately becomes endowed with
corporate personality, this serves as an exception to
 What should be contained in the articles of
the rule that a corporation acquires juridical
incorporation?
personality only upon the issuance of a certificate of
incorporation by the said government agency.

Notes on Corporation Law


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58

- Upon filing of verified articles of incorporation with the Section 114. Filling of vacancies. - The
SEC, will not require the approval of SEC successors in office of any chief archbishop, bishop,
priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on
 A corporation sole is possessed with the same power, their accession to office and shall be permitted to
rights and privileges, to own, acquire and hold or transact business as such on the filing with the
convey properties like any other corporation? True or Securities and Exchange Commission of a copy of their
False commission, certificate of election, or letters of
appointment, duly certified by any notary public.
- False, they have the same power rights and privileges,
but when it comes to alienation and acquisition, it During any vacancy in the office of chief
must possess a court order, however when there is a archbishop, bishop, priest, minister, rabbi or presiding
regulated method, a court order may be dispensed elder of any religious denomination, sect or church
with <sec. 113> incorporated as a corporation sole, the person or
persons authorized and empowered by the rules,
regulations or discipline of the religious denomination,
Section 113. Acquisition and alienation of
sect or church represented by the corporation sole to
property. - Any corporation sole may purchase and
administer the temporalities and manage the affairs,
hold real estate and personal property for its church,
estate and properties of the corporation sole during
charitable, benevolent or educational purposes, and
the vacancy shall exercise all the powers and authority
may receive bequests or gifts for such purposes. Such
of the corporation sole during such vacancy. (158a)
corporation may sell or mortgage real property held by
it by obtaining an order for that purpose from the
Court of First Instance of the province where the  If a corporation exists in equity may it not be
property is situated upon proof made to the dissolved?
satisfaction of the court that notice of the application
for leave to sell or mortgage has been given by
publication or otherwise in such manner and for such Section 115. Dissolution. - A corporation
time as said court may have directed, and that it is to sole may be dissolved and its affairs settled voluntarily
the interest of the corporation that leave to sell or by submitting to the Securities and Exchange
mortgage should be granted. The application for leave Commission a verified declaration of dissolution.
to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation The declaration of dissolution shall set forth:
sole, and may be opposed by any member of the
religious denomination, sect or church represented by
1. The name of the corporation;
the corporation sole: Provided, That in cases where the
rules, regulations and discipline of the religious
denomination, sect or church, religious society or 2. The reason for dissolution and winding up;
order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such 3. The authorization for the dissolution of the
rules, regulations and discipline shall control, and the corporation by the particular religious denomination,
intervention of the courts shall not be necessary. sect or church;
(159a)
4. The names and addresses of the persons who are to
 Since a corporation sole is consists only of one person, supervise the winding up of the affairs of the
will the registration of the property in the name of the corporation.
corporation sole vest unto the head thereof the
ownership of the property?
Upon approval of such declaration of
dissolution by the Securities and Exchange
- No, it will not vest unto the head, the head is acting Commission, the corporation shall cease to carry on its
merely as a guardian operations except for the purpose of winding up its
affairs. (n)

• Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land


Reg. Comm, et al. - While section 115 of the code provides for the process
and procedure for the dissolution of a corporate sole,
there is nothing in the law itself which would prohibit it
- Act only as a guardian from amending its articles of incorporation
- Ownership devolves upon the congregation or religious - It is believed that authorization for the dissolution by
denomination the particular religious denomination, sect or church,
- A corporation consists of one person only and his as required in sub-paragraph 3 of section 115 would
successors (who will always be one at a time, in some still be necessary in the case of amending the articles
particular station), who are incorporated by law in of incorporation to affect dissolution.
order to give them some legal capacities and
advantages, particularly that of perpetuity, which in
their natural persons they could not have had o Expiration of a corporate term will not apply
- Roman Catholic Church has no nationality and that the to a religious corporation
framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
 May a corporation sole be dissolved by judicial decree?
corporations sole when they provided that 60 percent
of the capital thereof be owned by Filipino citizens.
- General rule: No, because a corporation sole, is by its
very nature ecclesiastical and religious (doctrine of
• Director of Lands vs. CA
separation of church and state)
- Exception: police power of the state, if its purpose is
- Alienable public land is converted into private land being carried out and is instead being used for illegal
when the same has been openly, continuously and purpose, it may be so dissolved
exclusively in possession of the property as concept of
an owner for 30 years, automatically that is
 What are religious societies?

• Republic of the Philippines vs. IAC


- Under common law, a religious society is a body of
persons associated together for the purpose of
- Determination of the character of the land should be in maintaining religious worship.
mind
- If they still form part of public domain they cannot be
 Is it also required to file its articles of incorporation to
owned, but if they are converted into private land, the
the SEC?
constitutional prohibition will not apply

- No <sec. 116> “may”


 If there is vacancy who will fill up the same? What if
there is none, what must the successor do?
 What should be contained in the articles of
incorporation?
- According to section 114:

Notes on Corporation Law


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59

- Section 116 provides:  3 modes of dissolution

Section 116. Religious societies. - Any 1. By expiration of its term;


religious society or religious order, or any diocese, 2. By voluntary surrender of its primary franchise
synod, or district organization of any religious (voluntary dissolution);
denomination, sect or church, unless forbidden by the 3. By revocation of its corporate franchise (involuntary
constitution, rules, regulations, or discipline of the dissolution)
religious denomination, sect or church of which it is a
part, or by competent authority, may, upon written
consent and/or by an affirmative vote at a meeting • Philippine National Bank vs. CFI
called for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration of its
temporalities or for the management of its affairs, - When the period of corporate life expires, the
properties and estate by filing with the Securities and corporation ceases to be a body corporate for
Exchange Commission, articles of incorporation purposes of continuing the business for which it is
verified by the affidavit of the presiding elder, organized. But it shall nevertheless be continued as a
secretary, or clerk or other member of such religious body corporate for three years after the time when it
society or religious order, or diocese, synod, or district would have be dissolved, for the purpose of
organization of the religious denomination, sect or prosecuting and defending suits by or against it and
church, setting forth the following: for enabling it gradually to settle and close its affairs
to dispose of and convey its property and to divide its
assets. There is no need for the institution of a
1. That the religious society or religious order, or proceeding for quo warranto to determine the time
diocese, synod, or district organization is a religious and date of the dissolution of a corporation because
organization of a religious denomination, sect or the period of corporate existence is provided in the
church; articles of incorporation. When such period expires
and without any extension having been made
pursuant to law, the corporation is dissolved
2. That at least two-thirds (2/3) of its membership automatically insofar as the continuation of its
have given their written consent or have voted to business is concerned.
incorporate, at a duly convened meeting of the body; - The rights of the lessor and the lessee over the
improvements which the latter constructed on the
leased premises are governed by Article 1678 of the
3. That the incorporation of the religious society or
Civil Code. The provision gives the lessee the right to
religious order, or diocese, synod, or district
remove the improvements if the lessor chooses not to
organization desiring to incorporate is not forbidden by
pay one half of the value thereof. However, in the case
competent authority or by the constitution, rules,
at bar the law will not apply because the parties herein
regulations or discipline of the religious denomination,
have stipulated in the contract their own terms and
sect, or church of which it forms a part;
conditions concerning the improvements before the
termination of the lease. Petitioner PNB as assignee of
4. That the religious society or religious order, or PBM succeeded to the obligation of the latter under
diocese, synod, or district organization desires to the contract of lease. It could not possess rights more
incorporate for the administration of its affairs, than what PBM had as lessee under the contract.
properties and estate; Hence, petitioner was duly bound to remove the
improvements before the expiration of the period of
lease. Its failure to do so when the lease was
5. The place where the principal office of the terminated was tantamount to a waiver of its rights
corporation is to be established and located, which and interest over the improvements on the leased
place must be within the Philippines; and premise.

6. The names, nationalities, and residences of the o 3 modes of dissolution, 3 modes of


trustees elected by the religious society or religious voluntary dissolution and 3 modes of
order, or the diocese, synod, or district organization to liquidation and winding up- FREQUENTLY
serve for the first year or such other period as may be ASKED IN THE FINALS
prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than  What are the 3 modes of voluntary dissolution?
five (5) nor more than fifteen (15). (160a)
1. Voluntary dissolution where no creditors are affected;
 Is it required to indicate its term of existence? <sec.118>
2. Voluntary dissolution where creditors are affected;
<sec. 119>
- Likewise to exist in perpetuity, the law does not 3. Shortening of corporate term. <sec. 120>
require to indicate its term of existence

 Voluntary dissolution where no creditors are affected


 When will it acquire juridical personality? <sec.118>
- Only a corporation sole may come into existence
without SEC approval, section 19 will thus govern, - The formal and procedural requirements necessary are
Vested with judicial capacity upon issuance of the the following:
certificate by the SEC
1. Majority vote of the board of directors or trustees;
o However it is not accurate according to atty. 2. Sending of notice of each stockholders or member
either by registered mail or personal delivery at least
Ladia because there are those that can issue
thirty (30) days prior to the meeting (scheduled by the
for example cooperatives- BUREAU OF board for the purpose of submitting the board action
COOPERATIVES which register, home to dissolve the corporation for approval of the
insurance guaranty corporation- HOME stockholder or members.);
OWNERS 3. Publication of the notice of time, place and subject of
the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal
 How may religious societies be dissolved? office of said corporation is located or in a newspaper
of general circulation in the Philippines;
- Go to the general rules governing dissolution, because 4. Resolution adopted by the affirmative vote of the
the rules under special corporations do not provide for stockholders owning at least 2/3 of the outstanding
such rule capital stock or 2/3 of the members at the meeting
duly called for the purpose;
5. A copy of the resolution authorizing the dissolution
DISSOLUTION must be certified by a majority of the board of
directors or trustees and countersigned by the
corporate secretary;
 What is dissolution? 6. Issuance of a certificate of dissolution by the SEC.

- Extinguishment of the corporate franchise and the  Should this be strictly complied with?
termination of corporate existence

Notes on Corporation Law


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60

- Yes, compliance with the requirements and formalities incorporation shall be submitted to the Securities and
prescribed above is mandatory such that failure to Exchange Commission in accordance with this Code.
comply therewith will have no effect on the legal Upon approval of the amended articles of
existence of the corporation. incorporation of the expiration of the shortened term,
as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to
 Will dissolution be effective and valid by a mere the provisions of this Code on liquidation. (n)
resolution of the BOD and stockholders?

o Intra-corporate- special commercial courts


- No, a mere resolution by the stockholders or the BOD
of a corporation to dissolve the same does not affect
 Another way of dissolving a corporation is through
the dissolution but that some other steps,
involuntary dissolution
administrative or judicial is necessary. (Daguhoy
Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it is Section 121. Involuntary dissolution. - A
only through the State which can allow the termination corporation may be dissolved by the Securities and
of its existence; without consent of the State, it will not Exchange Commission upon filing of a verified
be dissolved. complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations. (n)
 Voluntary dissolution where creditors are affected
<sec.119>
- Dissolution is tantamount to the imposition of death
penalty
- By virtue of a petition, when there are creditors - Instead of dissolving the corporation, courts normally
affected enjoin the further commission of the questioned act
- The following formalities would thus be required: - The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
1. Affirmative vote of the stockholders representing at protected in some other way (Republic vs. Bisaya Land
least 2/3 of the outstanding capital stock or at least Trans. Co. Inc.)
2/3 of the members at a meeting duly called for that
purpose;
2. Petition for dissolution shall be filed with the SEC  What are the grounds for involuntary dissolution?
signed by a majority of its board of directors or
trustees or other officers having the management of
its affairs, verified by the president or secretary or one - It is commenced through a verified complaint or motu
of its directors or trustees, setting forth all claims and proprio by the proper courts
demands against it. - Section 6 of PD 902-A provides for the grounds for
3. Issuance of an order by the SEC reciting the purpose of involuntary dissolution as follows:
the petition and fixing the date on or before which
objections thereto may be filed by any person, which
date shall not be less than thirty days nor more than 1. Fraud in procuring its certificate of registration;
sixty days after entry of the order. 2. Serious misrepresentation as to what the corporation
4. Before such date, a copy of the order must be can do or is doing to the great prejudice of or damage
published once a week for three (3) consecutive weeks to the general public;
in a newspaper of general circulation published in the 3. Refusal to comply or defiance of any lawful order of
city or municipality where the principal office is the Commission restraining commission of acts which
situated or in a newspaper of general circulation in the would amount to a grave violation of its franchise;
Philippines. 4. Continuous inoperation for a period of at least five (5)
5. Posting of the same order for three (3) consecutive years;
weeks in three (3) public places in such city or 5. Failure to file by-laws within the required period;
municipality. 6. Failure to file required reports in appropriate forms as
6. Upon five (5) days’ notice, given after the date on determined by the Commission within the prescribed
which the right to file objections has expired, the SEC period.
shall hear the petition and try any issue made by the
objections filed. - Other grounds are provided for in the corporation code
7. Judgment dissolving the corporation and directing of itself: among them are:
its assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such
assets and pay the debts of the corporation. 1. Violation of any provision of the Code under section
144;
2. In case of deadlock in a close corporation as provided
o The foregoing are also mandatory for in section 105;
requirements 3. In a close corporation, any acts of directors, officers or
those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly
 Is the appointment of a receiver mandatory?
prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or
- No, it is merely permissive or discretionary on the part wasted under section 105.
of the court. The code uses the word “may”; the law
intended to let the shareholders have the control of
- Mere dishonesty is also a ground in a close corporation
the assets of the corporation upon dissolution and
- Other grounds can be found in other special laws like
winding up.
the Securities Regulation Code and the General
- The directors may also undertake liquidation and Banking Act as well as the Insurance Code.
winding up of its corporate affairs, and sound business
judgment, on how they will wind up
• Government vs. Philippine Sugar Estate

 Dissolution by shortening of corporate term


<sec.120> - It is necessary in order to secure judicial foreclosure of
respondent’s charter to show a mis-user of its
franchise justifying such a forfeiture
- Object is to protect the public, and not to redress
- Will be valid upon approval of the SEC, unlike general
private grievances, the mis-user must be such as to
amendments, which will be deemed approved if not work or threaten a substantial injury to the public, or
acted upon by the SEC within 6 months from the date such as to amount to a violation of the fundamental
of filing for a cause not attributable to the corporation. condition of the contract by which the franchise was
- Shortening of the corporate term partakes the nature granted and thus defeat the purpose of the grant
of an amendment of the articles of incorporation.
Section 16 under general amendments allows “written - Courts proceed with extreme caution which has for
assent” section 37 mandates that the vote must be their object the forfeiture of corporate franchise, and
cast at a duly constituted meeting. forfeiture will not be allowed, except under express
limitation, or for plain abuse of power by which the
corporation fails to fulfill the design and purpose of its
Section 120. Dissolution by shortening organization. But when the abuse or violation
corporate term. - A voluntary dissolution may be constitutes or threatens a substantial injury to the
effected by amending the articles of incorporation to public or such as to amount to a violation of the
shorten the corporate term pursuant to the provisions fundamental conditions of its charter, or its conduct is
of this Code. A copy of the amended articles of
Notes on Corporation Law
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61

characterized by obduracy or pertinacity in contempt - Any stockholder or member of a corporation can


of law, dissolution will be granted institute a dissolution proceeding against his own
- Did the court dissolve the corporation? No, it did not, it corporation before the proper forum
granted the corporation 6 months to cease and desist - Special Commercial Courts, shall hear and decide
the performance of the questioned act otherwise it will intra-corporate disputes
be dissolved

 May a corporation ask for dissolution of the


• Government vs. El Hogar corporation when there is no prejudice to the general
public?

- 3 causes of action, the first is that the corporation


violated the law by holding on the property beyond - Yes, in a close corporation, a petition for the
that provide for by law, the second is that the dissolution of the corporation may be instituted by any
corporation undertook the management f petitioners one individual shareholder on the ground, even by
belonging to delinquent shareholders of the mere dishonesty
association, and lastly that the by-law provision, which
empowers the BD to cancel shares and to return to the
owners thereof the balance returning from the  Effects of dissolution
liquidation
- The dissolution of a corporation not only terminates its
 Compare to Philippine Sugar Estate, wherein the court primary franchise to be a corporation, but generally
ruled conditional dissolution. Why decree conditional prevents it from further exercising other or secondary
dissolution in one and not in the other case? franchises which have been conferred to its. It
terminates its power to enter into contracts or t o
continue the business as a going concern.
- Because in El Hogar the government was at fault, the - Based on this general rule, the Supreme Court held
government wasn’t able to issue the certificate of title that a corporation, whose corporate life expired,
on time cannot lawfully pursue the business for which it was
- When the case was instituted, El Hogar was already organized. It cannot apply for a new certificate or a
able to dispose the properties in question, in secondary franchise for it is incapable of receiving a
Philippine Sugar Estate it was still the holding the grant. Neither can it enforce a contract executed prior
properties in order to enrich itself at the expense of its dissolution for the purpose of continuing the
the taxpayers business of its organization.
- In general the rights and liabilities of the corporation
are not extinguished by its dissolution.
• Republic vs. Security Credit and Acceptance Corp. et
al.
Section 145. Amendment or repeal. - No
right or remedy in favor of or against any corporation,
- The corporation here is a lending institution and not a its stockholders, members, directors, trustees, or
banking institution officers, nor any liability incurred by any such
- Defendant corporation violated the law because before corporation, stockholders, members, directors,
a corporation may engage into a banking activity it trustees, or officers, shall be removed or impaired
must first obtain a secondary franchise from the either by the subsequent dissolution of said
Central Bank corporation or by any subsequent amendment or
- Defendant corporation threatens substantial injury to repeal of this Code or of any part thereof. (n)
the general public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
• Buenaflor vs. Camarines Sur Industry Corp.

• Republic vs. Bisaya Land Transportation Co. Inc


- From that time on Camarines Sur was plying in an
activity that was illegal
- The relief of dissolution will be awarded only where no - A corporation where the corporate life has expired it
other remedy is available and it will not be allowed cannot lawfully pursue the business for which it was
where the rights of the stockholders can be, or are, organized.
protected in some other way - the Supreme Court held that a corporation, whose
- Misuse and misapplication of the funds and assets of corporate life expired, cannot lawfully pursue the
the respondent were committed particularly by the business for which it was organized. It cannot apply for
corporate officers, where they can instead be held a new certificate or a secondary franchise for it is
personally liable incapable of receiving a grant.
- Since there is another remedy available dissolution is - Awarding it to Camarines Sur is tantamount to a medal
not warranted for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It was
 Assuming the above stated corporation is a close not even a corporation de facto. And then, there is no
corporation, would the court decree otherwise? application subscribed by the new corporation
- And yet as stated, the new corporation has not filed
- Yes, because in a close corporation, mere dishonesty any application for certificate of public convenience in
is a ground for the dissolution Sabang, and has not published such application.
- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code < sec.
• Cebu Port Labor Union vs. State Marine Co
105>

- Even a cursory reading of the provision would convey


• Financing Corporation of the Philippines vs. Teodoro the idea clearly manifested in the limitation “but not
for the purpose of continuing the business for which it
was established,” that the 3-year period allowed by
- Minority stockholders may not ask for the dissolution the law is only for the purpose of winding up its affairs.
of a corporation in private suits and that such actions
should be brought by the Government through its legal
officers, except in cases where the intervention • Gonzales vs. Sugar Regulatory Administration
of the State, for one reason or another, cannot
be obtained, as when the State is not interested
because the complaint is strictly a matter - Instead of applying the corporation code, the court
between the stockholders and does not involve, applied the constitutional provision
in the opinion of the legal officer of the - Cannot be read as permitting to destroy the
Government, any of the acts or omissions substantive rights
warranting quo warranto proceeding , in which - Such would collide with the non-impairment of
minority stockholders are entitled to have such contracts clause of the constitution
dissolution. It should be exercised if necessary in - Complainants will have the right to follow the assets of
order not to entirely ignore and disregard the rights of the corporation in the hands of SRA or any other
said minority stockholders, especially when said agency for that matter
minority stockholders are unable to obtain redress and
protection of their rights within the corporation itself.  After dissolution what next?
Stockholders should not be left without recourse

- Liquidation and winding up should follow


 Present set up

Notes on Corporation Law


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62

 What is the definition of liquidation and winding up? - If this method is used, the three year period limitation
imposed by section 122 will not apply provided the
designation of the trustee is made within that period
- Collection of all corporate assets, the payments of all
its debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if any of 3. By appointment of a receiver
it remains, to all stockholders in accordance with their
proportionate stockholdings in the corporation or in
accordance with their respective contracts of - A receiver may be appointed by the proper forum on
subscription. petition or motu proprio upon the dissolution of the
corporation
- The appointment of a receiver is, however, permissive
 Preference upon liquidation rather than mandatory and the law tends to recognize
that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except
- If there are preferred shares, the preference granted under special circumstances and upon proper showing
to such should be complied with - If a receiver is appointed, the 3 year period fixed by
- Preferred shares may give the holder thereof, law within which to complete the task of liquidation
preference only in the dividends but also in the will not likewise apply because the dissolved
distribution of corporate assets upon liquidation or corporation is substituted by the receiver who may sue
termination of the corporate existence. If such is the or be sued even after that period
intent, the contract of subscription must so indicate
lest they are placed on equal footing with common
shareholders o Mere appointment of a receiver without
- Preference may be participating or non-participating anything more does imply in the dissolution
of a corporation

 Dissolved corporations are granted a period of 3 years


to liquidate • National Abaca other Fibers Co. vs. Pore

Section 122. Corporate liquidation. - Every - Actions pending for or against the corporation when
corporation whose charter expires by its own limitation the 3 year period expires, are abated since after that
or is annulled by forfeiture or otherwise, or whose period, the corporation ceases for all intents and
corporate existence for other purposes is terminated purposes and is no longer capable of suing or being
in any other manner, shall nevertheless be continued sued
as a body corporate for three (3) years after the time - May be continued by the trustee provided done within
when it would have been so dissolved, for the purpose the 3 year period
of prosecuting and defending suits by or against it and - Should the corporation, therefore, finds it difficult to
enabling it to settle and close its affairs, to dispose of finish its liquidation, it may, at any time during the
and convey its property and to distribute its assets, three year period, convey all its assets and receivables
but not for the purpose of continuing the business for to a trustee to prosecute and defend suits by or
which it was established. against the corporation begun before the expiration of
said period
- The effect of the conveyance is to make the trustees
At any time during said three (3) years, the the legal owners of the property conveyed, subject to
corporation is authorized and empowered to convey all the beneficial interest therein of creditors and
of its property to trustees for the benefit of stockholders
stockholders, members, creditors, and other persons
in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit • Sumera vs. Valencia
of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the - Thus it was held that when a corporation is dissolved
trustees, and the beneficial interest in the and the liquidation of the assets is placed in the hands
stockholders, members, creditors or other persons in of receiver or assignee, the period of 3 years
interest. prescribed by law is not applicable and the assignee
may institute all actions leading to the liquidation of
the corporation even after the expiration of 3 years.
Upon the winding up of the corporate affairs, - If the corporation carries out the liquidation of its
any asset distributable to any creditor or stockholder assets through its own officers and continues and
or member who is unknown or cannot be found shall defends the actions brought by or against it, its
be escheated to the city or municipality where such existence shall terminate at the end of three years
assets are located. from the time of dissolution; but if a receiver or
assignee is appointed, with or without a transfer of its
properties within 3 years, the legal interest passes to
Except by decrease of capital stock and as the assignee, the beneficial interest remaining in the
otherwise allowed by this Code, no corporation shall members, stockholders, creditors and other interested
distribute any of its assets or property except upon persons and said assignee may bring an action,
lawful dissolution and after payment of all its debts prosecute that which has already been commenced for
and liabilities. (77a, 89a, 16a) the benefit of the corporation, or defend the latter
against any other action already instituted or which
may be instituted even outside of the period of three
 However the 3 year period is not absolute years fixed for the offices of the corporation.
 Liquidation may be undertaken in either of the 3 ways

• Board of Liquidators vs. Kalaw


1. By the corporation itself through the BOD

- If there is a trustee, assignee or liquidator, it can


- Usual method or procedure of liquidating a corporation continue prosecuting suit even beyond the 3 year
and although there is no law authorizing it, neither is period fixed by law because he becomes the legal
there anything that prohibits the BOD from owner of the rights, assets and properties conveyed to
undertaking the same him
- If this method is resorted to, the board will only have a
period of 3 years to finish its task of liquidation
- Claims for or against the corporate entity not filed • Gelano vs. CA
within the period will become unenforceable as there
exist no corporate entity against which they can be
enforced - “Trustee” as used in the corporation statute must be
- Actions pending for or against the corporation when understood in its general concept which could include
the 3 year period expires, are abated since after the the counsel to whom was entrusted in the instant
period, the corporation ceases for all intents and case, the prosecution of the suit filed by the
purposes and is no longer capable of suing or being corporation. The purpose in the transfer of the assets
sued of the corporation to a trustee upon its dissolution is
more for the protection of its creditors and
stockholders. Debtors like the petitioners herein may
2. By a trustee appointed by the corporation not take advantage of the failure of the corporation to
transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show, in the first
- The corporation may opt to convey all corporate place. To sustain petitioners’ contention would be to
assets to a trustees who will take charge of liquidation allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.
Notes on Corporation Law
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- The counsel who prosecuted and defended the interest  According to atty Ladia: What happens to a
of the corporation may be considered as a “trustee” at corporation that is already dissolved, that has not
least with respect to the matter in litigation only been able to appoint a trustee with in the 3 year
period?

 May a corporation that is already dissolved, transfer


and assign its assets and properties to a new - a corporation dissolved which failed to exercise its
corporation which will continue the business of the rights granted in section 122 after the 3 year period
dissolved one? has elapsed, ceases to exist for all intents and
purposes, it can no longer sue or be sued
- according to 122 of the code, the property should be
- Yes, provided all the stockholders gave their consent escheated, accordingly:
(Chung Ka Bio vs. IAC)
Section 122. Corporate liquidation. - Every
• Republic vs. Marsman Development Company & corporation whose charter expires by its own limitation
Chung Ka Bio vs. IAC or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated
in any other manner, shall nevertheless be continued
as a body corporate for three (3) years after the time
- During the three year period granted to a corporation
when it would have been so dissolved, for the purpose
to liquidate or wind up its affairs, the BOD is not of prosecuting and defending suits by or against it and
normally permitted to undertake any activity outside enabling it to settle and close its affairs, to dispose of
the usual liquidation of the corporation. There is, and convey its property and to distribute its assets,
however, nothing to prevent the stockholders from but not for the purpose of continuing the business for
conveying their respective shareholdings toward the which it was established.
creation of a new corporation to continue the business
of the old. This is because winding up is the sole
activity of the dissolved corporation that does not At any time during said three (3) years, the
intend to incorporate a new. If it does, however, it is corporation is authorized and empowered to convey all
not unlawful for the old board of directors to negotiate of its property to trustees for the benefit of
and transfer the assets of the dissolved corporation to stockholders, members, creditors, and other persons
the new corporation intended to be created as long as in interest. From and after any such conveyance by
the stockholders have given their consent (Republic the corporation of its property in trust for the benefit
vs. Marsman Development Company) of its stockholders, members, creditors and others in
- Winding up is the sole activity of a dissolved interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
corporation that does not intend to incorporate anew.
trustees, and the beneficial interest in the
If it does, however, it is not unlawful for the old board
stockholders, members, creditors or other persons in
of directors to negotiate and transfer the assets of the
interest.
dissolved corporation to the new corporation intended
to be created as long as the stockholders have given
their consent (Chung Ka Bio vs. IAC) Upon the winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
 What happens to the remaining assets and properties cannot be found shall be escheated to the city
of the dissolved corporation if liquidation and winding or municipality where such assets are located.
up as provided in section 122 is not complied with, as
a result of which the 3 year period has elapsed
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
- If the three year extended life has expired without a distribute any of its assets or property except upon
trustee or receiver having been expressly designated lawful dissolution and after payment of all its debts
by the corporation within that period, the board of and liabilities. (77a, 89a, 16a)
directors o trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA may be
FOREIGN CORPORATIONS
permitted to do so continue as” trustees” by legal
implication to complete the liquidation. Still in the
absence of a BOD or BOT, those having any pecuniary  Definition
interest in the assets, including not only the
shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make - Section 123. Definition and rights of foreign
proper representations with the SEC, which has corporations. - For the purposes of this Code, a foreign
primary and sufficiently broad jurisdiction in matters of corporation is one formed, organized or existing under
this nature, for working out a final settlement of the any laws other than those of the Philippines and whose
corporate concerns (Clemente vs. CA) laws allow Filipino citizens and corporations to do
business in its own country or state. It shall have the
o According to atty. Ladia the ruling of the right to transact business in the Philippines after it
Supreme Court in the case of Clemente vs. shall have obtained a license to transact business in
CA is wrong, opinion is further discussed this country in accordance with this Code and a
after the Clemente Case certificate of authority from the appropriate
government agency. (n)

• Clemente vs. CA
 What if the law of the state of the foreign corporation
does not allow Filipino citizens to do business in their
- Who owns the properties? SOCIEDAD ANONIMA country?
- The termination of the life of a juridical entity does not
by itself cause the extinction or diminution of the
rights and liabilities of such entity or those of its - The phrase “and whose laws allow Filipino citizens and
owners and creditors. If the three year extended life corporations to do business in its own country or
has expired without a trustee or receiver having been state” is not, however, an accurate inclusion in the
expressly designated by the corporation within that definition as ay corporation registered or organized
period, the board of directors o trustees itself, under the laws of another state is necessarily a foreign
following the rationale of the Supreme Court’s decision corporation whether or not the state of its
in Gelano vs. CA may be permitted to do so continue incorporation allow Filipino citizens or corporations to
as” trustees” by legal implication to complete the do business in that forum.
liquidation. Still in the absence of a BOD or BOT, those - The said phrase was inserted by the framers of the law
having any pecuniary interest in the assets, including only as a condition precedent to the grant of a license
not only the shareholders but likewise the creditors of of a foreign corporation to do business in the
the corporation, acting for and in its behalf, might Philippines.
make proper representations with the SEC, which has
primary and sufficiently broad jurisdiction in matters of  Composed of 100% Americans; organized under the
this nature, for working out a final settlement of the laws other than the Philippines
corporate concerns

- The test is the “incorporation test”


o the ruling is wrong according to atty. - General rule: the place of its incorporation irrespective
Ladia of the nationality
- Exception: control test would apply in determining the
corporate nationality, i.e., the citizenship of the
Notes on Corporation Law
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64

controlling stockholders determines the nationality of Foreign banking, financial and insurance
the corporation corporations shall, in addition to the above
requirements, comply with the provisions of existing
laws applicable to them. In the case of all other foreign
 If a foreign corporation wants to transact business in corporations, no application for license to transact
the Philippines, what must it do? business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous
authority from the appropriate government agency,
- Obtain a license
whenever required by law. (68a)

 How may it do so?


 Is there any deposit or security requirement?

- According to sec. 125:


- Yes, within 60 days after the issuance of the license, a
foreign corporation, except those engaged in foreign
Section 125. Application for a license. - A banking or insurance, shall deposit with the SEC, for
foreign corporation applying for a license to transact the benefit of creditors, securities consisting of bonds
business in the Philippines shall submit to the or other evidence of indebtedness of the Philippine
Securities and Exchange Commission a copy of its government or its political subdivision, or of
articles of incorporation and by-laws, certified in government owned or controlled corporation, shares of
accordance with law, and their translation to an official stock in “registered enterprises” as this term is
language of the Philippines, if necessary. The defined in R.A. 5186, shares of stock in domestic
application shall be under oath and, unless already insurance companies and banks or any combination
stated in its articles of incorporation, shall specifically thereof with an actual market value of 100,000
set forth the following: - Additional securities may be required by the SEC if the
actual market value of the securities on deposit has
decreased by at least 10%. Section 126 of the code
1. The date and term of incorporation; provides:

2. The address, including the street number, of the Section 126. Issuance of a license. - If the
principal office of the corporation in the country or Securities and Exchange Commission is satisfied that
state of incorporation; the applicant has complied with all the requirements
of this Code and other special laws, rules and
regulations, the Commission shall issue a license to
3. The name and address of its resident agent the applicant to transact business in the Philippines for
authorized to accept summons and process in all legal the purpose or purposes specified in such license.
proceedings and, pending the establishment of a local Upon issuance of the license, such foreign corporation
office, all notices affecting the corporation; may commence to transact business in the Philippines
and continue to do so for as long as it retains its
4. The place in the Philippines where the corporation authority to act as a corporation under the laws of the
intends to operate; country or state of its incorporation, unless such
license is sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other special
5. The specific purpose or purposes which the laws.
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in Within sixty (60) days after the issuance of
the certificate of authority issued by the appropriate the license to transact business in the Philippines, the
government agency; license, except foreign banking or insurance
corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present and
6. The names and addresses of the present directors future creditors of the licensee in the Philippines,
and officers of the corporation; securities satisfactory to the Securities and Exchange
Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its
7. A statement of its authorized capital stock and the political subdivisions and instrumentalities, or of
aggregate number of shares which the corporation has government-owned or controlled corporations and
authority to issue, itemized by classes, par value of entities, shares of stock in "registered enterprises" as
shares, shares without par value, and series, if any; this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock
exchange, or shares of stock in domestic insurance
8. A statement of its outstanding capital stock and the
companies and banks, or any combination of these
aggregate number of shares which the corporation has
kinds of securities, with an actual market value of at
issued, itemized by classes, par value of shares,
least one hundred thousand (P100,000.) pesos;
shares without par value, and series, if any;
Provided, however, That within six (6) months after
each fiscal year of the licensee, the Securities and
9. A statement of the amount actually paid in; and Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by
10. Such additional information as may be necessary which the licensee's gross income for that fiscal year
or appropriate in order to enable the Securities and exceeds five million (P5,000,000.00) pesos. The
Exchange Commission to determine whether such Securities and Exchange Commission shall also require
corporation is entitled to a license to transact business deposit of additional securities if the actual market
in the Philippines, and to determine and assess the value of the securities on deposit has decreased by at
fees payable. least ten (10%) percent of their actual market value at
the time they were deposited. The Securities and
Exchange Commission may at its discretion release
Attached to the application for license shall part of the additional securities deposited with it if the
be a duly executed certificate under oath by the gross income of the licensee has decreased, or if the
authorized official or officials of the jurisdiction of its actual market value of the total securities on deposit
incorporation, attesting to the fact that the laws of the has increased, by more than ten (10%) percent of the
country or state of the applicant allow Filipino citizens actual market value of the securities at the time they
and corporations to do business therein, and that the were deposited. The Securities and Exchange
applicant is an existing corporation in good standing. If Commission may, from time to time, allow the licensee
such certificate is in a foreign language, a translation to substitute other securities for those already on
thereof in English under oath of the translator shall be deposit as long as the licensee is solvent. Such
attached thereto. licensee shall be entitled to collect the interest or
dividends on the securities deposited. In the event the
The application for a license to transact licensee ceases to do business in the Philippines, the
business in the Philippines shall likewise be securities deposited as aforesaid shall be returned,
accompanied by a statement under oath of the upon the licensee's application therefor and upon
president or any other person authorized by the proof to the satisfaction of the Securities and
corporation, showing to the satisfaction of the Exchange Commission that the licensee has no liability
Securities and Exchange Commission and other to Philippine residents, including the Government of
governmental agency in the proper cases that the the Republic of the Philippines. (n)
applicant is solvent and in sound financial condition,
and setting forth the assets and liabilities of the  Other than section 125 and 126. What other
corporation as of the date not exceeding one (1) year requirements are set under Philippine Law before a
immediately prior to the filing of the application.
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foreign corporation may transact business in the - No, if there is a resident agent, the designation is
Philippines exclusive and service must be made only to the
resident agent or else the service is without force and
effect unless made to him
- Yes. A Resident agent is required. As a condition - Thus, while the law allows service upon the SEC or any
precedent to the grant of a license to do or transact of its officers or agents within the Philippines
business in the Philippines, the foreign corporation is - The two modes may become effective only if the
required to designate its resident agent on whom foreign corporation failed or neglected to designate
summons and other legal processes may be served in such a person or an agent
all actions or legal proceedings against such - Summons must be made only to resident agent except
corporation when there is no resident agent appointed
- Section 128 provides:
- Where such foreign corporation actually doing
business here has not applied for a license to do and
Section 128. Resident agent; service of has not designated an agent to receive summons,
process. - The Securities and Exchange Commission then service of summons on it will be made pursuant
shall require as a condition precedent to the issuance to the provisions of the rules of court. If such foreign
of the license to transact business in the Philippines by corporation has a license to do business, then
any foreign corporation that such corporation file with summons to it will be served on the agent designated
the Securities and Exchange Commission a written by it for the purpose, or otherwise in accordance with
power of attorney designating some person who must the Corporation Law (General Corporation of the
be a resident of the Philippines, on whom any Philippines vs. Union Insurance Soc. Of Canton Ltd.)
summons and other legal processes may be served in
all actions or other legal proceedings against such
corporation, and consenting that service upon such  If the foreign corporation conducts business in the
resident agent shall be admitted and held as valid as if Philippines without the license requirement. What is
served upon the duly authorized officers of the foreign the effect?
corporation at its home office. Any such foreign
corporation shall likewise execute and file with the - Section 133 provides:
Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said
corporation, in form and substance as follows: Section 133. Doing business without a
license. - No foreign corporation transacting business
in the Philippines without a license, or its successors or
"The (name of foreign corporation) does assigns, shall be permitted to maintain or intervene in
hereby stipulate and agree, in consideration of its any action, suit or proceeding in any court or
being granted by the Securities and Exchange administrative agency of the Philippines; but such
Commission a license to transact business in the corporation may be sued or proceeded against before
Philippines, that if at any time said corporation shall Philippine courts or administrative tribunals on any
cease to transact business in the Philippines, or shall valid cause of action recognized under Philippine laws.
be without any resident agent in the Philippines on (69a)
whom any summons or other legal processes may be
served, then in any action or proceeding arising out of
any business or transaction which occurred in the - if they do so, the responsible officers may be
Philippines, service of any summons or other legal subjected to the penal sanctions provided for in
process may be made upon the Securities and section 144 of the code, which may either be fine or
Exchange Commission and that such service shall imprisonment
have the same force and effect as if made upon the
duly-authorized officers of the corporation at its home
office."  What if it is not doing business without a license?

Whenever such service of summons or other - If it is not transacting business in the Philippines, even
process shall be made upon the Securities and without a license, it can sue before the Philippine
Exchange Commission, the Commission shall, within Courts
ten (10) days thereafter, transmit by mail a copy of
such summons or other legal process to the
corporation at its home or principal office. The sending  The general rule is that “it is not the lack of required
of such copy by the Commission shall be necessary license but doing business without a license which
part of and shall complete such service. All expenses bars a foreign corporation form access to our courts.”
incurred by the Commission for such service shall be  Exception:
paid in advance by the party at whose instance the
service is made.
1. Foreign corporations can sue before the
Philippine Courts if the act or transaction involved
In case of a change of address of the is an “isolated transaction” or the corporation is
resident agent, it shall be his or its duty to not seeking to enforce any legal or contractual
immediately notify in writing the Securities and rights arising from, or growing out of, any
Exchange Commission of the new address. (72a; and business which it has transacted in the
n) Philippines
2. Neither is a license required before a foreign
corporation may sue before the forum if the
- The necessity of the appointment of a resident agent purpose of the suit is to protect its trademark,
is only for the purpose of receiving summons and trade name, corporate name, reputation or
other legal processes in any legal action or proceeding goodwill;
against the foreign corporation 3. Or where it is based on a violation of the Revised
Penal Code;
4. Or merely defending a suit filed against it
 Who may be appointed as a resident agent? 5. Or where a party is stopped to challenge the
personality of the corporation by entering into a
contract with it.
- Section 127 provides that:

Section 127. Who may be a resident agent.  Rules laid down by the SC
- A resident agent may be either an individual residing
in the Philippines or a domestic corporation lawfully A. As to whether or B. As to whether or
transacting business in the Philippines: Provided, That not it can sue not it can be sued
in the case of an individual, he must be of good moral
A foreign corporation A foreign corporation
character and of sound financial standing. (n)
transacting or doing transacting business in the
business in the Philippines Philippines with the
 May a partnership be appointed as a resident agent? with a license can sue requisite license can be
before Philippine Courts sued in the Philippine Courts
Subject to certain A foreign corporation
- Yes, domestic corporation taken in its general sense exceptions, a foreign transacting business in the
not legal sense corporation doing business Philippines without a license
in the country without a can be sued in Philippine
license cannot sue in Courts
 If there is a resident agent appointed. May summons Philippine Courts
be served to any officers of the corporation? If it is not transacting if it is not doing business in
business in the Philippines, the Philippines, it cannot be
even without a license, it sued in Philippine Courts for
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66

can sue before the lack of jurisdiction petitioner has been in the Philippines engaged in
Philippine Courts continuing business or enterprise for which it was
 A foreign corporation not doing business in the organized, when the sixteen bundles were erroneously
Philippines, may it be sued? discharged in manila, for it to be considered as
transacting business in the Philippines. The fact is that
the bundles, the value of which is sought to be
- If it is not transacting business in the country it cannot recovered, were landed not as a result of a business
be sued for lack of jurisdiction transaction, isolated or otherwise, but due to a
mistaken belief that they were part of the shipment of
forty similar bundles consigned to persons or entities
 Is there any sanction that can be enforced to foreign in the Philippines, there is no justification therefore, for
corporations which are doing business without the invoking the section
required license?

- Penal sanctions under section 144  There were 3 contracts entered into, how come they
- Any violation of the code is subject to such penal were still not considered as doing business? (Antam
sanctions Consolidted, Inc. vs. CA)

- Every case shall be judged in the light of its peculiar


 What would constitute doing business?
circumstances, where a single act or transaction
however, is not merely incidental or casual but
- The true test, however, seems to be whether the indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
foreign corporation is continuing the body or
transaction constitutes “doing” or “engaging in” or
substance of the business or enterprise for which it
“transacting” business in the Philippines
was organized or whether it has substantially retired
- In the case at bar, the transaction entered into by the
from it and turned it over to another. The term implies
respondent with the petitioners are not a series of
a continuity of commercial dealings and
commercial dealings which signify an intent on the
arrangements, and contemplates, to that extent, the
part of the respondent to do business in the Philippines
performance of acts or works or the exercise of some
but constitute an isolated one which does not fall
of the functions normally incident to, and in
under the category of “doing business.”
progressive prosecution of, the purpose and object of
- The records show that the only reason why the
its organization (Mentholatum Co. Inc. vs. Mangaliman)
respondent entered into the second and third
transactions with the petitioner was because it wanted
• Mentholatum vs. Mangaliman to recover the loss it sustained from the failure of the
petitioners to deliver the crude coconut oil under the
first transaction and in order to give the latter a
- The true test, however, seems to be whether the chance to make good on their obligation. From these
foreign corporation is continuing the body or facts alone, it can be deducted that in reality there
substance of the business or enterprise for which it was only one agreement between the petitioners and
was organized or whether it has substantially retired the respondent.
from it and turned it over to another. The term implies - The three seemingly different transactions were
a continuity of commercial dealings and entered into by the parties only in an effort to fulfill the
arrangements, and contemplates, to that extent, the basic agreement and in no way indicate an intent on
performance of acts or works or the exercise of some the part of the respondent to engage in a continuity of
of the functions normally incident to, and in transactions with petitioners which will categorize it as
progressive prosecution of, the purpose and object of a foreign corporation doing business in the Philippines
its organization - 3 contracts, but according to the court was not doing
- Whatever transaction the Philippine-American Drug business in the Philippines
Co. had executed in view of the law, the Mentholatum
Co. did it itself. And the Mentholatum Co. being a
foreign corporation doing business in the Philippines • Far East Int’l import vs. Nankai Kogyo Co. Ltd.
without the license required by section 68 of the
Corporation Law, it may not prosecute this action for
- Only one contract , but according to the Supreme
violation of trade mark and unfair competition
Court was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
 Why is foreign corporations barred access from our circumstances, where a single act or transaction
courts if they do business without a license? however, is not merely incidental or casual but
indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
- Marshall-Wells Co. vs. Henry W. Elser and Co. transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
- In the instant case, the testimony of Atty. Pablo
• Marshall-Wells Co. vs. Henry W. Elser and Co. Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellant’s officers, that he was sent
- The object of the statute was to subject the foreign
to the Philippines to look into the operation of mines,
corporation doing business in the Philippines to the
thereby revealing the defendant’s desire to continue
jurisdiction of its courts. The object of the statute was
engaging in business here, after receiving the
not to prevent the foreign corporation from performing
shipment of the scrap iron under consideration,
single acts, but to prevent it from acquiring a domicile
making the Philippines a base thereof.
for the purpose of business without taking the steps
- In such a case, the single act of transaction is not
necessary to render it amenable to suit in local courts.
merely incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the
• Bulakhidas vs. Navarro operations for the conduct of a part of corporation’s
ordinary business

- It is settled that if a foreign corporation is not engaged


in business in the Philippines, it may not be denied the  If a corporation appoints a distributor or a
right to file an action in Philippine courts for isolated representative, will it necessarily imply doing business
transactions in the country?
- The object of section 68 and 69 of the Corporation law
was not to prevent the foreign corporation from
- If the foreign corporation maintained an independent
performing single acts, but to prevent it from acquiring
status during the existence of the disputed contract.
a domicile for the purpose of business without taking
the steps necessary to render it amenable to suit in - Appointment of a distributor or representative in the
the local courts. It was never the purpose of the Philippines, unless it has an independent status
Legislature to exclude a foreign corporation which (transacts and does business in its own name and for
happens to obtain an isolated order for business from its account and not of the foreign corporation)
the Philippines, from securing redress in the Philippine - if that be the case the mere appointment of a
courts distributor will not constitute doing business

• The Swedish East Asia Co., Ltd. Vs. Manila Port Service  How do you know if it has an independent status?

- It must stated that the section is not applicable to a - Communications Materials and Design vs. CA
foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the
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67

• Communications Materials and Design vs. CA • Le Chemiste Lacoste vs. Fernandez

- A perusal of the agreements between petitioner ASPAC - The French company may gain access to our courts, in
and the respondents show that there are provisions the first place it was not doing business in the
which are highly restrictive in nature, such as to Philippines
reduce petitioner ASPAC to a mere extension or - The marketing of its products in the Philippines is done
instrument of the private respondents through an exclusive distributor, Rustan Commercial
- ITEC was doing business without a license, however Corporation. The latter is an independent entity which
ASPAC is estopped buys and then markets not only products of the
- by entering into the Representative Agreement” with petitioner but also many other products bearing
ITEC, petitioner is charge with knowledge that ITEC equally well-known and established trademarks and
was not licensed to engage in business activities in the trade-names
country, and is thus stopped from raising in defense
such incapacity of ITEC, having chosen to ignore or
even presumptively take advantage of the same  Assuming Rustans had no independent status would
- In top-weld we ruled that a foreign corporation may be the SC grant Lacoste access to our courts?
exempted from the license requirements in order to
institute an action in our courts if its representative in
- Even if Lacoste did business in the Philippines it can
the country maintained an independent status during
bring action because the case involves a violation of
the existence of the disputed contract. Petitioner is
our penal code
deemed to have acceded to such independent
- Such was a violation of article 189 of the RPC, if
character when it entered into the Representative
prosecution follows after the completion of the
Agreement with ITEC
preliminary investigation being conducted by the
Special Prosecutor the information shall be in the
• Western Equipment and Supply Co. vs. Reyes name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party since a
criminal offense is essentially an act against the State.
- The company is not here seeking to enforce any legal It is the latter which is principally the injured party
or contract rights arising from, or growing out of any although there is a private right violated
business which it has transacted in the Philippine - The records show that the goodwill and reputation of
Islands. The sole purpose of the action is to protect its the petitioner’s products bearing the trademark
reputation, its corporate name, its goodwill, whenever Lacoste date back even before 1964 when Lacoste
that reputation, corporate name or goodwill have clothing apparels were forst marketed in the
through the natural development of its trade, Philippines. To allow Hemandas to continue using the
established themselves trademark Lacoste for the simple reason that he was
- And it contends that its rights to the use of its the first registrant in the Supplemental Register of a
corporate and trade name, is a property right, a right trademark used in international commerce and not
in rem, which may assert and protect against all the belonging to him is to render nugatory the very
world, in any of the courts of the world even in essence of the law on trademarks and trade names
jurisdictions where it does not transact business just
the same as it may protect its tangible property, real
or personal, against trespass, or conversion • Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
- The law denies to a foreign corporation the right to
boundaries or municipalities or states or nations, but
maintain suit unless it has previously complied with a
extends to every market where the trader’s goods
certain requirement, then such compliance, or the fact
have become known and identified by the use of the
that the suing corporation is exempt there from,
mark
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge of
• General Garments Corporation vs. Director of Patents appellants alone, and it would be unfair to impose
upon appellee the burden of asserting and proving the
contrary. It is enough that foreign corporations are
- A foreign corporation which has never done business allowed by law to seek redress in our courts under
in the Philippine Islands and which is unlicensed and certain conditions: the interpretation of the law should
unregistered to do business here, but is widely and not go so far as to include, in effect, an inference than
favorably known in the Islands through the use therein those conditions have been met from the mere fact
of its products bearing its corporate and trade name that the party suing is a foreign corporation
has a legal right to maintain an action in the Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to “counteract the effects” of said • Olympia Business Machines Co. vs. E. Razon
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
- How do you distinguish this case with Atlantic?
juristic person to bring an action in Philippine Courts
- In Atlantic it dismissed the case, while in Olympia it did
for infringement of a mark or trade-name, for unfair
not
competition, or false designation of origin and false
description, “whether or not it has been licensed to do
business in the Philippines under Act Numbered • Time Inc. vs. Reyes
Fourteen hundred and fifty-nine, as amended,
otherwise known as Corporation Law, at the time it
brings complaint. - We fail to see how these doctrines can be a propos in
the case at bar, since the petitioner is not
“maintaining any suit” but is merely defending one
• Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC against itself; it did not file any complaint but only a
and MIL-ORO MFG. Corp. corollary defensive petition to prohibit the lower court
from further proceeding with a suit that it had no
jurisdiction to entertain
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity
Fair Mills Inc. vs. T. Eaton Co. this court further said:  What law govern foreign corporation doing and
transacting business in the Philippines with a license
“By the same token, the petitioner should be
given the same treatment in the Philippines - Laws of the Republic of the Philippines save and
as we make available to our own citizens. except that would normally be those matters which
We are obliged to assure to nationals of concern its formation, organization or dissolution, or
countries of the Union an effective those fixing the relationship, liabilities, responsibilities,
protection against unfair competition on the or duties of the stockholders, members or officers of
same way that they are obligated to the foreign corporation or their relations to each other.
similarly protect Filipino Citizen and firms - In effect, intra-corporate or internal matters not
affecting creditors or the public in general are
- The ruling in the aforecited case is in consonance with governed not by Philippine laws but the law under
the Convention of the Union of Paris for the protection which the foreign corporation was formed or organized
of Industrial Property to which the Philippines became
a party. Article 8 thereof provides that a trade name Section 129. Law applicable. - Any foreign
shall be protected in all the countries of the Union corporation lawfully doing business in the Philippines
without the obligation of filing or registration, whether shall be bound by all laws, rules and regulations
or not it forms part of the trademark applicable to domestic corporations of the same class,
except such only as provide for the creation,
Notes on Corporation Law
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68

formation, organization or dissolution of corporations the appropriate government agency in the proper
or those which fix the relations, liabilities, cases.
responsibilities, or duties of stockholders, members, or
officers of corporations to each other or to the
corporation. (73a) The Securities and Exchange Commission
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
 Will the pre-emptive rights of a foreign corporation be accompanied by a copy of the certificate of revocation.
governed by the same section of the code? Is the pre- (n)
emptive rights of a stockholder in a domestic
corporation same as the pre-emptive of a stockholder
of a foreign corporation.  Voluntary withdrawal of license

- No - All 3 conditions must be complied with

• M.E. Grey vs. Insular Lumber Company Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to transact
- PNB vs. Gonzales, will this apply to a foreign business in the Philippines may be allowed to withdraw
corporation? How do you distinguish this case from a from the Philippines by filing a petition for withdrawal
Philippine law? of license. No certificate of withdrawal shall be issued
- Since it concerns the rights of stockholders it is the law by the Securities and Exchange Commission unless all
of New York that should govern the following requirements are met;

 Is the license to do business of a foreign corporation 1. All claims which have accrued in the Philippines
subject to suspension or revocation? What are the have been paid, compromised or settled;
grounds?
2. All taxes, imposts, assessments, and penalties, if
- Section 134 provides: any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions have been paid;
and
Section 134. Revocation of license. -
Without prejudice to other grounds provided by special
laws, the license of a foreign corporation to transact 3. The petition for withdrawal of license has been
business in the Philippines may be revoked or published once a week for three (3) consecutive weeks
suspended by the Securities and Exchange in a newspaper of general circulation in the
Commission upon any of the following grounds: Philippines.

1. Failure to file its annual report or pay any fees as


required by this Code;
P.D. 902-A
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;  P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange  The jurisdiction of SEC for cases falling under section 5
Commission a statement of such change as required thereof was transferred to the courts of general
by this Title;
jurisdiction designated by the SC, they were called
special commercial courts, the only exceptions were
4. Failure to submit to the Securities and Exchange revocation of corporate franchise and calling of
Commission an authenticated copy of any amendment elections
to its articles of incorporation or by-laws or of any
articles of merger or consolidation within the time
prescribed by this Title;  However the SEC retained receivership or suspension
payments within June 20,2000

5. A misrepresentation of any material matter in any


 Jurisdiction of special commercial courts are exclusive
application, report, affidavit or other document
submitted by such corporation pursuant to this Title; and original, jurisdiction is conferred by law; 1 Special
Commercial Court per region except MAKATI and
QUEZON CITY which has two
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or  Devices or Schemes
political subdivisions;
- Pyramid scheme (misrepresentation)-Special
Commercial Courts
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation is
authorized under its license; - Syndicated estafa- not bailable

8. Transacting business in the Philippines as agent of  Alleje case


or acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the - Falls squarely under sec. 5 (a) Special Commercial
Philippines; or Courts

9. Any other ground as would render it unfit to - Allegation corporate officers employing schemes in
transact business in the Philippines. (n) diverting

- Not only detrimental to corporation, but general


 SEC does not have the sole authority to suspend or
revoke the license of a foreign corporation doing membership
business in the Philippines, other government agencies
like the Central Bank , the Insurance Commission may - Fraud must be stated with particularity
also do so within their respective dominion, despite
the provision of section 134
• Abad vs. CFI of Pangasinan
 If the SEC believes that revocation is warranted,
section 135 provides that:
- Fraud must be stated with particularity otherwise it
may be filed to any court
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such license
to transact business in the Philippines, the Securities  Intra-corporate
and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to
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69

- Exclusive and original jurisdiction of special - Suspension of payment, appointment of management


commercial courts receivership

- Sole criteria is there must be an intra-corporate  What is the reason for suspension of all claims?
relationship
- The reason for suspending actions for claims against
- Pertaining to a controversy (speaks also of intra- the corporation is not really to enable the
partnership controversy, that partnership must be management committee or the rehabilitation receiver
registered with the SEC) to substitute the defendant in any pending action
against it before any court, tribunal or body. The real
 Rule now justification is to enable the management committee
or rehabilitation receiver to effectively exercise his
1. Necessarily be an intra-corporate relationship; and, powers free from any Judicial or extra-judicial
interference that might unduly hinder or prevent the
2. The controversy must arise out of said relationship “rescue” of the debtor company. To allow such other
actions to continue would only add to the burden of
 Intra-corporate relationship alone will not suffice to put the management committee pr rehabilitation receiver,
it in the ambit of special commercial courts and courts whose time, effort and resources would be wasted in
of general jurisdiction may take cognizance defending claims against the corporation instead of
being directed towards restructuring and
rehabilitation.(PAL vs. Spouses Sadic and Kurangking)
 Case of a transferee of shares of stock to compel the
corporation to recognize him as a stockholder
- To enable the receiver to effectively exercise his or her
power free form any judicial or extra-judicial that may
 How can it be intra-corporate when he is not yet fully
disturb
paid

 3 types of suspension of payments


- When the transferee has done all he can be required
to do to render the transfer effectual and the
1. Simple suspension of payments
corporation refuses to register the transfer, the
requirement of the registration is waived and the
transferee is considered technically a stockholder who - where deferment of payment of claims against a
may sue to enforce the right to have the transfer distress company; ask the court to be given time to
registered the payment of liability by postponing the payment

- When it has sufficient assets and liabilities but forces


 Florendo vs. rivera, Embassy Farms
the impossibility of meeting them when they
respectively fall due
- The transferor withheld the delivery, they are not yet
prima facie; it will not be considered intra-corporate
2. Suspension of receiver with a management committee
with a rehabilitation play or suspension of payments
 Controversies in the appointment (asked in the bar)
accompanied by a proposal for rehabilitation (with or
without rehabilitation)
- Cases involving election, appointment and removal
- corporation has sufficient assets to cover its liabilities,
 In Andaya the court said that a corporate officer but sees the possibility; is or without rehabilitation
elected or appointed by the BOD is always a corporate plans; normally would attach the rehabilitation plan
act
- For purpose of economic development
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and exemplary 3. Suspension of payments when the corporation has no
damages and attorney’s fees in his complaint will not sufficient assets to its liabilities
operate to prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The jurisdiction will not
 May it still be revived?
wrest on the NLRC just because of that

- Yes, it may still be revived


• Tabang vs. NLRC

 How can a corporation with more liabilities than assets


- Jurisdiction lies originally and exclusively to special
continue its operations profitably?
commercial courts and not in the NLRC

- Even if the distressed company has no sufficient


- SEC has jurisdiction over cases of removal from
assets and liabilities it can go for suspension
employment of corporate officers

- It asked for a management committee without a


- The relationship of a person to a corporation, whether
receiver plan (Victorius Milling case)
as officer or as agent or employee or not determined
by the nature of the servides performed, but by the
 Convert their claims into equity
incidents of the relationship on they actually exist

- Corporate officers dismissal is always a corporate act - Their liability was almost wiped out they became
or intra-corporate controversy stockholders instead of creditors

- After 5 years those who converted sold it back to the


• Midland construction vs. Movilla
corporation, thereby making profits

- NLRC will be possessed of jurisdiction exception will


 Amendment is for the economic development of the
not apply to mere recovery
country

 Main consideration
 What if walang amendment, e mas maraming liabilities
kesa assets
- Asserts his right to the office or questions the
propriety or validity of his ouster or removal, it will be
the special commercial courts and not the NLRC  Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
 Securities Regulation Code

 Effect of suspension- you cannot foreclose


- Transferred jurisdiction of the SEC to Special
Commercial Courts
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 What are claims? - Save and except in the case of a close corporation in
case of deadlock management committee is allowed to
- Debts or demands of pecuniary nature. Assertion of a take over right away
right to have money paid
• Jacinto case
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must
- 2nd par of page 676
present a monetary claim, liquidated or unliquidated

- 2 requisites where present


 Nullification of corporations does not present a
monetary claim of pecuniary nature
- Wala ng mapautang, there was a paralyzation

• Union vs. CA
• Sy Chim

- It does not allow a mere individual to file the petition


- Did not appoint a management committee
which is limited to corporations partnership or
associations.
- In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction of
- Where no authority is granted to hear petitions of
assets or other properties of a corporation and
individuals for suspension of payments, such petition
paralysis of its business operations, the mere
are beyond the competence of the SEC
apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of
 What happens if there is a suspension order?
a management committee

 Explain the key phrase “quality is equity”


 Section 5 and 6(D) governed by separate rules; interim
rules and intra-corporate controversy
- All creditors stand on equal footing, secure or
unsecure, holding or lien or without a lien, no creditor
 Venue of actions
may enforce his lien while rehabilitation is going
(Alemar case)
- Rules of court- where the parties are residing

- No preference shall be given


- Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where the
• RCBC vs. IAC
principal office is located

- Decided on motion for reconsideration


 Rehabilitation proceedings venue

- It court 7 years to decide authentication


- In rem

 Rule of the thumb


- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments
- Automatic suspension even if not decreed in the thereof
decision itself
- A creditor may now file the suspension proceedings;
- Once lifted the preferred creditors will regain their provides that creditors owns at least 25%
preference
 Intra-corporate- rule 1 section 6
 Appointment of a management committee
 Service of summons- rule 2 section 5
- Take over the management committee of the
distressed corporation
- Summons may be made to anyone

- Extraordinary and drastic remedy


 In case of intra-corporate dispute, elections, fraud, etc;
if they are governed by interim rules of procedure on
- Without any remedy
intra-corporate controversies

 What is an intra-corporate controversy?


 Venue

- Section 5(B)
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Sole criteria is whether there exists an intra-corporate
dispute is that if there is an intra-corporate
- Matters of payment/suspension must be filed in the
relationship
city/ municipality where corporation is located

 Why is there suspension of all actions against claims


 Under old rule, creditors have no right to institute an
when a receiver is appointed?
action for receivership; now creditors, if they sold 20%
they can institute an action for receivership
- To enable the management committee to exercise its
powers
 Section 5

• Sy Chim vs. Sy Siy Ho (before a management


- Service of summons may be made by fax/e-mail
committee may be opt by a court)

• E.B. Villarosa vs. Benito


- 2 requisites for a valid appointment of management
committee
- Will apply only if it is not an intra-corporate
controversy
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
 If the controversy arose out of an intra-corporate
2. Paralysis of business operations, the mere dispute rules on interim rules of procedure of intra-
apprehension of future misconduct based upon prior corporate controversies shall govern
management
 Rule 4 section 17- immunity from suit

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 Rehabilitation receiver shall not subject to any action, f) Proprietary or non proprietary membership certificates
claim or demand in connection with any act done incorporations; and
omitted by him in good faith in the exercise of his
functions and powers herein conferred
g) Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;

 Claim GR: Securities shall not be sold or offered for sale or distribution
within the PH, without a registration statement filed with and
- Right to payment, whether or not it is reduced to approved by SEC. Prior to such sale, information on the
judgment, liquidated or unliquidated, fixed or securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
contingent, matured or unmatured, disputed or
prospective purchaser. (Sec 8)
undisputed, legal or equitable and secured or
unsecured EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the
 Investment contracts Government of the PH, or by any political subdivision
or agency thereof, or by any person controlled or
supervised by, and acting as an instrumentality of said
- A contract, transaction or scheme whereby a person Government.
invests his money in a common enterprise and is led b) Any security issued or guaranteed by the
to expect profits primarily from the effects of others government of any country with diplomatic relations
with the PH, or by any state, province or political
 The management committee and rehabilitation subdivision thereof on the basis of reciprocity:
Provided, that the SEC may require compliance with
receiver are empowered to: the form and content of disclosures the Commission
may prescribe.
1. Take custody and control of all assets of the c) Certificates issued by a receiver or by a
corporation trustee in bankruptcy duly approved by the proper
adjudicatory body.
d) Any security or its derivatives the sale or
2. Evaluate assets and liabilities, earnings operations of
transfer of which, by law, is under the supervision and
the corporation regulation of the Office of the Insurance Commission,
Housing and Land Use Regulatory Board, or the Bureau
3. Determine the best way to protect the investors and of Internal Revenue.
creditors e) Any security issued by a bank except its own
shares of stock.
4. Study, review evaluate the feasibility of continuing
AND Exempt Transactions under Sec 10
operation and structures a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
5. Submit recommendations to the RTC regarding insolvency or bankruptcy.
rehabilitation plan b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of
6. Rehabilitate the corporation if determined to be
business and not for the purpose of avoiding the
feasible by the RTC provisions of this Code, to liquidate a bona fide debt, a
security pledged in good faith as security for such
7. Report to the RTC until the corporation is dissolved debt.
c) An isolated transaction in which any security
is sold, offered for sale, subscription or delivery by the
THE SECURITIES REGULATION CODE (RA8799)
owner thereof, or by his representative for the owner’s
account, such sale or offer for sale, subscription or
- Also known as the Blue Sky Law since it was enacted to
delivery not being made in the course of repeated and
protect the public from unscrupulous promoters who stake
successive transactions of a like character by such
business which have no basis and sell shares and interest
owner, or on his account by such representative and
therein to investors, who are then left holding certificates
such owner or representative not being the
representing nothing more than a claim to a square of the blue
underwriter of such security.
sky.
d) Distribution by a corporation, actively
engaged in the business authorized by its AOI, of
-SEC. 2. Declaration of State Policy. – The State shall establish a
securities to its stockholders or other security holders
socially conscious, free market that regulates itself, encourage
as a stock dividend or other distribution out of surplus.
the widest participation of ownership in enterprises, enhance the
e) Sale of capital stock of a corporation to its
democratization of wealth, promote the development of the
own stockholders exclusively, where no commission or
capital market, protect investors, ensure full and fair disclosure
other remuneration is paid or given directly or
about securities, minimize if not totally eliminate insider trading
indirectly in connection with the sale of such capital
and other fraudulent or manipulative devices and practices
stock.
which create distortions in the free market.
f) Issuance of bonds or notes secured by
mortgage upon real estate or tangible personal
BROKER - person who buys and sells securities for the account of
property, where the entire mortgage together with all
others.
the bonds or notes secured thereby are sold to a single
purchaser at a single sale.
DEALER - person who buys and sells securities for his/her own
g) Issue and delivery of any security in
account in the ordinary course of business.
exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of
NOTE: No person shall engage in the
the security surrendered in exchange to make such
business of buying or selling securities in the
conversion: Provided, That the security so surrendered
Philippines as a broker or dealer, or act as a
has been registered under this Code or was, when
salesman, or an associated person of any broker
sold, exempt from the provisions of this Code, and that
or dealer unless registered as such with the
the security issued and delivered in exchange, if sold
Commission. (Sec 28)
at the conversion price, would at the time of such
conversion fall within the class of securities entitled to
SECURITES - shares, participation or interests in a corporation or
registration under this Code. Upon such conversion
in a commercial enterprise or profit-making venture and
the par value of the security surrendered in such
evidenced by a certificate, contract, instrument, whether written
exchange shall be deemed the price at which the
or electronic in character. It includes:
securities issued and delivered in such exchange are
CODE: COFDIPS
sold.
a) Certificates of assignments, certificates of h) Broker’s transactions, executed upon
participation, trust certificates, voting trust certificates customer’s orders, on any registered Exchange or
or similar instruments; other trading market.
i) Subscriptions for shares of the capital stock
b) Other instruments as may in the future be determined
of a corporation prior to the incorporation thereof or in
by the Commission; pursuance of an increase in its authorized capital stock
c) Fractional undivided interests in oil, gas or other under the Corporation Code, when no expense is
mineral rights; incurred, or no commission, compensation or
remuneration is paid or given in connection with the
d) Derivatives like option and warrants; sale or disposition of such securities, and only when
e) Investment contracts, certificates of interest or the purpose for soliciting, giving or taking of such
participation in a profit sharing agreement, certificates subscriptions is to comply with the requirements of
of deposit for a future subscription; such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can
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be registered and duly incorporated, or its authorized


capital increased.
7. Boiler Room Operations – involves an intensive
selling campaign through numerous salesmen by telephone or
j) The exchange of securities by the issuer with
through direct mail offerings for securities of either a certain type
its existing security holders exclusively, where no
or from a specific issuer. Investors are induced to purchase
commission or other remuneration is paid or given
through hard-sell based on unfounded predictions and mailing of
directly or indirectly for soliciting such exchange.
misleading market letters.
k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines during any
Note: Marking the close, Painting the tape, Squeezing
twelve-month period.
the float, Hype and dump, Boiler Room Operations
l) The sale of securities to any number of the
become unlawful if it is effected to either raise the
following qualified buyers: (i) Bank; (ii) Registered
price or induce the purchase of a security or of a
investment house; (iii)insurance company; (iv) Pension
controlling, controlled, or commonly controlled
fund or retirement plan maintained by the Government
company by others or to depress the price to induce
of the Philippines or any political subdivision thereof or
the sale of a security, whether of the same or of a
managed by a bank or other persons authorized by the
different class, of the same issuer or of a controlling,
Bangko Sentral to engage in trust functions; (v)
controlled company or common controlled company by
investment company or; (vi) Such other person as the
others or to create active trading to induce the
Commission may by rule determine as qualified
purchase through said devices or schemes.
buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience
in financial and business matters, or amount of assets 8. Circulating or Disseminating Information –
under management. circulating an information that any of the security listed in the
exchange will or is likely to rise or fall because of manipulative
PROTECTION OF SHAREHOLDERS INTEREST market operations of any one or more persons conducted for the
purpose of raising or depressing the price of the security and
1. Tender Offers (Sec 19) thus inducing the purchase of such security.
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 9. Making False or Misleading Statements with
22) respect to any material fact which he knew or had reasonable
ground to believe was so false or misleading for the purpose of
TENDER OFFER – A publicly announced intention acting alone or inducing the purchase or sale of such security.
in concert with others to acquire equity securities of a company. 10. Pegging or Fixing Or Stabilizing the price of
(2002 Bar Exams) security effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for such
Instances when Tender Offer is Required purpose.
1. When the person intends to acquire 15% or
more of the equity share of a public company pursuant 11. Short sale – selling of security which the vendor does
to an agreement made between or among the person not own unless done in accordance with the rules and regulations
and one or more sellers; of the SEC.
2. When the person intends to acquire 30% or 12. Insider Trading – the act of an insider to buy or sell
more of the equity share of a public company within a security of the issuer while in possession of material information
period of 12 months; with respect to such security that is not generally made known to
3. When the person intends to acquire shares the public unless (a) The insider proves that the information was
that would result in an ownership of more than 50% of not gained from such relationship; or (b) If the other party selling
the equity shares of a public company. to or buying from the insider (or his agent) is identified, the
insider proves: (i) that he disclosed the information to the other
PROXY SOLICITATION party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information.
NOTE: A broker or dealer who holds or acquires the proxy for at
least ten per centum (10%) or such percentage as the Note: When is information “material non-
Commission may prescribe of the outstanding share of the public”? - if: (a) It has not been generally disclosed to
issuer, shall submit a report identifying the beneficial owner the public and would likely affect the market price of
within ten (10) days after such acquisition, for its own account or the security after being disseminated to the public and
customer, to the issuer of the security, to the Exchange where the lapse of a reasonable time for the market to
the security is traded and to the Commission. (Sec 20.5) absorb the information; or (b) would be considered by
a reasonable person important under the
FRAUDULENT TRANSACTIONS AND OTHER MARKET circumstances in determining his course of action
MANIPULATIONS whether to buy, sell or hold a security.

1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a Note: Who is an “insider”? - “Insider” means: (a)
security which involves no change in the beneficial ownership the issuer; (b) a director or officer (or person
thereof. performing similar functions) of, or a person controlling
the issuer; (c) a person whose relationship or former
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for relationship to the issuer gives or gave him access to
the purchase or sale of security with the knowledge that a material information about the issuer or the security
simultaneous order or orders of substantially the same size, time that is not generally available to the public; (d) a
and price for the sale or purchase of such security has, or will be government employee, or director, or officer of an
entered by or for the same or different parties. exchange, clearing agency and/or self-regulatory
organization who has access to material information
Note: Wash sale and matched orders become illegal about an issuer or a security that is not generally
when they are used as a means to create false available to the public; or (e) a person who learns such
appearance of active trading in the security information by a communication from any of the
concerned. foregoing insiders.

3. Marking the close – placing the purchase order, at or INDEPENDENT DIRECTOR


near the close of the trading period. The price that was closed Person other than an officer or employee of the
will then be the price that will be posted on the following trading corporation, its parent or subsidiaries, or any other individual
day. having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the
4. Painting the tape – involves a series of transactions responsibilities of a director.
that are reported publicly to give the impression of an activity in
a security. Corporations which require an Independent Director
5. Squeezing the float – the part of an outstanding 1. An exchange; or
2. Any corporation with a class of equity securities listed
security intentionally held by dealers or other persons with a
for trading on an Exchange or with assets in excess of P50M and
view of reselling them later for profit.
having 200 or more holders, at least 200 of which are holding at
6. Hype and dump – Act employed by a person or group least 100 shares of a class of its equity securities or which has
of persons of purchasing the outstanding capital stock of a sold a class of equity securities to the public pursuant to an
dormant public shell company for a nominal amount and merge effective registration statement shall have at least two (2)
it with their privately held company. They would then gain independent directors or such independent directors shall
control of the majority stocks of the merged entity. Stock constitute at least 20% of the members of such board, whichever
certificates are often re-issued in the name of the merged entity is the lesser.
to relatives and associates who act as nominees of the person or
persons employing the device. They would then look for a OPTION TRADING
broker-dealer who would be willing to make a “hype” of the • Put – a transferrable option or offer to deliver a given
securities. The broker-dealer then generates volume and number of shares of stock at a stated price on any given time
advance bid price. When the market reaches a high price, they during the stated period.
would “dump” their shareholdings and bail out. • Call – a transferrable option to buy a specified number
of share at a stated price

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• Straddle – a combination of put and call.

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

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

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

Notes on Corporation Law


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