Right of Stockholders and Members

CORPORATION
LAW REVIEWER (2013-2014)
ATTY. JOSE MARIA G. HOFILEA
RIGHT OF STOCKHOLDERS AND MEMBERS

I. What Does Share Represent?
While shares of stock constitute personal property, they do not

represent property of the corporation [i.e., they are properties
of the stockholders who own them]. A share of stock only
typifies an aliquot part of the corporations property, or the
right to share in its proceeds to that extent when distributed
according to law and equity, but the holder is not the owner of
any part of the capital [properties] of the corporation, nor is he
entitled to the possession of any definite portion of its assets.
The stockholder is not a co-owner of corporate property.
Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds
of Manila, 6 SCRA 373 (1962).
o
As early as the case of Fisher v. Trinidad, the Court

already declared that [t]he distinction between the
title of a corporation, and the interest of its members or
stockholders in the property of the corporation, is
familiar and well-settled. The ownership of that
property is in the corporation, and not in the holders of
shares of its stock. The interest of each stockholder
consists in the right to a proportionate part of the
profits whenever dividends are declared by the
corporation, during its existence, under its charter, and
to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after
payment of its debts. Mobilia Products, Inc. v.
Umezawa, 452 SCRA 736 (2005).
Atty. Hofilea Shares of stock is intangible personal

property since the shares represent merely an interest
in the company.
The registration of shares in a stockholders name, the issuance

of stock certificates, and the right to receive dividends which
pertain to the shares are all rights that flow from ownership.
Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales
Corp. v. Court of Appeals, 349 SCRA 35 (2001).

A. Sources of Shares:
1. Shares acquired from the company itself these are shares
that are sold from the unissued shares of the company.
2. Shares acquired from a stockholder of the company these
are shares sold by a stockholder of the company to another
person who may or may not be an existing stockholder.

II. Preemptive Rights (Section 39)

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

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION LAW REVIEWER (2013-2014)

A. Pre-emptive rights defined
Atty. Hofilea Before Mr. X can become a member of the

corporation, the existing stockholders must first be allowed to
buy whatever stocks the company desires to issue. Where not
all the members of the corporation decide not to invest further,
the remainder may be offered to Mr. X.
o The recognition of the pre-emptive right is intended to
protect both the proprietary and voting rights of a
stockholder in a corporation. The proportionate
when no specific grant or recognition of such right is provided

for in statutory law.2
Pre-emptive right under Section 39 of the Corporation Code

refers to the right of a stockholder of a stock corporation to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings. Although it can
validly be withdrawn, it cannot be done in breach of fiduciary
duties such as to perpetuate control over the corporation.
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA
461 (2011).
SEC Opinion, 11 August 1997, XXXII SEC QUARTERLY BULLETIN 15 (No. 2, Dec.
1997); SEC EAD Memo, dated 29 July 1997.
Atty. Hofilea Can pre-emptive rights be taken away? YES.

The right may be denied by the articles of incorporation or by
the by-laws.

B. Extent of Coverage of Pre-emptive Rights
interests of a stockholder in a corporation determines

his proportionate power to vote in corporate affairs
when the law gives the stockholders a right to affirm or
deny board actions. The proportionate interest of the
stockholder to the outstanding capital stock also
determines his proportionate share in the dividends
declared by the corporation, as well as his
proportionate right to the remaining assets of the
corporation upon dissolution of the corporation. 1
The pre-emptive rights of stockholders in a corporation are not

statutory rights, but are common law rights, and exist even
Under the current provision Section 39 of the Corporation Code,

the pre-emptive right of stockholders is recognized to exist to
"all issues or disposition of shares of any class." The use of the
terms "issues or disposition" clearly provides that the pre-
emptive right should now be available even to issues from the
existing unsubscribed portion of the authorized capital stock
when the board decides to open them for subscription, and
even to re-issuance or sale of treasury shares of the
corporation.3

C. Exceptions to Pre-emptive Rights
3 exceptions provided in Section 39: (1) debt, (2) in compliance

with the required public issuance, and (3) shares to be issued,
with approval of the 2/3 of the stockholders, in exchange for
property for corporate purposes.
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.
3

The SEC has ruled that a majority vote of stockholders

waiving the pre-emptive right in a meeting called for the
purpose would not be valid and binding on the
individual stockholders since the pre-emptive right is a
personal right of a stockholder, and accordingly, the
waiver should be given individually by the stockholders
concerned or he may authorize somebody to execute
the same for and in his behalf by way of a special power
of attorney.1
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and
the number of shares transferred.

No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation. (35)

Issue v. Disposition
o
o
of the corporation they are owned by the stockholders of

record. The corporation whose shares of stock are the subject of
transfer transaction (through sale, assignment, donation, or any
other mode of conveyance) need not be a part to transaction to
be valid; however, to bind the corporation as well as third
parties, it is necessary that the transfer is recorded in the books
of the corporation. Forest Hills Golf & Country Club v. Vertex
Issue refers to new shares issued to stockholders.

Disposition treasury shares owned by the company
may be disposed by the company by selling such to
the stockholders.

III. Right to Transfer or Dispose of Shareholdings (Section 63)

Section 63. Certificate of stock and transfer of shares.
The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates endorsed 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
SEC Opinion, 6 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 10 (No. 2, June 1995);
SEC Opinion, 12 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 14 (No.2, June 1995);
SEC Opinion, 1 October 1981.
Shares of stock of a corporation are not owned or are the assets
Sales and Trading, Inc., 692 SCRA 706 (2013).

A. Restriction on Transfers:
A contractual undertaking on restriction of transfer of shares

that has a reasonable business purpose and limited in coverage
is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).

Lambert v. Fox

Facts: John R. Edgar & Co found itself in such condition financially that
its creditors, including Lambert and Fox, agreed to take over the
business, incorporate it and accept stock in payment of their respective
credits. Eventually, Lambert and Fox became the two largest


terms and considerations which are reasonable, and
only when the corporation or the other stockholders do
not or fail to exercise their option, is the offering
stockholder at liberty to dispose of his shares to third
parties.
Before you can sell your shares you must offer
stockholders in the new corporation, John R. Edgar & Co., Incorporated.

A few days after incorporation, Lambert and Fox entered into an
agreement where they mutually agreed not to sell, transfer, or
otherwise dispose of any part of their shareholdings until after one year
from the date of the agreement. A violation thereof would be liable for
breach of contract and damages. Fox sold his stock to one of the
corporations competitors, E.C. McCullough & Co.

Issue: Whether or not Fox is liable.

Held: YES. Fox contends that the stipulation in the contract suspending
the power to sell the stock is an illegal stipulation, is in restraint of trade
and offends public policy. The Court sees otherwise. The suspension of
the power to sell has a beneficial purpose, results in the protection of
the corporation as well as of the individual parties to the contract, and is
reasonable as to the length of time of the suspension. But the Court also
said that the mentioned doctrine did not mean to cover the suspension
of the right of alienation of stock, limiting ourselves to the statements
that the suspension in this particular case is legal and valid.

Doctrine: See above. Requisites for valid restriction on transfer:
Reasonableness
Time-boundedness
Valid and Binding
"Right of first refusal" which would provide that a

stockholder who may wish to sell or assign his shares
must first offer the shares to the corporation or to the
other existing stockholders of the corporation, under

them first to the corporation or existing

shareholders
Right of first option" grants to the corporation the
right to buy the shares at a fixed price, and would be
valid if the terms and consideration are reasonable.
"Buy-back agreement" exists in situations when
shares are given or assigned to officers or employees
under the condition that should they resign or be
terminated from employment, the corporation shall be
granted the right to buy-back the shares. Such
stipulations are valid so long as the terms and the
consideration are reasonable.
Void
o
"Right of prior consent" provision would require that

any stockholder who may wish to sell, assign or dispose
of his shares in the corporation may do so only when he
obtains the consent of the board of directors or other
stockholders of the corporation. Such stipulations are
void since they unduly restrain the exercise of the
stockholder of his proprietary interest in the shares, as
illustrated in a situation where a stockholder cannot
dispose of his shares because of failure to obtain such
consent.
Before you can sell your shares, you must first

get the approval of the shareholders. Atty.
Hofilea states that consent rights are not valid
because all the person, whose consent you
need, has to do is dissent. This is like making the
share non-transferable.
If the provision states that you can only sell

upon the approval of a third person (who may
or may not even be a member of the
corporation)
An absolute prohibition to transfer shares even when
contained in the articles of incorporation, would be void
since it would violate the provision of Section 63 of the
Corporation Code which treats of shares of stock as

personal property of which the stockholder has the
inherent right to dispose as incident of his ownership.1
1. RIGHT OF REFUSAL:
The indication on the face of the stock certificate that it is

Nontransferable alone does not compel the corporation to
buy back the shares from the stockholder, and held that in the
absence of a similar contractual obligation and of a legal
provision applicable thereto, it is logical to conclude that it
would be unjust and unreasonable to compel the corporation to
comply with a non-existent or imaginary obligation. Padgett v.
Padgett v. Babcock & Templeton, Inc.

Facts: Padgett was an employee of Babcock & Templeton, Inc. (BTI) and
bought 35 shares of the corporation. He was given 9 additional shares as
Christmas Bonuses. The Certificates of Stock bore the words Non-
transferable on their faces. Before he left BTI, Padgett proposed to the
President that BTI buy his 44 shares at par value plus interest or that he
be authorized to sell them to other people.

Issue: Whether or not the stocks are transferable.

Held: YES. The court held that the notation be held null and void
because it is a limitation on the right of ownership and a restraint on
trade.

Doctrine: Any restriction on a stockholders right to dispose of his
shares must be construed strictly. Any attempt to restrain a transfer of
shares is regarded as being in restraint of trade, in the absence of a valid
lien upon its shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable.

Babcock & Templeton, Inc., 59 Phil. 232 (1933).

SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3, Sept.
1995).

Section 63 contemplates no restriction as to whom the stocks

may be transferred. It does not suggest that any discrimination
may be created by the corporation in favor of, or against a
certain purchaser. The owner of shares, as owner of personal
property, is at liberty, under said section to dispose them in
favor of whomever he pleases, without limitation in this
respect, than the general provisions of law. Fleishcher v. Botica
Nolasco, 47 Phil. 583 (1925).

Fleishcher v. Botica Nolasco

Facts: Manuel Gonzales was the original owner of five shares of stock of
Botica Nolasco Inc. Gonzales assigned and delivered said five shares to
be transferred as therein provided. The holder of shares, as owner of

personal property, is at liberty, under said section, to dispose of them in
favor of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law.

Henry Fleischer to repay his debt to the latter. Doctor Miciano, who was
the secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock invoking
Article 12 of the by-laws, which states that the corporation had a
preferential right to buy from Manuel Gonzalez said shares. Fleischer
refused. Thereafter, Fleischer requested Doctor Miciano to register said
shares in his name but the latter refused to do so, saying that it would
be in contravention of the by-laws of the corporation.

Issue: Whether or not Article 12 of the by-laws of the Botica Nolasco,
Inc., is in conflict with the provisions of the Corporation Law (Act. 1459)

Held: YES. Section 13, paragraph 7 of the Corporation Law, empowers a
corporation to make by-laws, not inconsistent with any existing law, for
the transferring of its stock. Section 35 of the same specifically provides
that the shares of stock are personal property and may be transferred
by delivery of the certificate indorsed by the owner, etc. A stock
corporation in adopting a by-law governing transfer of shares of stock
should take into consideration the specific provisions of Section 13 and
35 of The Corporation Law, and said by-law should be made to
harmonize with said provisions. It should not be inconsistent therewith.

Doctrine: Section 35 defines the nature, character and transferability of
shares of stock. Under said section they are personal property and may

The only limitation imposed by Section 63 is when the

corporation holds any unpaid claim against the shares intended
to be transferred. A corporation, either by its board, its by-laws,
or the act of its officers, cannot create restrictions in stock
transfers, because Restrictions in the traffic of stock must have
their source in legislative enactment, as the corporation itself
cannot create such impediment. By-laws are intended merely
for the protection of the corporation, and prescribe relation, not
restriction; they are always subject to the charter of the
corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
The right of first refusal is primarily an attribute of ownership.

Conversely, a waiver thereof is an act of ownership. To allow the
PCGG to vote the sequestered shares for this purpose would be
sanctioning its exercise of an act of strict ownership. PCGG v.
SEC, G.R. No. 82188, 30 June 1988 (unrep.)
The agreement of co-shareholders to mutually grant the right of

first refusal to each other, by itself, does not constitute a
violation of the provisions of the Constitution limiting land
ownership to Filipinos and Filipino corporations; if the foreign
shareholdings of a landholding corporation exceed 40%, it is not
the foreign stockholders ownership of the shares which is
adversely affected by the capacity of the corporation to own
landthat is, the corporation becomes disqualified to own land.
This finds support under the basic corporate law principle that

the corporation and its stockholders are separate juridical
entities. In this vein, the right of first refusal over shares
pertains to the shareholders whereas the capacity to own land
pertains to the corporation. J.G. Summit Holdings, Inc. v. Court
of Appeals, 450 SCRA 169 (2005).
to preserve and protect itself by excluding competitors or

hostile interests. The provision is made obviously to prevent a
stockholder from creating an opportunity to take advantage of
the information which he may have acquired as such to
promote his individual interest to the prejudice of the
corporation and other stockholders. The stockholders have a
In a landholding corporation which by constitutional mandate is
fiduciary relation with their corporation for the collective

benefit of the stockholders. Any person who intends to buy
stock in a corporation does so with the knowledge that its
affairs are governed by the articles of incorporation and by-
laws; and with such knowledge, the stockholder may be
considered to have consented to the disqualification to engage
in the same line of business and thus, it cannot be said that the
limited to 40% foreign equity, and where there exists a right of

first refusal agreement between the co-shareholders, the fact
that the corporations owns land cannot deprive stockholders of
their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter
will exceed the allowed foreign equity, what the law disqualifies
is the corporation from owning land. J.G. Summit Holdings, Inc.
v. Court of Appeals, 450 SCRA 169 (2005).
2. Restraint of Trade: An agreement by which a person obliges
himself not to engage in competitive trade for five years is valid
and reasonable and not an undue or unreasonable restraint of
stockholders right is infringed. 2
trade and is obligatory on the parties who voluntarily enter into

such agreement. xOllendorf v. Abrahamson, 38 Phil. 585
(1918).
The SEC, as a matter of policy, allows restrictions on transfer of

shares in the articles of incorporation if the same is necessary
and convenient to the attainment of the objective for which the
competition clause may be properly provided for as a condition

for being a stockholder in the articles of incorporation or by-
laws of the corporation.1
company was incorporated, unless palpably unreasonable under

the circumstances. The underlying test as to whether the
restriction are valid and enforceable is whether the restriction is
sufficiently reasonable as to justify the restriction overriding the
general policy against restraint on alienation of personal
property. The SEC has ruled that the period of one month is
deemed reasonably sufficient for the existing stockholder of
The SEC ruled that such disqualification provision is a valid and
corporation within which to signify their desire to buy the
Non-Competition Clause: The SEC has opined that a non-
reasonable exercise of corporate authority since a corporation,

under the principle of self-preservation, has the inherent right
SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June,
1999).
SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June,
1999).


shares of stock being offered for sale by any stockholder before
the same may be offered to third parties.1

B. Remedy If Registration Refused:
Mandamus will not lie to compel the corporate secretary to

register the transfer of shares in the corporate books when the
petitioner is not the registered stockholder nor does he hold a
power of attorney from the latter. This is under the general rule
that as between the corporation one the one hand and its
shareholders on other, the corporation looks only to its books
for the purpose of determining who its shareholders are, so that
a mere indorsee of a certificate of stock, claiming to be the
owner, will not necessarily be recognized as such by the
corporation and its officers, in absence of express instructions
of the registered owner to make such transfer to the indorsee,
or a power of attorney authorizing such transfer. Hager v.
Bryan, 19 Phil. 138 (1911).2
the Bryan-Landon Company authorizing him to make demand on the

secretary of the Visayan Electric Company to make the transfer which
petitioner seeks to have made through the medium of the mandamus of
this court.

Issue: Whether or not a writ of mandamus will lie under the
circumstances of the case to allow the transfer of shares.

Held: NO. Petitioner did not have the right to demand the transfer since
he was not the stockholder of record. Furthermore, even the Bryan-
Landon Company did not demand from Visayan Electric Company the
transfer of said shares. Neither did it give by way of a special power of
attorney to petitioner the authority to effect such a transfer. Hence,
there is no clear and legal obligation upon the respondent that will
justify the issuance of a writ to compel the latter to perform a transfer.

Doctrine: See above.

Hager v. Bryan
1. Period to Enforce. Considering that the law does not prescribe

Facts: Hager files a petition for mandamus to compel the company
secretary to transfer certain shares of stock of the Visayan Electric
Company to a Mr. Levering. The company had refused to do so because
a period within which the registration of purchase of shares

should be effected, the action to enforce the right does not
accrue until there has been a demand and a refusal concerning
the transfer. Ponce v. Alsons Cement Corp., 393 SCRA 602
(2002).
o When all the requirements have been complied with,
the duty of the corporate secretary to record the
the stocks in question were in the name of Bryan-Landon Company.

There was no allegation that Hager holds any power of attorney from
transfer in the books of the corporation is ministerial.
SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3,

September 1995).
2
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393
SCRA 602 (2002).

A stipulation on the stock certificate that any assignment would

not be binding on the corporation unless registered in the

corporate books as required under the by-laws and without
providing when registration should be made, would mean that
the cause of action and the determination of prescription period
would begin only when demand for registration is made and not
at the time of the assignment of the certificate. Won v. Wack
Wack Golf & Country Club, 104 Phil. 466 (1958).
The claim for damages of what the shares could have sold had
the demand for their registration in the name of the buyer been
complied with is deemed to be speculative damage and non-
recoverable. Batong Buhay Gold Mines v. CA, 147 SCRA 4
(1987).

Note on Sale of Shares:
The Corporate Secretary can be held liable for recorded

transfers whose tax clearance have not been paid.
It is only when all these things have been complied that you can
really compel the corporate secretary to record your transaction
in accordance with his or her ministerial function.

Legal Advice for the transferee:

Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
transferee will be entitled to the transfer of dividends which the

transferor may receive from the corporation during the period
after the sale but before the name of the transferee is recorded
in the books of the corporation.
institution or creditor, whether local or foreign, from declaring

dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies. (n)
When there are board of meetings, you can ask the transferor
To get a declaration of trust from the transferor so that the
to give you a proxy who will vote for you in the meeting.

IV. Rights to Dividends (Section 43)

The term dividend in its technical sense and ordinary

acceptation is that part of portion of the profits of the
enterprise which the corporation, by its governing agents, sets

apart for ratable division among the holders of it capital stock
it is a payment, and the right thereto is an incident of ownership
of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).
Although stock certificates grant the stockholder the right to

receive quarterly dividends of 1%, cumulative and participating,
the stockholders do not become entitled to the payment
thereof as a matter of right without necessity of a prior
declaration of dividends. Section 43 of Corporation Code
prohibits the issuance of any stock dividend without the
approval of stockholders, representing not less than two-thirds
(2/3) of the outstanding capital stock, which underscores the
fact that payment of dividends to a stockholder is not a matter
of right but a matter of consensus. Furthermore, interest
bearing stocks, on which the corporation agrees absolutely to
pay interest before dividends are paid to the common
stockholders, is legal only when construed as requiring payment
of interest as dividends from net earnings or surplus only.
Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
When the Court directed that a total of 111,415 shares of PLDT

be reconveyed to the Republic by way of declaring the Republic
to be the rightful owner of said shares, that necessarily included
or series of shares, or both, any of which classes or series of shares

may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value
shares of stock.

Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred
shares of stock may be issued only with a stated par value. The board

V. Right to Vote and to Attend Meetings (Sections 6 and 89)

of directors, where authorized in the articles of incorporation, may fix

the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective
upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
Section 6. Classification of shares.

The shares of stock of stock corporations may be divided into classes
liable to the corporation or to its creditors in respect thereto:

Provided; That shares without par value may not be issued for a
the reconveyance to the Republic of the dividends and interest

accruing thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790
(2009).


consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

7. Investment of corporate funds in another corporation or business in
accordance with this Code; and

8. Dissolution of the corporation.
A corporation may, furthermore, classify its shares for the purpose of

insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.

Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.

Section 89. Right to vote.
The right of the members of any class or classes to vote may be
Where the articles of incorporation provide for non-voting shares in

the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
limited, broadened or denied to the extent specified in the articles of

incorporation or the by-laws. Unless so limited, broadened or denied,
each member, regardless of class, shall be entitled to one vote.

Unless otherwise provided in the articles of incorporation or the by-
laws, a member may vote by proxy in accordance with the provisions
of this Code. (n)

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
may be prescribed by, the Securities and Exchange Commission.

A. Who has the right to vote
6. Merger or consolidation of the corporation with another

corporation or other corporations;

General Rule: The person registered in the books of the

company has owner of the shares is one who is entitled to vote
as shareholder.
Since the appointment of proxy is purely personal, and

the right to vote is inseparable from the right of
ownership of stock without the owners consent, and
therefore a proxy to vote stock, to be valid, must have
been given by the person who is the legal owner of the
stock and entitled to vote the same at the time it is to
corporation that is exercised through his vote. The right

to vote is a right inherent in and incidental to the
ownership of corporate stock, and as such is a property
right. Castillo v. Balinghasay, 440 SCRA 442 (2004).
stockholder has a right to participate in any meeting, and in the

absence of fraud the action of the stockholders meeting cannot
be collaterally attacked on account of such participation, even if
it be shown later on that the shares had been previously sold
(but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil.
be voted.
The right to vote is inherent in and incidental to the ownership

of corporate stocks. It is settled that unissued stocks may not be
voted or considered in determining whether a quorum is
present in a stockholders meeting, or whether a requisite
proportion of the stock of the corporation is voted to adopt a
certain measure or act. Only stock actually issued and
outstanding may be voted. Under Section 6 of the Corporation
Code, each share of stock is entitled to vote, unless otherwise
provided in the articles of incorporation or declared delinquent
under Section 67 of the Code. Neither the stockholders nor the
corporation can vote or represent shares that have never
passed to the ownership of stockholders, or, having so passed,
have again been purchased by the corporation. These shares are
not to be taken into consideration in determining majorities.
When the law speaks of a given proportion of the stock, it must
be construed to mean shares that have passed from the
corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216
(2006).
o One of the rights of a stockholder is the right to
participate in the control and management of the
SEC Opinion, 3 December 1993, XXVIII SEC QUARTERLY BULLETIN 5 (No. 2, June
1994).

Until challenged successfully in proper proceedings, a registered
707 (1933).
The sequestration of shares does not entitle the government to

exercise acts of ownership over the shares; even sequestered
shares may be voted upon by the registered stockholder.
Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991).
o The right to vote sequestered shares of stock registered
in the names of private individuals or entities and
alleged to have been acquired with ill-gotten wealth
shall, as a rule, be exercised by the registered owner.
The PCGG may, however, be granted such voting right
provided it can (1) show prima facie evidence that the
wealth and/or the shares are indeed ill-gotten; and (2)
demonstrate imminent danger of dissipation of the
assets, thus necessitating their continued sequestration
and voting by the government until a decision, ruling
with finality on their ownership, is promulgated by the
proper court. Nevertheless, the foregoing "two-tiered"
test does not apply when the funds that are prima facie
public in character or, at least, are affected with public

interest. Inasmuch as the subject UCPB shares in the
present case were undisputably acquired with coco levy
funds which are public in character, then the right to
vote them shall be exercised by the PCGG. In sum, the
"public character" test, not the "two-tiered" one,
applies. Republic v. COCOFED, 372 SCRA 462 (2001);
Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA
455 (2006).

B. Instances When Stockholders Entitled to Vote:
1. Amendment of articles of incorporation (Section 16)
2. Election of directors and trustees (Section 24)
3. Investment in another business or corporation (Sections 36 and
4.
5.
6.
7.
8.
42)
Increase and Decrease of capital stock (Section 38)
Incurring, or increasing bonded indebtedness (Section 38)
Sale, disposition or encumbrance of all or substantially all of the
corporate assets (Section 40)
Declaration of stock dividends (Section 43).
Management contracts (Section 44)
necessary, unless there is a written proxy, signed by all the co-owners,

authorizing one or some of them or any other person to vote such
share or shares: Provided, That when the shares are owned in an
"and/or" capacity by the holders thereof, any one of the joint owners
can vote said shares or appoint a proxy therefor. (n)

D. Pledgor, Mortgagors and Administrators (Section 55)

Section. 55. Right to vote of pledgors, mortgagors, and administrators.
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
meetings of stockholders, unless the pledgee or mortgagee is expressly
given by the pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books. (n)

Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy. (27a)

9. Adoption, amendment and repeal of by-laws (Section 48).

10. Fixing of consideration of no par value shares (Section 62)
11. Merger and consolidation (Section 72)
registered stockholder to pay his loan. Consequently, without

proper foreclosure, the lender cannot demand that the shares
be registered in his name. Lim Tay v. Court of Appeals, 293
SCRA 634 (1998).

C. Joint Ownership (Section 56)

Section 56. Voting in case of joint ownership of stock.
In case of shares of stock owned jointly by two or more persons, in
order to vote the same, the consent of all the co-owners shall be

When shares are pledged by means of endorsement in blank

and delivery of the covering certificates to a loan, the pledgee
does not become the owner thereof simply by the failure of the
Although the Rules of Court, while permitting an executor or

administrator to represent or to bring suits on behalf of the
deceased, do not prohibit the heirs from representing the

deceased. When no administrator has been appointed, there is
all the more reason to recognize the heirs as the proper
representatives of the deceased. Gochan v. Young, 354 SCRA
207 (2001).

E. Treasury Share No Voting Rights (Section 57)

or the bylaws. Applying Section 91 to the present case,

we hold that dead members who are dropped from the
membership roster in the manner for the cause
provided for in the By-Law of GCHS are not to be
counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual
members meeting. With 11 remaining members, the
Section 57. Voting right for treasury shares.

Treasury shares shall have no voting right as long as such shares
remain in the Treasury. (n)

Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA

216 (2006).
quorum in the present case should be 6. therefore,

there being a quorum, the annual members meeting,
conducted with six members present, was valid. Tan v.
Sycip, 499 SCRA 216 (2006).

F. Voting Rights of Members
In stock corporation, shareholders may generally transfer their

shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the
legal title to the stock and entitled to vote it. Until a settlement
and division of the estate is effected, the stocks of the decedent
Under the By-Laws of GCHS, membership in the

corporation shall, among others, be terminated by the
death of the member. Section 91 of the Corporation
Code further provides that termination extinguishes all
the rights of a member of the corporation, unless
otherwise provided in the articles of the incorporation

G. Conduct of Stockholders' Meetings:
1. Kinds and Requirements of Meetings (Sections 49 and 50);
are held by the administrator or executor. On the other hand,

membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation
provide otherwise. In other words, the determination of
whether or not dead members are entitled to exercise their
voting rights (through their executor or administrator) depends
on those articles of incorporation or by-laws. Tan v. Sycip, 499

SCRA 216 (2006).
on a date fixed in the by-laws, or if not so fixed, on any date in April of

every year as determined by the board of directors or trustees:
Section 49. Kinds of meetings.

Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)

Section 50. Regular and special meetings of stockholders or members.
Regular meetings of stockholders or members shall be held annually


Provided, That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks prior to the
meeting, unless a different period is required by the by-laws.

Special meetings of stockholders or members shall be held at any time
2. Place and Time of Meeting (Sections 51 and 93);

Section 51. Place and time of meetings of stockholders or members.
Stockholders' or members' meetings, whether regular or special, shall
be held in the city or municipality where the principal office of the
deemed necessary or as provided in the by-laws: Provided, however,

That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.

corporation is located, and if practicable in the principal office of the

corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.

Notice of meetings shall be in writing, and the time and place thereof
stated therein.

Whenever, for any cause, there is no person authorized to call a

meeting, the Secretaries and Exchange Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may
issue an order to the petitioning stockholder or member directing him
to call a meeting of the corporation by giving proper notice required
by this Code or by the by-laws. The petitioning stockholder or member
shall preside thereat until at least a majority of the stockholders or
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation
are present or duly represented at the meeting. (24 and 25)

Section 93. Place of meetings.
members present have been chosen one of their number as presiding

officer. (24, 26)
The by-laws may provide that the members of a non-stock corporation

may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the
date, time and place of the meeting: and Provided, further, That the
place of meeting shall be within the Philippines. (n)
Regular Meetings
o
o
Regular meetings may (1) be provided in the by-laws or

(2) scheduled by the board in April.
The by-laws may provide for more than one meeting
annually there is no prohibition to this effect.
Special Meetings
o
Held at any time it is called.

Stock Corporation
Principal office or city where it is
located

Non-Stock Corporation
Any place in the Philippines, even
if it is outside the city or place of

the principal office

3. Quorum (Section 52)

Section 52. Quorum in meetings.
Unless otherwise provided for in this Code or in the by- laws, a
quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of
non-stock corporations. (n)
Section 58. Proxies.

Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed
by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy,
it shall be valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5) years at
any one time. (n)

proxies, while proxy validation concerns the validation of such

secured and submitted proxies. It is possible that an intra-
corporate controversy may animate a disgruntled shareholder
to complain to the Securities and Exchange Commission (SEC) a
corporations violations of SEC rules and regulations, but that
motive alone should not be sufficient to deprive the SEC of its
Quorum is based on the totality of the shares which have been

subscribed and issued whether it be founders shares or
common shares. To base the computation of quorum solely on
the obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and outstanding
shares indicated in the articles of incorporation would work
injustice to the owners and/or successors in interest of the said
shares. The stock and transfer book cannot be used as the sole
basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when
the articles of incorporation show a significantly larger amount
of shares issued and outstanding as compared to that listed in
the stock and transfer book. Lanuza v. Court of Appeals, 454
SCRA 54 (2005).

VI. Contracts and Agreement Affecting Shareholdings

A. Proxy (Section 58)

Proxy solicitation involves the securing and submission of
investigatory and regulatory powers, especially so since such

powers are exercisable on a motu proprio basis. GSIS v. Court of
Appeals, 585 SCRA 679 (2009).
Nature of Proxy Relationship: A proxy is a special form of

agency and governed by the Law on Agency. Consequently,
being a strictly fiduciary relation, a proxy is essentially revocable
in nature; and any attempt or stipulation to render it irrevocably
would be to no avail. Generally, proxies, even those with
irrevocable terms, have always been considered as revocable,
unless coupled with an interest, and their revocation may be by
formal notice, orally, or by conduct as by the appearance of the
stockholder or member giving the proxy, or the issuance of a
subsequent proxy, or the sale of shares.

The SEC has appropriately observed that a person acting
as proxy for a stockholder is in the eyes of the law, the
latters agent and as such, a mere fiduciary who has the
duty of acting in strict accord with requirements of a
fiduciary relation; and that accordingly, the proxy holder
must act in accordance with the instructions given to
it is to its abrogated jurisdictional powers. The fact that the

jurisdiction of the regular courts under Section 5(c) is confined
to the voting on election of officers, and not on all matters
which may be voted upon by stockholders, elucidates that the
power of the Securities and Exchange Commission (SEC) to
regulate proxies remains extant and could very well be
him/her by the stockholder and any violation of such

fiduciary duty shall be governed by the pertinent laws
on Agency, not by the Corporation Code.1
1. Requisites for Valid Proxy:
a. The proxy shall in writing
b. Signed by the stockholder or member
c. Filed before the scheduled meeting with the corporate
exercised when stockholders vote on matters other than the

election of directors. GSIS v. Court of Appeals, 585 SCRA 679
(2009).
secretary.
2. Who May be Appointed Proxy: Section 58 of the Corporation
Code imposes no limitation as to the persons who may be
appointed as proxy and by-law provisions restricting the right of
a stockholder to appoint a proxy would be void. However, in the
case of non-stock corporation, Section 89 of the Corporation
Code the articles of incorporation or by-laws may restrict the
right of a member to vote by proxy. The SEC has opined that
under Section 89 the right of members to vote by proxy may be
denied entirely by appropriate provisions in the articles of
incorporation or by-laws of a non-stock corporation.2
The SECs power to pass upon the validity of proxies in relation

to election controversies has effectively been withdrawn, tied as
SEC Opinion, 15 July 197, XXXII SEC QUARTERLY BULLETIN 4 (No. 2, Dec. 1997).
SEC Opinion, 20 September 1994, XXIX SEC QUARTERLY BULLETIN 20 (No.1, March
1995).
2

B. Voting Trust Agreements (Section 59)

Section 59. Voting trusts.
One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the
terms and conditions thereof. A certified copy of such agreement shall
be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be canceled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made


pursuant to said voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise. (36a)

the transferor transfers the right to votes, etc. but not the right
to own, the transferor remains to be the owner. A transfer of
the right to own the shares amounts to a disposition/sale of the
shares.

The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both
the transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.

Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.

No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.

Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed canceled
and new certificates of stock shall be reissued in the name of the
transferors.

Atty. Hofilea where, pursuant to a voting trust agreement,
Transferor transfers the certificates of stock.

Even where the transferor holds only the voting
trust certificate, he may sell his shares. What he
delivers to the buyer is the VTC. This kind of
disposition does not terminate the rights of the
trustee.
Transferee/Trustee gives a voting trust certificate
A VTA separates the voting rights and other rights covered of

the stock from other attributes of ownership, intended to be
irrevocable for a definite period of time and the purpose of
which is to give to the trustee to acquire voting control of the
corporation. Lee v. CA, 205 SCRA 752 (1992).

Lee v. Court of Appeals

Facts: Herein petitioners were served summons in accordance with a
third party complaint filed against Alfa Integrated Textile Mills of which
Lee and Lacdao was president and vice president respectively. They
claim that the summons for Alfa was erroneously served upon them
considering that the management of Alfa had been transferred to
Development Bank of the Philippines. They claim that the voting trust


agreement between Alfa and DBP vests all management and control of
Alfa to the DBP. DBP claimed that it was not authorized to receive
summons on behalf of Alfa since DBP had not taken over the company
which has a separate and distinct corporate personality and existence.

voting rights of a stockholder from his other rights. This may create a
dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholder, on the one hand, and the legal title
thereto on the other. With the omission of the phrase "in his own right"
[in the new corporation code] the election of trustees and other persons
Issue: Whether or not the 5-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered
by the said voting trust agreement ipso facto reverted to Lee and
Lacdao as beneficial owners pursuant to the 6th paragraph of Section 59
of the new corporation code

Held: NO. It is manifestly clear from the terms of the voting trust
who in fact are not the beneficial owners of the shares registered in
their names on the books of the corporation becomes formally
legalized. Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the corporation.
agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. Had the five-year period of the voting trust
agreement expired in 1986, the DBP would not have transferred all its
rights, titles and interests in ALFA "effective June 30, 1986" to the
national government through the Asset Privatization Trust (APT) as
attested to in a Certification dated 24 January 1989 of the Vice
Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).
President of the DBP's Special Accounts Department II. In the same

certification, it is stated that the DBP, from 1987 until 1989, had
handled accounts, which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT. Hence,
there is evidence on record that at the time of the service of summons
on ALFA through Lee and Lacdao on 21 August 1987, the voting trust
agreement in question was not yet terminated so that the legal title to
the stocks of ALFA, then, still belonged to the DBP.

Doctrine: A voting trust agreement results in the separation of the
The trustor has a right to terminate the VTA for breach thereof.
Voting trust agreement as part of a loan arrangement. NIDC v.
Aquino, 163 SCRA 153 (1988).

C. Pooling Agreements or Shareholders Agreements (Section 100)

Section 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and
shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such
agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said
articles of incorporation.


2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any
voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.

3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them
partners among themselves.

4. A written agreement among some or all of the stockholders in a
close corporation shall not be invalidated on the ground that it so
relates to the conduct of the business and affairs of the corporation as
to restrict or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the
stockholders who are parties thereto the liabilities for managerial acts
imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance.

VII. Rights to Inspect and Copy Corporate Records

A. Basis of Right
The stockholders right of inspection of corporate books and

records is based on his ownership of the assets and property of
the corporation. It is therefore an incident of ownership of the
corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership or a
quasi-ownership. The right of inspection is predicated upon the
necessity of self-protection on the part of the stockholder.
Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).

Gokongwei, Jr. v. Securities and Exchange Commission

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a
president and stockholder of Robina Corp. and Consolidated Foods
Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice
Cream, Poultry and Hog Feeds and many more), filed a petition for
declaration of nullity of amended by-laws, cancellation of certificate of
filing of the amended-by laws, injunction and damages against the
majority of the members of the Board of Directors of the SMC based on
the following grounds:
Corporations have no inherent power to disqualify a

stockholder from being elected as director depriving him of his
vested right because he is an officer of a competitor company.
The corporation has been investing corporate funds in other

corporations and business outside of the primary purpose of the
corporation (This gave rise to the second issue)

The second issue arose when, Gokongwei filed a motion to inspect the
documents of San Miguel International Inc. (SMI) a subsidiary of, and
wholly controlled by, SMC. GokongweiS motion was denied by the
SECTION When SMC invested in SMI, according to Gokongwei, this was


the demand is made in good faith or for a legitimate purpose.
Africa v. PCGG, 205 SCRA 39 (1992).
against the primary purpose clause of SMC, which is a violation of the

Corporation Law.

Issue: Whether or not the SEC gravely abused its discretion in denying
petitioners request for an examination of the records of San Miguel
Summary of Rulings: The right to inspect corporate books and

records:
o Is exercisable through agents and representatives,
otherwise it would often be useless to the stockholder
who does not know corporate intricacies. W.G.
Philpotts v. Philippine Manufacturing Co., 40 Phil. 471
(1919).
o Cannot be denied on the ground that the director is on
International Inc., a fully owned subsidiary of San Miguel Corporation

Held: YES. Considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it
would be more in accord with equity, good faith and fair dealing to
construe the statutory right of Gokongwei as stockholder to inspect the
books and records of the corporation as extending to books and records
of such wholly subsidiary which are in respondent corporations
possession and control.

Doctrine: See above.
The stockholders right of inspection of the corporations books
and records is based upon his ownership of shares in the

corporation and the necessity for self-protection. Puno v. Puno
Enterprises, 599 SCRA 585 (2009).

B. Limitations on Right
The only express limitations on the right of inspection under

Section 74 of Corporation Code are: (a) it should be exercised at
reasonable hours on business days; (b) the person demanding
the right to examine and copy excerpts from the corporate
records and minutes has not improperly used any information
secured through any previous examination of records; and (c)
unfriendly terms with the officers of the corporation

whose records are sought to be inspected. Veraguth v.
Isabela Sugar Co., 57 Phil. 266 (1932).
Although it includes the right to make copies, does not
authorize bringing the books or records outside of
corporate premises. Veraguth v. Isabela Sugar Co., 57
Phil. 266 (1932).
Does not include the right of access to minutes until
such minutes have been written up and approved by
the directors. Veraguth v. Isabela Sugar Co., 57 Phil.
266 (1932).
Cannot be limited to a period of ten days shortly prior
to the annual stockholders meeting, as such would be
an unreasonable restriction and violates the legal
provision granting the exercise of such right at
reasonable hours. Pardo v. Hercules Lumber Co., 47
Phil. 964 (1924).

C. Specified Records (Sections 74, 75 and 141)


Section 74. Books to be kept; stock transfer agent.
Every corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all meetings
of stockholders or members, or of the board of directors or trustees, in
Code: Provided, That if such refusal is made pursuant to a resolution

or order of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a
defense to any action under this section that the person demanding to
which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and
every act done or ordered done at the meeting. Upon the demand of
any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and
examine and copy excerpts from the corporation's records and

minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock
nays must be taken on any motion or proposition, and a record

thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be
recorded in full on his demand.

The records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any director,
and transfer book", in which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the
trustee, stockholder or member of the corporation at reasonable

hours on business days and he may demand, writing, for a copy of
excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director,
corporation or in the office of its stock transfer agent and shall be

open for inspection by any director or stockholder of the corporation
at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from
the Securities and Exchange Commission and pays a fee as may be
trustee, stockholder or member for damages, and in addition, shall be

guilty of an offense which shall be punishable under Section 144 of this
fixed by the Commission, which shall be renewable annually: Provided,

That a stock corporation is not precluded from performing or making


transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable. (51a and 32a; B. P. No. 268.)

Section 75. Right to financial statements.
Within ten (10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of
the end of the last taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets and liabilities and
the result of its operations.

At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and
certified by an independent certified public accountant.

However, if the paid-up capital of the corporation is less than
may require. Such report shall be submitted within such period as may
be prescribed by the Securities and Exchange Commission. (n)

business transactions" covers practically all matters of import in

a profit-seeking corporation. The corporation is in duty bound to
expose its records and book for inspection by the shareholders,
but it is not always bound to show all of them under all
circumstances.1

Summary of Doctrinal Rulings on Right to Inspect

The right to inspect by a stockholder, member, director or trustee is
subject to the following doctrinal rulings:
a. The demand for inspection should cover only reasonable hours
on business days;
b. The stockholder, member, director or trustees demanding the
exercise of the right is one who has not improperly used any
information secured through any previous examination of the
records of the corporation or any other corporation;
c. The demand must be accompanied with statement of the
purpose of the inspection, which must show good faith or
P50,000.00, the financial statements may be certified under oath by

the treasurer or any responsible officer of the corporation. (n)

Section 141. Annual report or corporations.
Every corporation, domestic or foreign, lawfully doing business in the
Philippines shall submit to the Securities and Exchange Commission an
annual report of its operations, together with a financial statement of
its assets and liabilities, certified by any independent certified public
accountant in appropriate cases, covering the preceding fiscal year and
such other requirements as the Securities and Exchange Commission
The section is worded in broad language, for "record of all
legitimate purpose; and

d. If the corporation or its officers contest such purpose or
contend that there is evil motive behind the inspection, the
burden of proof is with the corporation or such officer to show



the same.

D. Remedies If Denied: Mandamus
In contrasting the language of the present Corporation Code

from the old Corporation Law, the law now provides for express
limitation on the right to inspect and now requires as a
condition for such examination that one requesting it must not
have been guilty of using improperly any information secured
through a prior examination, an that the person asking for such
examination must be acting in good faith and for a legitimate
purpose in making his demand. The stockholder seeking to
exercise the right of inspection must set forth the reasons and
the purposes for which he desires such inspection. Gonzales v.
PNB, 122 SCRA 489 (1983).
Provided, That such dissolution shall not preclude the institution of

appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes
for dissolution of a corporation provided in this Code. (190 1/2 a)

the penal provision under Section 144 of the Corporation Code

may be applied in a case of violation of a stockholder or
members right to inspect the corporate books/records as
provided for under Section 74 of the Corporation Code. Sy Tiong
Shiou v. Sy Chim, 582 SCRA 517 (2009).

1. Who May Be Held Liable: The corporate officer who has in his
custody the books and paper sought to be inspected, and
Burden of proof to show that examination is for improper

purpose is on the part of the corporation. Republic v.
Sandiganbayan, 199 SCRA 39 (1999).
refuses to allow inspection. If the refusal is pursuant to a

resolution or order of the board of directors or trustees, then
the directors or trustees who voted for such refusal shall be
held liable.1
2. Defenses Available to Director, Trustee or Officer Held Liable:
The following defenses are expressly recognized under Section
74 as defenses available to a director, trustee or officer for

E. Criminal Sanction under Section 144

Section 144. Violations of the Code.
Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation,
the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission:
In the recent case of Ang-Abaya v. Ang, 573 SCRA 129 (2008),

the Court had the occasion to enumerate the requisites before
refusing to allow a stockholder or member to exercise his right

to inspect corporate records:
a. The person demanding to examine has improperly used
any information secured through any prior examination



of the records or minutes of such corporation or for any
other corporation; or
b. The one requesting to inspect was not taking in good
faith or for a legitimate purpose in making his demand.
Corporation Code, the defense of improper use or motive is in

the nature of a justifying circumstance that would exonerate
those who raise and are able to prove the same where the
corporation denies inspection on the ground of improper
motive or purpose, the burden of proof is taken from the
Exception:
o
o
In a criminal complaint for violation of Section 74 of the
Atty. Hofilea take notice of the type of documents

The law requires the findings to be made public
The findings must be presented as evidence before a
court

VIII. Appraisal Right (Sections 81 to 86 and 105)

Section 81. Instances of appraisal right.
Section 142. Confidential nature of examination results.
Any stockholder of a corporation shall have the right to dissent and

demand payment of the fair value of his shares in the following
instances:

1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any respect superior to
All interrogatories propounded by the Securities and Exchange

Commission and the answers thereto, as well as the results of any
examination made by the Commission or by any other official
authorized by law to make an examination of the operations, books
and records of any corporation, shall be kept strictly confidential,
except insofar as the law may require the same to be made public or
where such interrogatories, answers or results are necessary to be
those of outstanding shares of any class, or of extending or shortening

the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and

presented as evidence before any court. (n)
3. In case of merger or consolidation. (n)

Section 82. How right is exercised.
The appraisal right may be exercised by any stockholder who shall
have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the
shareholder and placed on the corporation. Sy Tiong Shiou v. Sy

Chim, 582 SCRA 517 (2009).

F. Confidential Nature of SEC Examinations (Section 142)

General Rule: The SEC has the authority to inspect all

documents submitted to them, but they must keep their
findings confidential. As such the public has no entitlement to
the findings.


date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate or certificates of
except the right of such stockholder to receive payment of the fair

value thereof: Provided, That if the dissenting stockholder is not paid
the value of his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored. (n)

stock representing his shares, the fair value thereof as of the day prior
to the date on which the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of the shares, it shall be
Section 84. When right to payment ceases.

No demand for payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for payment
is withdrawn with the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the corporation or
disapproved by the Securities and Exchange Commission where such
approval is necessary, or if the Securities and Exchange Commission
determined and appraised by three (3) disinterested persons, one of

whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the majority of
the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided,
That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to
determines that such stockholder is not entitled to the appraisal right,

then the right of said stockholder to be paid the fair value of his shares
shall cease, his status as a stockholder shall thereupon be restored,
and all dividend distributions which would have accrued on his shares
shall be paid to him. (n)

Section 85. Who bears costs of appraisal.
cover such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation. (n)

Section 83. Effect of demand and termination of right.
From the time of demand for payment of the fair value of a
stockholder's shares until either the abandonment of the corporate
action involved or the purchase of the said shares by the corporation,
The costs and expenses of appraisal shall be borne by the corporation,

unless the fair value ascertained by the appraisers is approximately
the same as the price which the corporation may have offered to pay
the stockholder, in which case they shall be borne by the latter. In the
case of an action to recover such fair value, all costs and expenses shall
be assessed against the corporation, unless the refusal of the
stockholder to receive payment was unjustified. (n)

all rights accruing to such shares, including voting and dividend rights,
shall be suspended in accordance with the provisions of this Code,
Section 86. Notation on certificates; rights of transferee.

Within ten (10) days after demanding payment for his shares, a


shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code. Clearly, the
right of appraisal may be exercised when there is a fundamental
change in the charter or articles of incorporation substantially
prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken. It serves the
dissenting stockholder shall submit the certificates of stock

representing his shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under this Title. If
shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled, the rights of
the transferor as a dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)

Section 105. Withdrawal of stockholder or dissolution of corporation.
In addition and without prejudice to other rights and remedies
available to a stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than
their par or issued value, when the corporation has sufficient assets in
its books to cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation may, by written
purpose of enabling the dissenting stockholder to, have his

interest purchased and to retire from the corporation. Turner v.
Lorenzo Shipping Corp., 636 SCRA 13 (2010).
Appraisal rights ensure the stockholder a way out in certain

instances.
o Even in the middle of the process of appraisal rights, a
stockholder can decide to just sell his shares to another
person rather than to the company.

B. Who is Entitled to Exercise
A prejudiced stockholder may exercise such right. A prejudiced

stockholder is one who dissented in the meeting where the
proposal or proposed amendment was approved. The
stockholder must have voted against the corporation
transaction in order to avail of the appraisal right. Mere silence
petition to the Securities and Exchange Commission, compel the

dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent,
or dishonest, or oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being misapplied or
wasted.
or abstention does not entitle such stockholder to the exercise

of the right.1
The stockholder must be present at the meeting and vote

therein to be able to avail of his appraisal rights.
o
A. Nature of Appraisal Right
A stockholder who dissents from certain corporate actions has

the right to demand payment of the fair value of his or her
Where appraisal rights were availed of on the ground of

extension of corporate term, and after which such



extension was abandoned, the right of the stockholder
to exercise appraisal rights ceases also.

C. Instances When Right is Exercisable:
of the corporation, the president or managing director is

disqualified by law to sue in her own name. The power to sue
and be sued in any court by a corporation is lodged in the Board
that exercises its corporate powers and not in the president or
officer thereof. Bitong v. Court of Appeals, 292 SCRA 503
(1998).
Sections 37, 42 and 81 of the Corporation Code enumerate.

D. Denial of Appraisal Right: May the right be denied in the articles of
incorporation? Is a contractual stipulation in the articles of
incorporation waiving the appraisal right void? Rights granted by law
can be waived individually, unless such waiver would contravene public
intracorporate remedy is futile or useless, a stockholder may

institute a suit in behalf of himself and other stockholders and
for the benefit of the corporation. However, the corporation is
the real party in interest in a derivative suit and the suing
stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA
645 (2009).
IX. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra-

Corporate Controversies)
Derivative suits are governed by a special set of procedural rules
known as the Interim Rules of Procedure Governing Intra-
Corporate Controversies under Republic Act No. 8799 (A.M.
No. 01-2-04-SC; effective 01 April 2001). Section 1, Rule 1
thereof expressly lists derivative suits among the cases covered
by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548,
556 (2009).

A. Derivative Suit Must Be Effected When Board Cannot Properly
Exercise Business Judgment

While questions of policy and management are left to the

honest decision of the officers and directors of a corporation,
and the courts are without authority to substitute their
judgment for the judgment of the Board of Directors; yet where
the corporate directors are guilty of breach of trust not of
mere error of judgment or abuse of discretion and
policy. Therefore, when it is waived without the dissenting stockholder's

consent, such as when it is defeated by provisions in the articles of
incorporation, then it will be violative of public policy. But when an
individual, who is already a stockholder, who is not constrained to waive
because he is already a stockholder enters into a contract knowingly,
intelligently waiving his appraisal right, such waiver is not void.

General Rule: In the absence of a special authority from the

Board of Directors to institute a derivative suit for and in behalf
Under Section 36 of the Corporation Code, in relation to Section

23, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. An individual
stockholder is permitted to institute a derivative suit on behalf
of the corporation wherein he holds stocks in order to protect
or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold
the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation

as the real party in interest. Chua v. Court of Appeals, 443 SCRA
259 (2004).1

is a remedy designed by equity and has been the principal

defense of the minority shareholders against abuses by the
majority. Western Institute of Technology, Inc. v. Salas, 278
SCRA 216 (1997).
Chua v. Court of Appeals

Issue: Whether or not the criminal complaint is in the nature of a

derivative suit

Held: NO. It was not stated that the criminal complaint was filed by Hao
in behalf and for the benefit of the corporation.

Doctrine: In a derivative suit, the plaintiff must allege that he is suing in
allow the stockholders/member to enforce rights which are

derivative (secondary) in nature, i.e., to enforce a corporate
cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA
312 (2005).2
suing stockholder is regarded as the nominal party, with the

corporation as the party in interest. Majority Stockholders of
Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).

B. Nature of the Power to File Derivative Suit
A stockholders right to institute a derivative suit is not based on
any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when
the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for
violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA

C. Requisites of Derivative Suit
In the case of, we enumerated the foregoing requisites before a

stockholder can file a derivative suit: (a) the party bringing suit
should be a shareholder during the time of the act or
transaction complained of, the number of shares not being
material; (b) the party has tried to exhaust intra-corporate
remedies, relief, but the latter has failed or refused to heed his
588 (2009).
An individual stockholder is permitted to institute a derivative

suit on behalf of the corporation wherein he holds stocks in
order to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are the ones to be
sued or hold the control of the corporation-in such actions, the
behalf and for the benefit of the corporation and all other stockholders
who may wish to join him. The corporation must be impleaded as a
party and must be served with process.
The whole purpose of the law authorizing a derivative suit is to
A derivative suit is an action brought by minority shareholders

in the name of the corporation to redress wrongs committed
against the corporation, for which the directors refuse to sue. It
plea; and (c) the cause of action actually devolves on the

corporation; the wrongdoing or harm having been or being
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589
SCRA 588 (2009); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).


caused to the corporation and not to the particular stockholder
bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447
(1989).1
Section 1, Rule 8 of the Interim Rules of Procedure Governing
the institution by a stockholder of a derivative suit. Yu v.

Yukayguan, 589 SCRA 588 (2009).

D. Who May Bring the Suit
Intra-Corporate Controversies lays down the following

requirements which a stockholder must comply with in filing a
derivative suit: A stockholder or member may bring an action in
the name of a corporation or association, as the case may be,
provided, that: (1) He was a stockholder or member at the time
the acts or transactions subject of the action occurred and at
the events constituting the cause of action and at the time of

the filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83
(1911); Gochan v. Young, 354 SCRA 207 (2001).
o Atty. Hofilea Once you file an action, any disposition
of your shares may only be made under permission of
the time the action was filed; (2) He exerted all reasonable
efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires; (3) No appraisal
rights are available for the act or acts complained of; and (4)
The suit is not a nuisance or harassment suit. Yu v. Yukayguan,
the Court.
The fact that it is a family corporation does not in any way

exempt a stockholder from complying with the clear
requirements and formalities of the rules for filing derivative
suit there is nothing in the pertinent laws or rules supporting
the distinction between, and the difference in the requirements
for, family corporations vis-a-vis other types of corporations, in
Cruz, may validly institute a derivative suit to vindicate

the alleged corporate injury, in which case Cruz is only a
nominal party while Filport is the real party-in-interest.
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007)Reyes v. Regional Trial
Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-Yield Realty, Inc. v. Court of
Appeals, 590 SCRA 548 (2009).
2
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v.
Tan, 607 SCRA 645 (2009).
A derivative action is a suit by a shareholder to enforce a

corporate cause of action. The corporation is a necessary party
to the suit. And the relief which is granted is a judgment against
a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf
of the corporation. Chua v. Court of Appeals, 443 SCRA 259
(2004).3
o Since the ones to be sued are the directors/officers of
the corporation itself, a stockholder, like petitioner
589 SCRA 588 (2009).2
The relators must be stockholders both at time of occurrence of
A minority stockholder and member of the board has no power

or authority to sue on the corporations behalf. Nor can we
Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).


uphold this as a derivative suit, since it is required that the
minority stockholder suing for and on behalf of the corporation
must allege in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the
suit. There is now showing that petitioner has complied with the
a derivative suit. The Court held that where the director of the
corporation permitted the fraudulent transaction to go
unpunished by allowing the importation of finished textile
instead of raw cotton for the textile mill, and nothing appears to
have been done to remove the erring purchasing managers, the
appointment of receiver may have been thought of by the court
so that the dollar allocation for raw material may be reviewed
and the textile mill placed on an operating basis, because it is
foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475

(2001); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548,
556 (2009).
o A minority stockholder can file a derivative suit against
the president for diverting corporate income to his
personal accounts. Commart (Phils.) Inc. v. SEC, 198
SCRA 73 (1991).
possible that a receiver in which the Central Bank may have

confidence is appointed, the dollar allocation for raw material
may be restored.
The status of heirs as co-owners of shares of stocks prior to the

partition of the decedents estate does not immediately and
necessarily make them stockholders of the corporation unless
and until there is compliance with the Section 63 of the
Corporation Code on the manner of transferring shares, the
heirs do not become registered stockholders of the corporation.
Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593
(2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).
Violation of Laws Reyes v. Tan 3 SCRA 198 (1961) also gave a

valid basis the violation of laws allowed by the board as basis for
Wastage and Diversion of Corporate Funds It may be

considered a wastage or diversion of corporate funds to hire
officers and appoint directors whose main purpose is to shield
the chairman from criminal prosecution.

F. Exhaustion of Intra-Corporate Remedies:
party has tried to exhaust inta-corporate remedies, i.e., has

made a demand on the Board of Directors for the appropriate
relief, but the latter has failed to or refused to heed his plea.
Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v.
Santos, 64 Phil. 697 (1937).
A lawyer engaged as counsel for a corporation cannot represent
members of the same corporations board of directors in a

derivative suit brought against them. To do so would be
tantamount to representing conflicting interests, which is
prohibited by the Code of Professional Responsibility. Hornilla
v. Salunat, 405 SCRA 220 (2003).
E. Grounds for Derivative Suit

A condition precedent to the filing of a derivative suit is that the
A derivative suit to question the validity of the foreclosure of

the mortgage on corporate assets can be filed without prior
demand upon the Board of Directors where the legality of the

constitution of the Board lies at the center of the issues. DBP v.
Pundogar, 218 SCRA 118 (1993).
benefit or interest of the corporation. When the relief prayed

for do not pertain to the corporation, then it is an improper
derivative suit. Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453
(2012), 1 citing VILLANUEVA, PHILIPPINE CORPORATE LAW,
1998 ed., p. 375.
Further, while it is true that the complaining stockholder must

satisfactorily show that he has exhausted all means to redress
his grievances within the corporation, except when such remedy
is complete control of the person against whom the suit is being
filed. The reason is obvious: a demand upon the board to
institute an action and prosecute the same effectively would
have been useless and an exercise in futility. Hi-Yield Realty,
Inc. v. Court of Appeals, 590 SCRA 548, 557 (2009).
pertaining to the corporation, and does not disqualify them

from filing a derivative suit on behalf of the corporation. It
merely gives rise to an additional cause of action for damages
against the erring directors. Gochan v. Young, 354 SCRA 207
(2001).
The obvious intent behind the rule requiring the stockholder

filing a derivative suit to first exert all reasonable efforts to
exhaust all remedies available under the articles of
incorporation, by laws, laws or rules governing the corporation
or partnership to obtain relief he desires is to make the

derivative suit the final recourse of the stockholders, after all
other remedies to obtain the relief sought had failed. Yu v.
Yukayguan, 589 SCRA 588 (2009).
The complaint cannot demand for the defendants to pay the
Where corporate directors have committed a breach of trust

either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the
wrong, a stockholder may sue on behalf of himself and other
stockholders and for the benefit of the corporation, to bring
about a redress of the wrong done directly to the corporation
Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198

(1961).
Since it is the corporation that is the real party-in-interest in a
derivative suit, then the reliefs prayed for must be for the
Appointment of receiver can be an ancillary remedy in a

derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966).
suing stockholders the value of their respective participation in

the assets that have been damaged, for a derivative suit must
have cause of action for the benefit of the corporation.
Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v.
In a derivative action, the real party in interest is the

corporation itself, not the shareholders who actually instituted
it. A suit to enforce preemptive rights in a corporation is not a
derivative suit, and therefore a temporary restraining order
enjoining a person from representing the corporation will not
bar such action, because it is instituted on behalf and for the
benefit of the shareholder, not the corporation. Lim v. Lim-Yu,
352 SCRA 216 (2001).

G. Nature of Relief or Remedies Prayed For:
The allegations of injury to the relators can co-exist with those
Also R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005).


and indirectly to the stockholders. This is what is known as a
derivative suit, and settled is the doctrine that in a derivative
suit, the corporation is the real party in interest while the
stockholder filing suit for the corporations behalf is only
nominal party. The corporation should be included as a party in
the suit. Hornilla v. Salunat, 405 SCRA 220 (2003).
business judgment consideration are not applicable since in

such a conflict situation it can hardly be expected that the board
or its culprit members would be in a position to exercise proper
business judgment to protect the interest of the corporation. In
such situation, not even the exhaustion of intra-corporate
remedy is necessary for a stockholder to bring a derivative suit
in behalf of the corporation.

H. Venue for Derivative Suit
Under Section 5, Rule 1 of the Interim Rules, the proper venue

for derivative suit would be in the RTC which has jurisdiction
over the principal office of the corporation. Hi-Yield Realty, Inc.
v. Court of Appeals, 590 SCRA 548 (2009).

J. Nuisance Suits2

I. Business Judgment Rule1
Sometimes in may be better for the corporation not to seek
Under Section 1, Rule 8 of the Interim Rules of Procedure

Governing Intra-Corporate Controversies, one of the conditions
for filing a derivative suit is that the suit is not a nuisance or
harassment suit; otherwise, the court is authorized to
forthwith dismiss the case.
relief for a wrong done to it. Since the primary duty of the
directors is to increase the net asset value of the corporation, by
deriving profits, certain remedies may actually cost the
corporation more in terms of future profits. Therefore, when
wrong is committed against the corporation, whether to bring a
suit for the corporation or not primarily lies within the
discretion and exercise of business judgment of the board. And
consequently, when the board has in the exercise of its business
judgment, decided in good faith that it will not pursue remedies
on behalf of the corporation, then the use of the derivative suit
mechanism by the stockholder would be improper.
It is only when the board itself has the be author of the wrong
being done or having been done to the corporation, where
Under Section 1(b)(4), Rule 1 of the said Interim Rules, the

availability of appraisal right for the act or acts complained of is
an important factor in intra-corporate suits for the courts to
determine whether the suit is a nuisance suit or one brought for
harassment.

X. Right to Proportionate Share of Remaining Assets Upon Dissolution
(Section 122)

Section 122. Corporate liquidation.




Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close

its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it
was established.

At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.

Upon the winding up of the corporate affairs, any asset distributable
to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.

Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)

In the liquidation of a corporation, after the payment of all

corporate debts and liabilities, the remaining assets, if any, must
be distributed to the stockholders in proportion to their
interests in the corporation. The share of each stockholder in
the assets upon liquidation is what is known as liquidating
dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).

Right of Stockholders and Members - 6

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Right of Stockholders and Members - 6

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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

While shares of stock constitute personal property, they do not

As early as the case of Fisher v. Trinidad, the Court

Atty. Hofilea Shares of stock is intangible personal

The registration of shares in a stockholders name, the issuance

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Atty. Hofilea Before Mr. X can become a member of the

when no specific grant or recognition of such right is provided

Pre-emptive right under Section 39 of the Corporation Code

Atty. Hofilea Can pre-emptive rights be taken away? YES.

interests of a stockholder in a corporation determines

The pre-emptive rights of stockholders in a corporation are not

Under the current provision Section 39 of the Corporation Code,

3 exceptions provided in Section 39: (1) debt, (2) in compliance

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

The SEC has ruled that a majority vote of stockholders

of the corporation they are owned by the stockholders of

Issue refers to new shares issued to stockholders.

Shares of stock of a corporation are not owned or are the assets

Sales and Trading, Inc., 692 SCRA 706 (2013).

A contractual undertaking on restriction of transfer of shares

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

stockholders in the new corporation, John R. Edgar & Co., Incorporated.

Valid and Binding

"Right of first refusal" which would provide that a

them first to the corporation or existing

"Right of prior consent" provision would require that

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Before you can sell your shares, you must first

If the provision states that you can only sell

Corporation Code which treats of shares of stock as

The indication on the face of the stock certificate that it is

Padgett v. Babcock & Templeton, Inc.

Babcock & Templeton, Inc., 59 Phil. 232 (1933).

Section 63 contemplates no restriction as to whom the stocks

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

be transferred as therein provided. The holder of shares, as owner of

The only limitation imposed by Section 63 is when the

The right of first refusal is primarily an attribute of ownership.

The agreement of co-shareholders to mutually grant the right of

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

to preserve and protect itself by excluding competitors or

In a landholding corporation which by constitutional mandate is

fiduciary relation with their corporation for the collective

limited to 40% foreign equity, and where there exists a right of

stockholders right is infringed. 2

trade and is obligatory on the parties who voluntarily enter into

The SEC, as a matter of policy, allows restrictions on transfer of

competition clause may be properly provided for as a condition

company was incorporated, unless palpably unreasonable under

The SEC ruled that such disqualification provision is a valid and

corporation within which to signify their desire to buy the

Non-Competition Clause: The SEC has opined that a non-